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2025 (6) TMI 451 - AT - Service TaxValuation of taxable service under the Works Contract Service (WCS) for the purpose of service tax liability - appellant s method of segregating the invoice value into VAT on goods and service tax on the service portion complies with the provisions of the Service Tax (Determination of Value) Rules 2006 particularly Rule 2A or not - HELD THAT - This Bench in the appellant s own case for an earlier period in M/S. OCEAN INTERIOR LIMITED VERSUS COMMISSIONER OF G.S.T. CENTRAL EXCISE CHENNAI 2019 (11) TMI 124 - CESTAT CHENNAI has considered the binding judicial precedence of the Hon ble Supreme Court in the case of Safety Retreading Co. (P) Ltd. Vs Commissioner of Central Excise Salem 2017 (1) TMI 1110 - SUPREME COURT and other rulings of CESTAT Benches to hold that the calculation of payment of service tax by the appellant was in order. Conclusion - The appellant has correctly discharged Service Tax on the service portion. There are no reasons to deviate from the above order and hence the impugned order cannot sustain - appeal allowed.
The primary legal questions considered in this appeal revolve around the proper valuation of taxable service under the Works Contract Service (WCS) for the purpose of service tax liability. Specifically, the issues presented include:
Issue-wise detailed analysis follows: 1. Valuation of Taxable Service under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 The legal framework governing valuation of taxable service in works contracts is primarily Rule 2A, which provides a bifurcated approach:
The Court observed that the appellant had adopted the valuation method under clause (i), segregating the invoice value into VAT on goods and service tax on the service portion, whereas the Department relied on clause (ii) percentages, contending that the appellant's calculation was not based on the actual value of goods transferred. The Court emphasized that clause (ii) applies only if the value is not determined under clause (i). Since the appellant determined the value of goods transferred by applying VAT law and paid VAT accordingly, the value adopted by the appellant must be accepted. Key precedent: The Supreme Court in Safety Retreading Co. (P) Ltd. held that service tax liability arises only on the service component, quantified under the State Act at 30%, and not on the entire contract value including the goods/materials supplied. The Court reasoned that the appellant, being subject to VAT law, must abide by the valuation principles under VAT for determining the value of goods transferred. The remaining portion after deducting VAT-paid goods value is liable for service tax, thereby avoiding double taxation. Competing arguments from the Department, which contended that the appellant's valuation was rough and not based on actual value, were rejected on the ground that the appellant's method was consistent with VAT law and judicial precedents. 2. Interpretation of Explanation (c) of Rule 2A and the Requirement of "Actual Value" of Property in Goods The Department challenged the appellant's valuation on the basis that the appellant arrived at the value of goods transferred by adding average cost of materials, 30% overheads, and 9.5% profit margin, which was not the "actual value" as required under Explanation (c). The Court analyzed that Explanation (c) requires the value adopted for VAT payment purposes on the goods transferred to be taken as the value for service tax valuation. The appellant, as a VAT assessee, applied the VAT law to determine the value of goods transferred and paid VAT accordingly. The Court held that the appellant's method, involving apportionment of overheads and profit margin to arrive at the value of goods, is an accepted accounting practice under VAT law and thus qualifies as the "actual value." The Court rejected the Department's contention that the method was rough or arbitrary, noting that the appellant's VAT compliance and payment on the computed value demonstrate acceptance of the valuation under the relevant State VAT law. Thus, the appellant's valuation method satisfies the statutory requirement under Explanation (c) of Rule 2A, and the value so determined must be accepted for service tax valuation. 3. Application of Judicial Precedents and Binding Authority The Court relied heavily on the binding Supreme Court decision in Safety Retreading Co. (P) Ltd., which clarified that service tax is payable only on the service component and not on the entire contract value including goods supplied. Additional precedents cited include:
These precedents reinforce the principle that VAT-paid goods value should be excluded from the service tax valuation, and only the service portion is taxable. The Court noted that these precedents were applied in the appellant's earlier case for an earlier period, where the Tribunal had held that the appellant's calculation of service tax was in order. The Court found no reason to deviate from these authoritative rulings and accordingly upheld the appellant's valuation method. 4. Final Determination on Demand and Appeal The Court concluded that the appellant had correctly discharged service tax on the service portion of the works contract in accordance with Rule 2A and relevant judicial precedents. The Department's demand based on the alternative valuation method under Rule 2A(ii) and rejection of the appellant's valuation was set aside. The appeal was allowed with consequential benefits, and the impugned order confirming the demand was quashed. Significant holdings and core principles established: "The appellant has arrived at the value of service portion of Works Contract Service as per Rule 2A (i) whereas the Department has proceeded to arrive at the value as per Rule 2A (ii) for the period after 01.07.2012 and under the Composition Scheme for the period prior to 01.07.2012. Rule 2A (ii) would apply only if the value is not determined under clause (i). The appellant in the present case has arrived at the value and also paid VAT as per the VAT Law. The value of transfer of property in goods has to be arrived at on the basis of purchase price of various goods, apportionment of overheads and profit margin. The appellant, being an assessee under the VAT Law, has to abide by the state law for payment of VAT. Thus, he can only arrive at the value of goods used in the Works Contract by applying the VAT Law after deducting the value arrived for payment of VAT; the remaining portion has been subjected to payment of Service Tax. When VAT has already been paid on the value of goods, the same cannot be subjected to levy of Service Tax again." "The Hon'ble Apex Court in the case of M/s. Safety Retreading Co. (P) Ltd. ... has held that the assessee is liable to pay Service Tax only on the service component, which under the State Act was quantified at 30%. It was held that the assessee is not liable to pay Service Tax on the total amount for retreading including the value of materials/goods that have been used and sold in execution of the contract." "After appreciating the facts and following the decisions cited above, we are of the considered opinion that the appellant has correctly discharged Service Tax on the service portion. The demands therefore cannot sustain."
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