Wipro Ge Medical Systems Pvt. Ltd v. The Commissioner Of Service Tax

T.K. Jayaraman, Member (T)

1. These appeals have been filed against the following Orders-in-Original No. passed by the Commissioner of Service Tax, Bangalore.

Sl. No.

Appeal No.

Order-in-Original No.

Amount involved







Service Tax (Rs)

Penalty (Rs)

1

ST/367/2007

68/2007 dt. 25.06.2007

3,03,77,607/-

200/- per day Under Section 76 1000/-Under Section 77 4,00,00,000/- Under Section 78

2

ST/113/2006

07/2006 dt. 30.01.2006

3,03,77,607/-

200/- per day Under Section 76 1000/-Under Section 77 4,00,00,000/- Under Section 78

2. Mr. G. Shiva Dass, the learned Advocate, appeared on behalf of the appellants and Ms Sudha Koka, the learned SDR, for the Revenue.

3. We heard both sides.

4. The appellants undertake installation of various medical equipments. They enter into Annual Maintenance Contract with their customers for maintenance of such equipments. In the present case, we are concerned with an agreement called "Maxicare and Comprehensive Annual Maintenance Contract." In this the appellants apart from supplying labour, also supply the materials which have to be used in the maintenance contract. In other words, for the maintenance of the equipments at certain times the spare parts etc. have to be replaced and the contract covers these spares also. The contention of the department is the entire amounts received by the appellants in these cases are liable to service tax under the category of "Annual Maintenance and Repair Service." It is the contention of the appellants that they are not liable to pay service tax on the cost of the materials supplied in the course of the service. In fact, the appellants have paid service tax only on 30% value of the gross receipt. In respect of the remaining 70%, they have stated that they had paid the sales tax to the State Government. According to them, in any works contract the transfer of property in the course of the works contract will be considered as sale. For this they have relied on the Constitutional provision in Article 366(29) (B) of the Constitution. However, the Commissioner, Service tax has not accepted the contention of the appellants and he has demanded the service tax on the entire receipt towards the Annual Maintenance Contract. Apart from demanding interest, he has imposed penalties under the various provisions of the Finance Act, 1994.

5. The learned Advocate for the appellants invited our attention to Section 67 of the Valuation Rules which provide as to how the services have to be valued for purposes of service tax. Our attention was invited to the provision which states that the value does not include the cost of the parts or other materials if any sold to the customers during the course of providing maintenance or repair service. Therefore, they had taken 70% abatement on the gross receipt and they have also stated that on the 70%, they had paid sales tax. They have given all the evidences before the authorities. However, the Commissioner Service Tax has not accepted the same. The main contention of the appellant is on the entire receipt only 30% is towards the service therefore they would pay only service tax on 30% of the receipt. In fact, this matter was initially before this Bench, and this bench issued the final order dated 20.07.2006 remanding the matter to the Commissioner Service Tax. On the said order Revenue approached the Honble High Court of Karnataka and in terms of the decision of the Honble High Court of Karnataka the Commissioner had to hear the appeals De Novo and he has passed the impugned Order-in-Original De Novo. In the impugned order, the Commissioner has stated that the Constitutional Article 366 29A (B) cited by the appellant has absolutely no application. He says that the contract is only for maintenance and repair and there is no involvement of any sale of the material. This is the thrust of his argument. Therefore, he has concluded that the appellants are liable for the entire value received by them. There cannot be any abatement. He has also stated that this 30% 70% division of the contract value for purposes of service tax and sales tax is entirely arbitrary. He has also refused to accept the contention that in the contract of this type the goods which are replaced should be considered as goods sold.

6. The learned Advocate made the following submissions:

(i) Section 67 of the Finance Act, 1994 itself recognizes the fact that goods and materials would indeed be sold during the course of the maintenance or repair. Further, it was submitted that the Honble High Court of Karnataka in the case of Modi Xerox Ltd. v. State of Karnataka reported in 1999 (114) STC 424 (KAR) has held that during the course of providing maintenance service in Annual Maintenance Contract the supply of materials can be considered as sale and this position has been affirmed by Supreme Court in 2005 (3) GJX 0143 SC. Therefore, it is now settled law that even during the course of maintenance there is a sale of goods. Our attention was also invited to the Notification No. 12/2003 dated 20.06.2003 issued by the Government which recognizes the fact and exempts the value of materials sold during provision of a service.

(ii) Reliance was placed on the decision of this Bench in the case of Shilpa Colour Lab v. CCE, Calicut reported in 2007 TIOL 40 CESTAT-BANG which passed the order after considering Section 67, Notification 12/2003-ST and the Circular dated 03.03.2006 issued by the Board. It has been held that service tax is not payable on the amount on which sales tax is paid. A similar view has also been expressed in the case of Kone Elevators India Pvt. Ltd. v. Commissioner of Service Tax, Chennai 2007 TIOL 921 CESTAT MAD. Even the Tribunal in the earlier proceedings in the order dated 20.07.2006 has specifically held that the finding of the Commissioner that there is no sale of goods and material in the course of providing AMC is not correct.

(iii) It was submitted that for arriving at the taxable value for Service Tax, the appellant had ascertained, based on historical data, the material consumption and service portion contract wise. This worked out approximately 70% towards materials and the remaining 30% towards labour as shown in the following column:

Month

Total Revenue based on billing

Material Procurement Cost

Percentage

April 03

20,078,520

15,217,738

76%

February 03

19,790,055

7,421,452

38%

January 03

16,381,907

8,043,854

49%

June 03

26,074,910

12,858,860

49%

March 03

18,419,702

26,381,048

143%

May 03

16,528,842

10,023,947

61%

Grand Total

117,273,936

79,946,900

68%

(iv) The above working was in line with the abatement granted by the State Government towards labour while calculating the Works Contract. This is the reason for the appellants to adopt the ratio of 70:30 for the payment of service tax. It is now settled law that once an amount suffers sales tax, service tax cannot be demanded on the same amount. The following case laws were relied on:

a) BSNL and Anr. v. UOI and Ors. 2006 (145) STC 91 [LQ/SC/2006/192 ;]

b) Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes

c) BPL Mobile Communications Ltd. v. CCE, Mumbai

d) ASLI Motors Pvt. Ltd. v. CCE, Customs & Service Tax, Patna 2008 TIOL114 CESTAT KOL

(v) It was also stated out of the total turn over of Rs. 49,47,95,474/-, the appellants had received only Rs. 30,17,97,929/-. Taking this into consideration the value of taxable service tax works out to Rs. 2,58,66,915/- only. It was submitted that the appellants had actually paid excess service tax to the tune of Rs. 1,68,48,054/-. It was submitted that the appellants had always paid service tax upfront in advance at the rate of 30% of the contract value when they were liable to pay at a much lesser value. Thus, it was urged that the appellants had always paid Service Tax in advance and there has been no short levy whatsoever.

(vi) The show cause notice had invoked the longer period under Section 73 of the Finance Act. It is now a settled law that longer period of limitation cannot be invoked unless there is an element of fraud, collusion or any willful mis-statement or suppression of facts or contravention of any of the provisions of the or Rules with an intention to evade payment of duty. The following case-laws are relied on:

a) Continental Foundation Joint Venture Sholding, Nathpa H.P. v. Commissioner of Central Excise, Chandigarh - I 2007 TIOL 152 SC

b) CCE v. Chemphar Drugs & Liniments reported in

c) Padmini Products v. CCE 1989 (43) 195 (S.C)

d) Pushpam Pharmaceuticals Company v. CCE, Bombay reported in

e) Ugam Chand Bhandari v. CCE reported in

f) Anand Nishikawa Co. Ltd. v. CCE reported in

7. The learned Departmental Representative stated that the contract is only for the annual maintenance and the consideration received is only for the maintenance and repair. The replacement of spare parts is only incidental and there is actually no sale of the goods involved. Therefore, she supported the order-in-original and stated that the Order of the Commissioner is in accordance with law and the appellants are liable to pay service tax on the gross receipts. She also invited our attention to the Commissioners order wherein he has relied on the Boards circular dated 03.03.2006 according to which the appellants could have availed of the abatement only after producing the documentary evidence. She stated that there is actually no documentary evidence for the abatement claimed. This 30% 70% appears to be arbitrary. In this view of the above, she requested the Bench to uphold the order of the Commissioner, Service Tax.

8. On a very careful consideration of the fact, we find that there is no dispute with regard to the leviability of service tax on the maintenance and repair services. The main point of dispute is with regard to the valuation. However, Section 67 of the Finance Act clearly provides for the abatement of the value of the goods sold in the course of the carrying out of the service. The point is whether the goods are actually sold. According to the department, the contract is only for the maintenance and repair. Therefore, it cannot be said that the spare parts were sold. This view is not correct. The chartered accountant has actually given a certificate with regard to the consumption of materials. It is also not denied that in the course of the maintenance no material was used. In several decisions it has been held that service tax cannot be levied on that portion of the value on which sales tax has been charged. This position has been elaborately dealt with in the decision of the Shilpa Colour Lab case decided by this Bench and cited supra. This view has been affirmed in many decisions. Once, the sales tax has been paid on the materials, then on the same service tax also cannot be charged. In fact, the appellants had relied on the decision of the Honble Karnataka High Court which has been upheld by the Honble Supreme Court. In the Modi Xerox case it has been clearly held that in the Annual Maintenance Contract, the replacement of spares etc. would be considered as sale. Even in the present case, on 70% of the value sales tax has been paid and this has been accepted by the Government of Karnataka. This fact also cannot be ignored. Moreover, Notification No. 12/2003 dated 20.06.2003 clearly provides for exempting the value of the materials sold during the provision of the service. Whenever, any service is provided if in the course of the provision of the service certain materials are used they will definitely be considered as sale. This is clearly covered by the Constitutional Article 366(29)(B) cited by the learned Advocate. We do not agree with the learned Commissioner that the said Constitutional provision has no application here. The Maintenance and Repair Contract entered by the appellant with their customers has been recognized as Works Contract by the Government of Karnataka and the registration has been obtained for payment of sales tax. When that is the case, it cannot be said that the spare parts received by the clients of the appellant have not been sold to them. We hold that in any Annual Maintenance Contract the spare parts etc. which have been used in the course of the maintenance service are definitely to be considered as sold and when sales tax has been paid on the value of such goods, simultaneously one cannot charge them to the service tax. In view of these clear legal provisions, there is absolutely no justification for levy of service tax beyond 30% of the value of the total contract.

We would like to state that the data provided by the appellant shows that the adoption of 30% of the value of the contract towards value of services rendered appears to be reasonable in the light of the payment of sales tax on the 70% value which has also been accepted. Therefore, this valuation cannot be said to be arbitrary. In these circumstances, we do not find any merit in the impugned orders. Since, the demand of duty is not sustainable the demand of interest, penalty etc. also are not justified. Hence, we allow the appeals with consequential relief.

(Operative portion of this Order was pronounced in open court on conclusion of hearing)