New Parts Used in Vehicle Repairs Amount to Goods Transfer: CESTAT Quashes Service Tax Demand on Maruti Suzuki Service Station
Pranav B Prem
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has quashed a service tax demand raised on M/s Prem Motors (P) Ltd., an authorized Maruti Suzuki service station, holding that the use of new parts in vehicle repairs amounts to a transfer of property in goods, which qualifies as a deemed sale under Article 366(29A) of the Constitution of India.
The Bench comprising Dr. Rachna Gupta (Judicial Member) and Mr. P.V. Subba Rao (Technical Member) observed that in works contracts where goods are transferred in the course of providing services, such as automobile repairs, the value of those goods—if determinable—should be excluded from the taxable value of the service and subjected to VAT instead. The Tribunal emphasized that Rule 2A(i) of the Service Tax (Determination of Value) Rules, 2006 applies in cases where the value of transferred goods is identifiable, whereas Rule 2A(ii) applies in cases where the value is not separately ascertainable.
The issue arose following an audit of the appellant's records by the Central Excise Audit Commissionerate, Jaipur, which revealed that M/s Prem Motors was issuing single composite invoices for jobs involving labour, painting, and replacement of parts. While the company paid VAT on parts and service tax on labour and painting, the Department objected to the use of two different valuation methods for computing service tax under Rule 2A(i) and Rule 2A(ii) for what it claimed was a single indivisible contract.
According to the Department, before May 7, 2013, the appellant had paid service tax on the full amount charged for painting work by applying Rule 2A(i). However, for the period from May 7, 2013 to September 30, 2015, the appellant discharged service tax on only 70% of the painting charges by opting for the abatement method under Rule 2A(ii)(B). This, the Department alleged, led to a short-payment of service tax to the tune of ₹19,60,956/-, and further claimed that the appellant had failed to disclose this dual-method approach, thereby invoking the extended period of limitation for demand under Section 73(1) of the Finance Act, 1994.
Challenging the demand, the appellant contended that where the value of goods used during repair services was known and identifiable, VAT was correctly paid on such goods and service tax was paid only on the labour portion under Rule 2A(i). However, for painting jobs—where the exact quantity or value of paint used could not be quantified—the company rightly opted for Rule 2A(ii), which allows a notional 70:30 division between service and goods. The appellant stressed that both methods are statutorily permitted and may be adopted in accordance with the nature of the transaction.
Accepting these arguments, the Tribunal emphasized that the definition of works contract under Section 65B(54) of the Finance Act, 1994 clearly includes repair and maintenance involving transfer of goods. It noted that the law permits bifurcation of composite contracts based on whether the value of goods can be separately determined or not. The Bench referred to the Supreme Court’s decision in Larsen & Toubro Ltd. v. State of Karnataka [ 2014 (303) ELT 3 (SC)] to reiterate that even an indivisible contract can be treated as a deemed sale if there is a transfer of property in goods.
The Tribunal observed: “From the invoices in question, it is apparent that the value of goods/spare parts while rendering the services of the motor vehicles by the appellant has been separately earmarked... However, vis-à-vis the service of painting there is no bifurcation of amount of paint consumed and the labour charges. The painting job becomes nothing but works contract where the value of goods is not determinable.”
It was further noted that the Commissioner's order had denied bifurcation of the composite contract on an erroneous basis and failed to recognize that Rule 2A(ii) specifically allows abatement where exact value of goods cannot be determined. The Tribunal highlighted that transfer of consumables like paint, even though not independently marketable, still falls under deemed sale if the value is not separately determinable, warranting application of Rule 2A(ii).
The Tribunal also cited the judgment of the Madhya Pradesh High Court in Agarwal Colour Advance Photo System v. Commissioner of Central Excise [2020 (38) GSTL 298 (MP)], which upheld the legal validity of bifurcating contracts into goods and service components for tax purposes.
Rejecting the Department’s reliance on the Gauhati High Court’s decision in Anamika Motors v. State of Assam [2022 (63) GSTL 421 (Gau.)], the Tribunal pointed out that the said decision was rendered in a different factual context where the paint job was seen purely as a labour service, unlike the present case where goods were clearly involved.
Concluding that the service tax demand was wrongly confirmed, the Tribunal set aside the orders passed by the adjudicating and appellate authorities. It held that the appellant’s approach of applying Rule 2A(i) for transactions where the value of goods was known, and Rule 2A(ii) where it was not, was in full compliance with the Valuation Rules. Accordingly, the appeal filed by M/s Prem Motors (P) Ltd. was allowed, and the impugned demand was quashed in its entirety.
Appearance
Present for the Appellant: Shri Vishal Kumar, Advocate
Present for the Respondent: Shri Manoj Kumar, Authorized Representative
Cause Title: M/s Prem Motors (P) Limited V. Commissioner, Central Excise & Central Goods & Service Tax, Jaipur
Case No: Service Tax Appeal No. 51360 of 2019
Coram: Dr. Rachna Gupta [Judicial Member], Mr. P.V. Subba Rao [Technical Member]
[Read/Download order]
