CESTAT Chennai Rules No Double Taxation in Works Contracts, Limits Service Tax to Balance Value After VAT
CESTAT Chennai Rules No Double Taxation in Works Contracts, Limits Service Tax to Balance Value After VAT
Introduction
The Customs Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has held that in a works contract, where VAT has already been discharged on a specified portion of the contract value, service tax can be levied only on the remaining portion.
A Bench comprising Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar observed that VAT and service tax are mutually exclusive levies and the same portion of value cannot be subjected to both.
Factual Background
The case involved Super Transports (P) Ltd., a Madurai-based entity engaged in tyre retreading activities, which involve both supply of materials and provision of services. For the period July 2012 to September 2014, the appellant discharged VAT on 70% of the contract value under the Tamil Nadu VAT provisions, adopting the prescribed percentage method due to non-ascertainability of labour charges.
Procedural Background
The Department raised a service tax demand of approximately ₹1.07 crore, alleging incorrect valuation by the appellant, who had paid service tax only on labour charges under Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006. The Department sought to apply Rule 2A(ii)(B), treating 70% of the contract value as the service portion for taxation. Aggrieved, the appellant filed an appeal before the Tribunal.
Issues
1. Whether service tax can be levied on the same portion of contract value on which VAT has already been paid.
2. Whether Rule 2A(i) or Rule 2A(ii) of the Valuation Rules is applicable in cases where labour charges are not ascertainable.
3. Whether dual taxation on the same component of a works contract is permissible.
Contentions of the Parties
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 prescribed method. It argued that levying service tax again on the same portion would result in impermissible double taxation.
The Department contended that the appellant wrongly adopted Rule 2A(i), which applies only when the value of goods and services is ascertainable. It argued that Rule 2A(ii) should apply, under which 70% of the contract value is deemed to be the service portion for maintenance or repair services.
Reasoning and Analysis
The Tribunal noted that under both VAT and service tax regimes, where actual segregation of labour and material is not possible, a deemed percentage method is permissible. It observed that the appellant had already discharged VAT on 70% of the contract value in accordance with the applicable VAT rules, and that such payment covered the material portion of the contract.
The Bench emphasised that VAT and service tax operate in mutually exclusive domains, and the same portion of value cannot be subjected to both levies. Rejecting the Department’s approach, the Tribunal held that applying Rule 2A(ii) to tax 70% of the contract value as service would effectively result in taxing the same portion already subjected to VAT. It concluded that once VAT is paid on 70% of the contract value, service tax can be levied only on the remaining 30%, representing the service component.
Decision
The CESTAT Chennai set aside the service tax demand and allowed the appeal. It held that service tax is leviable only on the remaining 30% of the contract value where VAT has already been discharged on 70%.
In this case the appellant was represented by Advocates Raghav Rajeev and Nimrah Ali.
