Value of Spares and Consumables Excluded from Service Charge for Power Plant Maintenance: CESTAT [Read Order]

In the recent ruling,the Ahmedabad bench of Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that the value of spares and consumables, supplied under a separate contract, could not be included in the service charge for maintenance.

The revenue filed an appeal against the order-in-original, in which the Adjudicating Authority ( AA ) dropped a service tax demand of Rs. 4,12,31,224/-. This demand was raised in a show cause notice against the respondent.

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Kepco Plant Service & Engineering Company Limited,the respondent-assessee, operated and maintained the Akimota Thermal Power Station for M/s. GMDC Limited, a Gujarat government enterprise. The company entered into a Long Term Operation & Maintenance Service Agreement with a contract price of Rs.24,73,58,742 for the first year, escalating by 7% annually. The agreement included penalties capped at 10% of O&M fees for various performance metrics, along with similar incentives.

A no cap penalty applied if the Progressive Plant Available Factor ( PAF ) fell below 75%, while a no cap incentive of 12.5 paisa per unit generated was provided for PAF above 75%. The respondent also had a Long-Term Spares & Consumable Supply Agreement priced at Rs.6,75,39,000 for the first year, with the same annual escalation.

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When the PAF dropped below 75%, the monthly O&M fees were reduced according to a formula, leading the respondent to issue credit notes to M/s. GMDC Limited. The department argued that the penalties from these reduced fees should be included in the gross value of the service, as they represented a decrease in the fixed contract price.

The show cause notice raised an issue regarding the respondent's supply of spares and consumables during the maintenance of the power plant, which were not included in the service value. The department argued that, since Notification No. 12/2003-ST was repealed on June 20, 2012, the value of these items should be included in the gross service value, making the Adjudicating Authority's decision to drop the demand of Rs.3,25,16,268 incorrect.

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The respondent counsel argued that the credit note issued due to the PAF being less than 75% was not part of the transaction value and therefore not subject to service tax. He stated that, according to Section 67, service tax applies only to the gross amount charged, so no tax could be demanded on the reduced amount, leading the Adjudicating Authority to rightly drop the proceedings.

Regarding the spares and consumables, he claimed these were covered under a separate contract with distinct consideration, making them exempt from service tax. He acknowledged a Cenvat credit claim of Rs.1,35,771 for these spares. While the related show cause notice was resolved in order-in-original No. 16/Asst. Commr./2020, he conceded that the bench's view suggested the credit was not legal and committed to reversing it, reiterating his submissions in the cross-objection filed.

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The tribunal considered whether credit notes issued for lowering the contract price due to a PAF below 75% were subject to service tax. It concluded that these credit notes reflected reduced service fees because of lower performance per the contract. According to Section 67 of the Finance Act, 1994, the gross value for service tax is based on the amount charged for the service. Thus, the reduced fee constituted the gross value, and no additional amount could be added for tax. The Adjudicating Authority rightly dropped the service tax demand on the credit notes.

The bench ruled on the service tax demand for spares and consumables, stating that the contract involved two separate transactions: operation and maintenance services and the sale of spares. As a result, the value of spares cannot be included in the service charge.

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The two member bench comprising Ramesh Nair ( Judicial Member ) and C L Mahar ( Technical Member ) noted that the previous order dropped the Cenvat credit demand but didn't clarify its availability when no service tax was charged. The respondent agreed to reverse the Cenvat credit on spares sold without service tax, leading the bench to conclude that this reversal was required.

In conclusion,the Revenue’s appeal was dismissed.

To Read the full text of the Order CLICK HERE

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