The Karnataka High Court recently ruled that service tax under a composite works contract entered into by a tyre retreader is limited to the service component only and not on the entire contract value.
The Petitioner M/s. Tyresoles (India) Pvt. Ltd. (Tyresoles) is engaged in providing tyre retreading services whereby material is procured and then repurposed to be bonded to the retreaded tyres; the execution of the work by the petitioner is done by means of a composite indivisible works contract.
As part of the business regimen, the Petitioner discharges Value Added Tax (VAT) at 70% of the turnover, being the value of the deemed sale component and discharges Service Tax to the Union of India at 30% of the turnover being the value of the service provided.
A total of three writ petitions were instituted by Tyresoles challenging Orders-in-Original passed by the Respondent with regard to five different periods from April 2006 to June 2017. The Orders-in-Original sought to levy service tax on the entire turnover of the value of the service provided by the Petitioner.
Rajesh Chander Kumar, Satish L Karale, Anirudha R J Nayak, Yovini Rajesh Kohra, T V Ajayan and Aravind D Kulkarni appearing for the Petitioner contested the levy averring that they had already paid VAT on 70% of the contract value and service tax on only 30%, representing the service component.
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Meanwhile, Shivaraj S Ballolli, Mrutyunjay Tata Bangi, M B Kanavi and Jeevan J Neeralagi, appearing for the Respondents in the three Writs argued that post-July 1, 2012, amendments in service tax law altered the taxability of such contracts effectuating the tax levy on the entire works contract.
The Petitioner proceeded to rely on the Supreme Court decision in Safety Retreading Company (P) Ltd., v. Commissioner of C.EX., Salem (2017), and the decision of the Bombay High Court in Tyresoles India Pvt. Ltd., v. Union of India (2019) where the High Court vitiated the Revenue’s contest that an alternative remedy of appeal was available.
The Single-Judge Bench of Justice C.M. Poonacha observed that service tax can only be imposed on the service portion of a composite contract and not on materials, reiterating the constitutional separation of taxation powers between the Union and the State.
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The Karnataka High Court further noted that the petitioner had consistently paid VAT on 70% of the contract value and service tax on the remaining 30%, thereby complying with relevant tax laws. The Bench held that the Department’s attempt to levy service tax on the entire amount was untenable in terms of the Supreme Court decision in Safety Retreading Company,
The Bench also acceded to the petitioner’s contention that tax invoices clearly bifurcated material costs in terms of VAT and labour charges according to service tax provisions, aligning with the law laid down by judicial precedents.
In light of all the observations made, the Karnataka High Court proceeded to quash the impugned Orders-in-Original, setting aside the tax demand and penalties imposed by the Revenue.
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