Supreme Court Rules on Service Tax Applicability in Tyre Retreading Contracts

The Supreme Court of India recently decided a crucial case on the applicability of service tax in contracts involving the retreading of tyres. The appeal was filed by Safety Retreading Company (P) Ltd., along with other appellants, challenging the imposition of service tax on the total amount charged for retreading, including the cost of materials used.

Background of the Case

The primary issue before the Court was whether service tax should be levied on the entire amount charged for tyre retreading, including the value of materials and goods used in the process. The appellants argued that the tax should apply only to the service component, while the cost of materials should be excluded.

Legal Framework

The case centered around Section 65(105)(zzg) of the Finance Act, 1994, which defines ‘taxable service’ as:

“Any service provided to a customer by any person in relation to maintenance or repair.”

Additionally, Section 65(64) of the Finance Act defines ‘management, maintenance, or repair’ as including:

• Maintenance or repair of properties, whether immovable or not.
• Maintenance or repair, including reconditioning or restoration, or servicing of any goods (excluding motor vehicles).

The charging provision, Section 66, imposes service tax on the value of taxable services, while Section 67 clarifies that the valuation does not include the cost of parts or other materials sold to the customer during maintenance or repair services.

Government Notifications and Circulars

The appellants relied on Notification No. 12/2003-ST, dated June 20, 2003, which exempts the value of goods and materials sold by a service provider from service tax. Additionally, a CBEC Circular dated April 7, 2004, clarified that exemption is available if the service provider maintains records showing material consumption and specifies the material value on invoices.

Tribunal’s Decision

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled against the appellants, holding that the entire value of the service, including material costs, was taxable. The majority view in the tribunal stated that:

• There was no evidence of sale of materials in rendering the maintenance and repair service.
• ‘Maintenance and Repair Service’ could not be classified as a ‘Works Contract’ for service tax purposes.
• The concept of ‘deemed sales’ was only relevant to ‘Works Contracts,’ not to maintenance and repair services.
• The appellants had not provided sufficient documentary proof to satisfy the conditions under Notification 12/2003-ST.

Supreme Court’s Observations

The Supreme Court examined the legal provisions and the factual matrix of the case and held:

“On the very face of the language used in Section 67 of the Finance Act, 1994, we cannot subscribe to the view held by the majority in the appellate tribunal that in a contract of the kind under consideration there is no sale or deemed sale of the parts or other materials used in the execution of the contract.”

The Court noted that the appellants had paid value-added tax (VAT) on 70% of the total invoice amount under state laws, indicating that the cost of materials was separately identified and taxed under state sales tax regulations.

Final Judgment

The Supreme Court ruled in favor of the appellants, setting aside the tribunal’s decision and holding that:

• Service tax should only be levied on the service component, which was quantified at 30% under state tax laws.
• The appellants had provided sufficient proof of material costs through invoices and VAT payments.
• Any amounts deposited by the appellants pursuant to earlier orders should be refunded immediately.
• The bank guarantee furnished for penalties should be discharged.

Conclusion

This landmark judgment clarifies that service tax cannot be levied on the total value of a contract where materials are separately sold and accounted for. The ruling provides relief to businesses engaged in maintenance and repair services, ensuring that only the service component is subject to taxation.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: Safety Retreading Co vs Commissioner of Cent Supreme Court of India Judgment Dated 18-01-2017.pdf

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