Paying VAT on 80% and Service Tax on 20% of Works Contract Value Complies with Rule 2A: CESTAT in Otis Elevator Case [Read Order]

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that Otis Elevator Company (India) Ltd.'s methodology of paying VAT on 80% of the works contract value and service tax on the remaining 20% complies with Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

Otis Elevator Company, the appellant, is engaged in manufacturing elevator components and executing turnkey contracts that include the supply, erection, commissioning, and maintenance of elevators. For such composite contracts, the appellant treated 80% of the contract value as the sale of goods on which VAT was discharged, and paid service tax on the balance 20% considered as the service portion.

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The department issued a statement of demand under Section 73(1A) of the Finance Act, 1994 for the financial year 2014–15, alleging short payment of service tax amounting to Rs. 15.15 crore. The basis of this demand mirrored earlier show cause notices issued for previous years, challenging the same valuation method.

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The appellant challenged the demand, submitting that its tax treatment was in accordance with amended Rule 2A, which allows the value of the service component in a works contract to be calculated by deducting the value of goods (on which VAT is paid) from the gross amount charged. They pointed out that the VAT was paid on 80% of the contract value, and service tax on the remaining 20%, consistent with the legal framework.

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They also cited the tribunal’s previous decision in its own case for the period 2012–14, in which the demands were set aside on the grounds of improper show cause notices and evolving legal standards following the introduction of the negative list regime in 2012.

The two-member bench comprising Anil G. Shakkarwar ( Technical Member ) and Dr. Suvendu Kumar Pati (Judicial Member) referenced appellant own case final order dated 13 March 2020, the tribunal held that the appellant’s practice was consistent with Rule 2A and that no fresh grounds were raised in the current demand for 2014–15.

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The tribunal observed that the same factual and legal matrix had already been adjudicated in the appellant’s favor, and the present demand was not sustainable. The tribunal set aside the Rs. 15.15 crore demand and allowed the appeal.

To Read the full text of the Order CLICK HERE

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