Service Tax Payable Only on Service Portion in Works Contract Where VAT Already Paid on Goods: CESTAT [Read Order]

Ocean Lifespaces India Private Limited, the appellant, is a company engaged in providing interior decoration services for commercial, industrial, and residential buildings. The appellant classified its services under "Works Contract Service" and paid VAT on 79.85% of the invoice value while paying service tax on the remaining 20.15%.

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The department issued a statement of demand, arguing that the appellant should have paid service tax on 70% of the gross value under Rule 2A(ii)(C) of the Service Tax (Determination of Value) Rules, 2006, and not on the reduced value as claimed. The appellant’s reply was rejected by the adjudicating authority, confirming the demand against them. Aggrieved by this order, the appellant approached the CESTAT.

The appellant's counsel argued that VAT had already been paid on the goods used in the works contract, so service tax could only be charged on the service portion. They relied on previous judgments, including Safety Retreading Co. (P) Ltd. v. CCE, Salem, Singh Sales and Services v. CCE, and Sobha Developers Ltd. v. CCE, which held that service tax cannot be levied on the goods portion where VAT has been paid.

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The revenue counsel countered that the appellant did not pay VAT on the actual value of the goods transferred but on a notional value, so the method adopted by the appellant was incorrect. They argued that service tax should be paid on 70% of the gross value under the valuation rules applicable to works contracts.

The two-member bench comprising P. Dinesha (Judicial Member) and P. Anjani Kumar (Technical Member) observed that Rule 2A(ii) would apply only if the value is not determined under Rule 2A(i) and that the appellant, having paid VAT under state law on the goods portion, was correct in paying service tax only on the service portion. The tribunal also observed that once VAT is paid on the goods, the same value cannot be subjected to service tax again.

The tribunal explained that the appellant had correctly determined the service tax payable under the works contract provisions and that the department's demand could not be sustained in law. The appellant’s appeal was allowed with consequential relief.

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