CESTAT Chennai Sets Aside Demand After VAT Paid On 70%, Holds Service Tax Can Apply Only On Remaining 30% Contract

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that in a works contract involving tyre retreading, where VAT had been discharged on 70% of the contract value under the prescribed method, service tax could be levied only on the remaining 30%, observing that the same portion cannot be subjected to both levies.

A bench of Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar allowed the appeal filed by Madurai-based Super Transports (P) Ltd.

The appellant, engaged in tyre retreading, carried out activities involving both the supply of materials and the provision of services.

For the period July 2012 to September 2014, the Department raised a service tax demand of Rs. 1.07 crore, alleging that the appellant incorrectly valued the service portion by paying tax only on labour charges under Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006, and instead sought to apply Rule 2A(ii)(B), taxing 70% of the total contract value.

The appellant contended that the activity was an admitted works contract and that VAT had already been paid on 70% of the contract value under the Tamil Nadu VAT provisions, as labour charges were not separately ascertainable. It argued that taxing the same portion again under service tax would amount to double taxation.

The Department contended that the appellant had wrongly adopted Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006, by paying service tax only on labour charges, even though such a method is applicable only when the value of goods and services is clearly ascertainable.

It was argued that since the appellant had admittedly opted for the percentage method under VAT law due to the non-ascertainability of actual labour charges, the segregation shown in invoices was not based on actuals and could not be relied upon. Therefore, Rule 2A(i) was inapplicable, and valuation had to be done under Rule 2A(ii), under which 70% of the total contract value is deemed as the service portion for maintenance or repair services.

The bench noted that "under the TNVAT Rules, 2007, as in the case of Service Tax, VAT may be discharged either by deducting actual labour charges where ascertainable or, where they are not, by adopting a deemed percentage of the contract value."

The Tribunal rejected the Department's contention, observing that VAT had been paid on 70% of the contract value under the prescribed method. It emphasized that VAT and service tax are mutually exclusive levies, and the same portion of value cannot be subjected to both taxes.

The bench stated that "In the present case, it is undisputed that the Appellant adopted the percentage method and paid VAT on 70% of the contract value, as actual labour charges were not ascertainable. Since VAT and service tax are mutually exclusive, it would be impermissible to levy service tax again on the same 70% under Rule 2A(ii)(B)(i) of the Valuation Rules, 2006."

The bench further opined that once VAT is paid on the material portion, service tax can only be levied on the remaining service component.

The bench held that "once VAT has been discharged on 70% of the contract value, service tax can be levied only on the remaining 30%."

Accordingly, the tribunal set aside the demand and allowed the appeal, granting consequential relief to the appellant.

For Appellant: Advocates Raghav Rajeev and Nimrah Ali

For Respondent: G. Krupa, Authorised Representative