Department Cannot Selectively Recalculate Service Tax On Works Contract Invoices: CESTAT Bengaluru

The Bengaluru Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 3 July held that the Department cannot selectively compute differential service tax on works contract services by accepting taxpayer's valuation methodology for some invoices while rejecting it for others.

Judicial Member P. A. Augustian and Technical Member R. Bhagya Devi allowed two appeals and partly allowed another appeal filed by M.N. Associates challenging differential service tax demands raised by the Department. The Bench held:

"As rightly pointed out by the appellant, the demand has been calculated only on those invoices where the service tax paid is on 30% of the value and the other invoices where service tax has been paid on the value more than 30%, has been accepted."

The dispute arose after the Department recalculated the taxable value of works contract services provided by M.N. Associates. It treated only 30 per cent of the invoice value as attributable to goods in certain invoices and demanded service tax on the remaining amount, while accepting the valuation adopted in other invoices involving identical services.

M.N. Associates contended that it had separately determined the value of goods and services in accordance with Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006, and had paid Value Added Tax (VAT) on the value of goods transferred during execution of the contracts.

It argued that the Department had selectively accepted its valuation methodology in some invoices while rejecting it in others where service tax had been paid on 30 per cent of the value, resulting in an artificial differential demand.

The Tribunal accepted the contention and held that the Revenue could not adopt different valuation methods for identical services. It observed that the service portion of a works contract must be determined after excluding the value of goods and that the Department could not selectively recalculate tax based on the percentage of value adopted in different invoices. The Bench noted:

"For the same services, the Revenue cannot segregate and calculate the differential tax based on the percentages of the value without determining the serviced portion of the value of the services rendered by the appellant."

The Bench also noted that service tax had already been paid on services including preparation of layout plans and obtaining approvals from the concerned authorities. It therefore found no justification to sustain the differential service tax demands confirmed by the adjudicating authorities.

Accordingly, the CESTAT partly allowed one appeal by sustaining only a demand of Rs. 6,504 relating to Goods Transport Agency (GTA) services and set aside all penalties. The remaining two appeals were allowed in full.

For Appellant: N. Anand, Advocate

For Respondent: Malatesh S. Kulkarni, Assistant Commissioner