1. The stay and appeal are taken up together as the issue lies in short compass. By Order-in-Original No. 7/2006 dated 30.1.2006, the Commissioner has confirmed demands on the ground that the assessee are carrying on the activity of Annual Maintenance Contract (AMC) in terms of Section 67 of the Finance Act. However, they have not properly computed the correct Service Tax, which is required to be deposited by them. The show cause notice has proceeded on the basis of the statement dated 21.2.2005 given by Shri Srikant Navale, Manager (Taxation).
During the course of summon proceedings inter-alia stated that they were not showing bifurcation of the value of the AMC into service component and cost of material sold, in their invoices raised to their customers. It was alleged that they had devised their own modality for payment of Service Tax as they mentioned the value of AMC in their invoices, but computed and charged Service Tax only on 30% of such value. It was alleged that remaining 70% of AMC value was deducted by them on their own without any legal basis. It was alleged that though the statutory rate of Service Tax was 10%, the assessee did not pay the correct amount of Service Tax in accordance with statutory provisions.
Further, it was stated that in terms of Notification No. 21/2002 Cus dated 1.3.2002, parts/spares parts of specific medical equipment imported by the assessee were not to be sold. Therefore, it was alleged that the provisions of Section 67, 68 and 70 of Finance Act has been violated. The appellants reply dated 29.12.2005 to the show cause notice has been incorporated in the impugned order, which is extracted herein below.
2. In their reply dated 29.12.2005 to the SCN, the assessee inter alia put forth the following submissions: 1) They are engaged in importing various medical equipments and selling the same to their Indian customers. They also undertake installation of those equipments and enter into Annual Maintenance Contract (AMC) with their customers for maintenance of such equipments. In the maintenance contract, there are 2 types of agreement, one is the agreement for providing service only, with the spares used during the course of maintenance being charged separately. Such agreements are known as Labour Alone Agreements.
The other type of agreement is a Comprehensive Agreement wherein an amount is charged in lumpsum from the customer for both rendering of service and for replacements of spares. In such contracts, the lumpsum amount is arrived at, based on the past experience of replacement, the average value of spares, that would need to be replaced and the estimated cost of labour that would be involved in providing the services.
2) In the 1st type of maintenance contract, the value of service provided is separately distinguished from the value of spares as the customer is liable to pay for it separately. It is only in the case of the latter type of the agreement i.e., comprehensive contracts, there arises a situation where the value of goods and materials used during the course of providing the maintenance or repair services are inbuilt, alongwith the services in the consolidated value of the agreement. Three types of Annual Maintenance Contracts (AMCs) are provided by them.
In case of Procare AMC, the agreement is labour alone contract with the parts including the tube detection being charged separately. The Maxcare AMC is a contract where labour and parts other than tube detection are carried. If there is a use of tube detector, it is charged separately. The Comprehensive AMC is one where the labour, parts and tube detectors are covered. In their case, Comprehensive Annual Maintenance Contract is the subject matter of dispute.
3) They first generate a report of all equipments which complete the warranty period. The quotation is thereafter sent to the customer, furnishing details of 3 types of AMCs referred to above. The customer then indicates his preference of AMC after discussing with the Service Engineer and signs the AMC form and sends it to the assessee. The details of the contract are entered into the computerized system. The No. of visits made by the service engineer alongwith the details of materials replaced are captured in the system. Invoices are thereafter generated, depending on the visits made by the service engineer. After the invoices are raised, the Service Tax and the works contract tax is paid to the respective department in the subsequent month on 30:70 basis.
4) If the customer is in Procare AMC, the cost of parts is realized from him. If the customer is in Max care AMC or Comprehensive AMC, then the parts are replaced without collecting any additional amount. The engineer diagnoses the problem and ascertains whether any part is to be replaced. The parts that are used during the AMC are imported by them by availing the benefit of Notfn.No. 2 1/2002 --Cus. dt. 1.3.02.
5) They referred to the definition of Maintenance or Repair Services as provided under Section 65(64) of the Finance Act, 1994 and stated that the service rendered by them gets covered in either part of the definition, in as much as there is a maintenance contract and they are also authorized person of the manufacturer to undertake such maintenance and repair.
6) They referred to Section 67 of the Finance Act, 1994 regarding the valuation of taxable service and stated that, the cost of parts or other material sold to the customer during the course of providing maintenance or repair service would get excluded from the computation of value of taxable service. Further, they referred to Notfn. No. 12/2003 ST dated 20.6.03, which also exempted value of goods and materials sold by the service provider during the course of providing the service from the value of taxable service.
7) They stated that taxable value for Service Tax, had been ascertained based on historical data, the material consumption and service portion contract wise. This worked out to approximately 70% towards material and the remaining 30% towards labour. They started paying Service tax on 30% of the value of the contract, considering it to be the service portion.
8) In a case of Labour Alone Agreement, there would not be any necessity to deduct the value of the spares replaced, since the value of the service provided is separately distinguished from the value of the spares. It is only in the case of comprehensive agreement that a situation arises of identifying the value of the goods and materials used during the course of providing the maintenance or repair service from the total value indicated in the contract. As per Section 67 of the Finance Act' 1994, read with Notfn. No. 12/2003 dated 20.6.03, the value of goods and materials sold in the course of maintenance or repair are exempted from the value of taxable service. The supplies of materials during the course of AMC are to be considered as sales and accordingly, the benefit is admissible to them. They drew attention to Circular dated 20.6.03 issued on the subject. They also referred to definition of sale as inserted by Clause 29A in Article 366 of the Constitution of India. They referred to the decision in case of Asian Techs Ltd., Geo Tech Foundation and Consultants v. CCE, Pune-II 2005-TIOL-1005-CESTAT- Mumbai (LB), wherein it was held that even under execution of works contract, there is a transfer of property in the goods used in the works contract. Therefore, the supply of spares during the course of maintenance or repair undertaken during the period covered by the comprehensive contract would be treated as "sale" and they are entitled to the benefit of exemption under Section 67 of the Finance Act, 1994 and NotfitNo. 12/2003 dated 20.6.03.Modi Xerox Ltd., v. State of Karnataka reported in 1999 (114) STC 424(KAR) wherein the Hon'ble High Court held that when the parts were supplied during the maintenance contract, it amounted to sale. The said decision of Hon'ble High Court was upheld by the Hon'ble Apex Court -- 2005 (ST3)-GJXO 143-SC. 10) Section 65(121) of the Finance Act, 1994, states that "words" and "expression" used but not defined in this chapter, but defined in Central Excise Act, 1944 or the Rule thereunder shall apply, so far as may be in relation to Service Tax as they apply in relation to duty of Excise. They referred to definition of "sale" as mentioned under Section 2(h) of the Central excise Act, 1944.
Relying on the definition, it was stated that transfer of possession for consideration by one person to another would constitute "sale".
In their case, the possession of materials have been transferred to the customers and amount have been received in advance as consideration. Therefore, the definition of "sale" is satisfied with reference to service Tax. They also cited the following case laws to corroborate their contention that transfer of possession without transfer of property is to be considered as "sale".Imex Engineering Co. Pvt. Ltd., v. CCE 11) If the departments view is taken, then the benefit of the notification cannot be given effect to at all, since it allows abatement only then the goods are sold to the customer.
12) Notification No. 12/2003 of Service Tax dated 20.06.03 exempts the value of the goods and materials sold by the service provider from the payment of Service Tax in respect of all the services. The Show Cause Notice sought to deny the benefit of notification on the ground that they did not indicate the amount of the parts replaced, in the invoices separately. As per the said notification, any documentary proof is sufficient enough to claim the benefit. They have got a price-list wherein the value of each of the materials replaced is available. They have taken into consideration, the said price-list in the case of a comprehensive contract to arrive at the value of the materials replaced during the course of providing the service.
13) The goods imported under notification No. 21/2002-Cus, have been used for the maintenance of the medical equipments only. They did not violate any condition either of the Customs notification or the Service Tax notification. Goods used in the course of maintenance are considered as deemed sales and they are entitled to the benefit of the Service Tax notification.
14) The quantification of taxable turnover is not correct. The value of cancelled invoices raised during Feb.2004 to Aug,'04 aggregating to Rs. 2,70,25,079/- was not deducted. The taxable value for the period July, 03 -- Dec.04 works out to Rs. 49,47,95,474 instead of Rs. 52,18,20,553/- as shown in the Show Cause Notice. Further, deducting the value of material used for the service (R.27,59,31,014/-) and the Cenvat Credit w.e.f. 10.9.04, there is no short- payment of tax. Further, out of the total turnover of Rs. 49,47,95,474/-, they recovered an amount of Rs. 30,17,97,929/- only.
Deducting the value of materials used for providing the maintenance service, the value of taxable service works out to Rs. 2,58,66,915/- only, with Service Tax liability of Rs. 20,69,353/-. They have paid an amount of Rs. 1,38,72,810/- on Maxicare and Comprehensive contracts. Hence, there is no short- levy of any Service Tax.
15) There was no suppression of any information or any intention to evade payment of tax. It is a matter of legal interpretation as to whether, the value of material used can be considered as sold. The extended period is not invokable in the absence of any deliberate intention to evade payment of duty / tax. They have been regularly filing the returns and did not suppress anything from the department.
In view of the following decisions of the Hon'ble Apex extended period can not be invoked in their case.Padmini Products v. CCE The demand made in the Show Cause Notice is required to be set aside on the ground of limitation, except for the period May, '04 - Dec.
'04.
16) Penalty under the provisions of Section 76 and Section 77 of the Finance Act 1994 is not sustainable, since the Service Tax itself is not payable and hence, none of the provisions of the Act has been contravened. Further, since the extended period of limitation is not invokable, the penalty under the above sections is also not imposable.
17) The notice also proposed to impose penalty under Section 78 of the Finance Act. They were and still are of the bonafide belief that no Service Tax is liable to be paid by them on the value of materials used for providing the maintenance service. There is no suppression or concealment by them. The question of evading the tax does not arise. They relied on the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd., v. The State of Orissa and theKellner Pharmaceuticals Ltd., v. CCE .
In the present case, there was neither any malafide intention nor was there any intention to evade payment of tax. Hence, no penalty is imposable.
The Commissioner in the impugned order has taken a view that the utilization of parts for repair and maintenance cannot be considered as a sale.
2. This portion of the order is attacked by the appellants on the ground that the provisions of Section 67 of Finance Act clearly lays down that the value of any taxable service shall be the gross amount charged by the service provider for such service provided by him. It is further contended that Explanation [I] of Section 67 has clearly laid down that the cost of parts and other material, if any, sold to the customers during the course of providing maintenance or repair service is not required to be added in the value of taxable value. It is their submission that they have provided the entire details of the parts or other materials which have been used in the AMC. Therefore, the Revenue's stand that there was no sale of these materials is not in terms of cited provisions of law.
4. On this point we are of the considered opinion that the finding given by the Commissioner that there is no sale of parts or other materials in the AMC is not a correct finding. The value of the parts and other materials have been collected by the appellants, therefore, there is clear sale of materials to their customers. But the only point now left for consideration is as to whether the appellants have correctly arrived at their deductions in terms of the invoices produced by them. The Commissioner has taken a view that there is no documentary evidence on record that invoices aggregating to Rs. 2,70,25,079/- had been cancelled. The Commissioner in Para 7 of the impugned order has also noted that no details were adduced by the assessee. On this point, the learned Counsel has produced enormous evidence to show that all the documentary evidence had been produced and they have correctly computed the details and the Service Tax paid by them is correct in law. On this point we have directed the Commissioner to file his comments by our Miscellaneous Order No. 442/2006 dated 16.6.2006. The learned JCDR has filed the comments on behalf of the Commissioner. In the comments besides the plea that there is no sale, they have again reiterated the plea that the details were not furnished.
5. On a careful consideration, we are of the considered opinion that the Commissioner has not applied his mind on the various submissions made by the appellants in their reply to the show cause notice, which has already been extracted supra. Therefore, the order is not a speaking order. We are constrained to remit back this case to the Commissioner for denovo consideration to reconsider the replies to show cause notice on record. Prima facie, the replies to show cause notice supports the plea of the appellants that they have arrived at the correct computation. The plea of time bar and other pleas raised in the show cause notice, which is already extracted should also be reconsidered.
6. The learned JCDR refers the Board's Circular No. 233/2003-CX.4 dated 3.3.2006 and contended that in terms of the said Circular the goods which are consumed in the AMC are not entitled for deductions. In counter the learned Counsel points out that the Circular is contra to the provisions of law and it cannot be given effect to. Prima facie, the plea is correct. The matter has to be re-adjudicated on this point also in terms of the pleas raised by the appellants. Thus, the impugned order is set aside and the matter remanded for denovo consideration and the matter shall be re-adjudicated within a period of four months from the receipt of this order. The stay application is also disposed of accordingly and the appeal is allowed by remand for denovo consideration.