By TIOL News Service

MUMBAI, MAY 20, 2014: THE appellant entered into an agreement with their customers M/s Sunflag Iron & Steel Co. Ltd., Bhandara and M/s Lloyds Steel Industries Ltd., Wardha for plant operation and maintenance and for the services rendered they had received consideration from the clients on which service tax liability was discharged.

On scrutiny of the accounts maintained by the party, it was observed by the department that the appellants were receiving electricity free of cost from their clients and without supply of electricity they could not have undertaken the operation and maintenance of the plants. The department, therefore, took a view that the cost of electricity supplied free by the client should also be included in the value of taxable services.

A service tax demand of Rs.3.31 Crores was issued for the period January 2004 to July 2008 and the same was confirmed along with imposition of penalty and interest by the CCE, Nagpur.

Before the CESTAT, the appellant submitted that they have discharged the service tax on the consideration received and since they have not charged any amounts towards electricity supplied, they are not liable to pay service tax on the said value. Reliance was placed on the decisions CMS (I) Operations & Maintenance Co. P. Ltd. vs. CCE, Pondicherry - 2007-TIOL-892-CESTAT-MAD, Rolls Royce Industries Power (I) Ltd. vs. CCE, Vishakhapatnam - 2004-TIOL-529-CESTAT-DEL. Incidentally, the appellant was paying Service Tax by classifying the service under 'Consulting Engineer Service' and they had also filed a miscellaneous application to reclassify the service under the category of 'management, maintenance or repair service'. The said application was dismissed by holding that it was not an issue before the adjudicating authority.

Be that as it may, the Bench had while ordering pre-deposit of Rs.1 crore observed thus -

...When electricity is supplied free of cost by the service receiver and such electricity is required for rendering the service of operation and maintenance of the plant, then the cost of supply of electricity is a consideration for the service rendered and such cost will have to be included in the value of the taxable services rendered….

We reported this Stay order as 2012-TIOL-135-CESTAT-MUM.

Unhappy with this order, the appellant filed an appeal before the Bombay High Court and the High Court after citing the provisions of s.67 of the FA, 1994 & Rule 3 of Service Tax (Determination of Value) Rules, 2006 held as under -

"10. Perusal of the aforesaid provision would show that where the consideration for the services rendered is in terms of money then the gross amount charged by the service provider would be the value of taxable service. But, where the consideration for rendering the service is charged partly in terms of money and partly in kind, then, the value taxable service would be the money actually received plus the money equivalent to the consideration received in kind. In the present case, it is the case of the Revenue that since the electricity is supplied free of cost for maintaining and operating the equipment, the cost of electricity supplied shall form part of the consideration received in kind and, hence, the cost of electricity supplied free of cost is liable to be included in the taxable service.

11. Prima facie, we find it difficult to accept the argument of the Revenue that the electricity supplied free of cost is a consideration in kind received by the assessee from its customers. Admittedly, the electricity supplied free of cost is meant to be consumed in the manufacture of oxygen and admittedly the oxygen so manufactured is used by the customers in the manufacture of their final product. It is the customers of the assessee who clear the final product on payment of duty and no benefit accrues to the assessee on such clearances. Thus, the electricity supplied free of cost by the customers to the assessee does not in any way amount to additional consideration received by the assessee in kind.

12. The fact that the cost of electricity used in the manufacture of oxygen has to be considered in determining the excise duty payable on oxygen does not mean that the cost of electricity used in the manufacture of oxygen has also to be considered in determining the value of taxable services because the excise duty is on manufacture, whereas service tax is on the value of consideration received in cash or kind for the services rendered. Therefore, unless the cost of electricity supplied free of cost constitutes the consideration received by the assessee, the cost of electricity would not be includible in the value of taxable service.

13. Instead of supplying the electricity free of cost for the manufacture of oxygen, if the customers were to permit the assessee to purchase electricity from third parties and the customers were to reimburse the cost of electricity, it could not be said that the cost of electricity reimbursed constituted consideration received by the assessee for rendering the services. Similarly, if electricity is supplied free of cost for the manufacture of oxygen and the said oxygen belongs to the customer, then, it cannot be said that the cost of electricity constitutes the consideration in kind received by the assessee.

14. In these circumstances, we are prima facie of the opinion that the sustainability of the demand raised against the assessee being in doubt, it is a fit case for entertaining the appeal without any pre deposit. Accordingly, the impugned order is set aside and the CESTAT is directed to hear the appeal on merits without insisting on any pre deposit. We make it clear that our view expressed herein above is a prima facie view and the CESTAT shall pass order on merits without being influenced by this order…"

The order of the Bombay High Court was reported as 2012-TIOL-510-HC-MUM-ST.

The appeal was heard recently along with three more appeals filed against similar orders of the CCE, Nagpur passed in the appellants case.

And the Bench while allowing the appeals held thus -

++ We find that the operation of a plant for manufacture of goods is an activity for the production of goods. It is doubtful that such an activity can be covered by the consulting engineer service as it is neither advice, consultancy or technical assistance. Even it is doubtful whether such an activity can be considered as covered within the scope of management, maintenance or repair service. However, these are not the issues before us.

++ In our considered view, electricity is used for operating a plant which results in the production of goods, in this case, oxygen and not as a part of the service. In view of this position, in our view, electricity is not an input for the service provided by the appellant. The question of adding the value of electricity for computing the taxable value of service of operation of plant will not arise.

++ In the present case, gross amount charged by the service provider for the service provided is as per the agreement. The price of electricity cannot be considered as an additional consideration received by the appellant form their customers. The appellant does not get benefitted by the free supply of the electricity in any way. Further, the electricity is consumed in the manufacture of oxygen. Thus, electricity is an input for the manufacture of oxygen. Oxygen, in turn, is used by the appellant's clients in the manufacture of iron and steel products.

++ We are of the view that electricity cannot be considered as an input for providing the services of operation of air separation plant, it cannot be considered as an additional consideration flowing to the appellant from their client for providing the service of operation of plant and cannot be considered as part of the gross amount charged for the service of operation of the plant.

All the appeals are allowed.

In passing: Now, you know wherefrom this reasoning originated. Is this the end of the story?

(See 2014-TIOL-803-CESTAT-MUM)