The querists have placed before me certain queries for my opinion in regard to the levy of service tax on the maintenance contract, popularly known as Preventive Maintenance Contract. The facts relevant for the queries are as under :

1. The querists undertake various preventive maintenance contracts for maintaining Airconditioners and the Airconditioning systems under a composite contract for maintenance and service, repair, improvement etc. The contracts in question are normally executed in the beginning of the year, providing for periodical visits to the places of the customers by technical engineers for servicing the Unit or the System in question. When the agreement is entered into, neither the customer nor the querists could precisely ascertain or evaluate the value of the material that would be required during the course of the year for maintaining the equipment or the system in its proper optimum working condition. Under the circumstances, a composite amount for the entire preventive maintenance contract is agreed upon to be paid by the customer in advance for maintaining the equipment or system during the period agreed upon by the parties. Normally the duration of such agreements are for twelve months. The dominant intention of the parties, therefore, is of rendering service alongwith replacement of the obsolete or worn out spare parts, components etc. For such replacement etc., the querists do not charge any amount, either extra or separately, though the querists at the end of the period of each agreement would be in a position to acertain the actual value of the spare parts, components etc. that were supplied or replaced as a part of the preventive maintenance contract. In other words, the consideration agreed for maintaining the equipment or system during the period under agreement include the value of the spare parts or components in which there would be transfer of property during the course of rendering the maintenance service.

2. The querists desire to have my opinion on the above facts, as to whether they can claim deduction of the value of the material on which VAT was payable while calculating the service tax payable on preventive maintenace contract.

Statutory background

3. The service tax is levied under Finance Act, 1994. In other words, there is no separate enactment providing for levy of service tax. The rate of service tax presently is 12% plus an education cess at 3% on tax. Thus, the effective rate is 12.36%. Till 2003, the Parliament used to levy service tax under residuary entry of List I of Seventh Schedule by expanding the tax net while introducing the annual general budget through amendments in Finance Act, 1994. However, thereafter, the Constitution was amended by introduction of new Article 288A and Entry 92C in Union List; i.e., List I of the Seventh Schedule appended to the Constitution.

4. As per the provisions of various sections, it is clear that the service tax is on services provided/rendered/performed or delivered, but no such tax is levied or leviable on sale or manufacture of goods.

5. Chapter 5 of the Finance Act, 1994 and 5A of the Finance Act, 2003 are relevant along with the subsequent amendments for the purpose of queries before me.

6. Section 65 is a definition clause. Sub-clause 41 thereof to define the term ‘goods’ to mean the same meaning as is assigned to it by section 2(7) of the said Sales of Goods Act, 1930. The said provision under the Sale of Goods Act define ‘goods’ to mean every kind of movable property other than actionable claims and money and includes stock of shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

7. Sub-clause (64) of section 65 define the expression “management, maintenance or repair” to mean and include any service provided by any person under the contract or an agreement in relation to the maintenance or repair or servicing of any goods excluding motor vehicles. The said sub-clause (64) was substituted with effect from 1st May, 2006. That substitution replaced the earlier sub-clause (64) as it then existed. Incidentally, this kind of service was roped in the tax net with effect from 1st July, 2003.

8. The term ‘taxable service’ has been defined in clause (105) of section 65 to mean any service provided or to be provided:
   
   (a) ................ to
   (zzf) ...............
   (zzg) to a customer; by any person in relation to management, maintenance or repair.
   (zzh) to (zzzz) ...............
   (zzzza) to any person by any other person in relation to the execution of a Works Contract excluding certain contracts mentioned therein. The term ‘Works Contract is defined by way of Explanation thereunder to mean a contract wherein transfer of property in goods involved in the execution of the contract is leviable to tax as sale of goods rule such contract is for the purpose of carrying out various jobs mentioned therein. It may, however, be mentioned here that the said specification of jobs does not include the job of maintenace or repair of any equipment.

9. Such an exclusion or departure from the provisions of the various VAT Acts enacted by State legislatures was made possibly because the maintenance or repair or servicing of any goods was expressly covered by sub-clause (64) right from 1st July, 2003. In other words, though under Article 366(29A)(b) of the Constitution, the value of the material in which there could be said to be transfer of property from the person maintaining or repairing the equipment to another person would be deemed to be a transaction of deemed sale to the extent of value of such material. Incidentially, it may be recalled that the above referred constitutional amendment was carried out with a view to get over the ratio of the judgment of the Supreme Court in the case of State of Madras vs. M/s. Gannon Dunkerley & Co. (9 STC 353).

10. The true scope of the Fortysixth Amendment to the Constitution as referred to above, came to be considered by the Constitution Bench of the Supreme Court in the case of M/s. Builders Association of India vs. Union of India (73 STC 370).

11. While considering the determination of the value on which tax can be levied for the goods transferred in the execution of Works Contract to the principal, the Supreme Court referred to the similar provisions under the Australian law and held that the vesting of material or the transfer of property from the contractor to the principal, would take place bit by bite; i.e., the moment the material becomes part of the property (wether movable or immovable) belonging to the principal. The Constitution Bench ruled that in an indivisible composite contract involving utilisation of the material by the contractor, the value of the goods can be arrived at by bifurcating the composite contract into two, one for supply of material and another for rendering the services. The Supreme Court, therefore, rejected the submission made by the State that the States have power to levy tax on the total contract value. In yet another judgment in the case of Second Gannon Dunkerley (88 STC 204), the Constitution Bench not only rejected the prayer of the State to reconsider the earlier decision in the case of M/s. Builders Association of India (supra), but also laid down guidelines for providing deductions that have to be considered while levying tax under the amended constitutional provisions. Such deductions include labour charges, profit in relation thereto, payment to engineer for visiting the site, drafting of plan etc.

12. Now, turning to the provisions of Maharashtra VAT Act, 2002 and the rules framed thereunder, Rule 58 provide for the determination of sale price in respect of sale by transfer of property in goods involved in the execution of a works contract. The said rule provide for virtually all the deductions mentioned by the Supreme Court in the case of Second Gannon Dunkerley (supra) that are to be deducted from the value of the entire contract value. It also provides for deduction of 40% from the total contract price whenever Annual Maintenance Contracts are involved and wherein the contractor was unable to evaluate the value of different charges mentioned in Rule 58. In other words, the VAT is payable on 60% of the Annual Maintenance Contract value, considering it to be the value of the material in which there is a transfer of property from the job worker to the principal.

13. Though the above referred provisions form part of the enactment by the State legislature, the review of Lists I & II appended to the Seventh Schedule of the Constitution and the provisions of Article 246 establish that the power of levying tax have been succinctly earmarked for the levy by Parliament as well as the State legislature. That has been done in such a manner that there is no case of overlapping or levy of tax, both by the Parliament and the State legislature on the same quantum of amount relating to the same transaction. I take support for this proposition from yet another Constitution Bench judgment of the Supreme Court in the case of M/s. Godfrey Phillips India Ltd. vs. State of U.P. (139 STC 537). The Supreme Court in that case has clearly laid down that the powers of Parliament and State legislature under the respective List I & II are mutually exclusive. In other words, if a transaction is treated as a case of deemed sale under Article 336(29A)(b), the same to the extent of value of the goods utilized in the execution of that job, cannot be considered for the purpose of levy of service tax under Entry 92C of List II; i.e., Union List appended to the Seventh Schedule of the Constitution simultaneously to the introduction of a new Article 268A.

14. Similar controversy also arose before the Larger Bench of the Tribunal in the case of B.S.N. L. vs. Union of India (145 STC 91) where the Supreme Court, while reversing the decision of the Kerala High Court in the case of M/s. Escotel (126 STC 475) as well as its own decision in the case of State of U.P. vs. Union of India (130 STC 01), held that both the judgments did not lay down the correct law.

15. Taking an overall view of the controversy placed before me, I may say that for the purpose of computing the value of taxable services, the value of goods sold [whether as pure sale as understood under the Sale of Goods Act or as a deemed sale under Article 366 (29A)(b)] will have to be deducted or excluded from the gross amount charged. In other words, the gross amount charged for rendering services only would be liable to tax under the Service Tax law and nothing more. For arriving at the correct decision in the matter, all the above referred Supreme Court judgments will have to be considered and due cognisance thereof will have to be taken before arriving at the gross value on which service tax is leviable.

16. The recently codified Service Tax Valuation Rule cannot override the Charging Section 66 or the Valuation Section 67 of the Finance Act, 1994.

17. The definition of the term ‘Works Contract’ under the Service Tax law and the State VAT law or the Central Sales Tax Act, 1956 are varied, yet the law of the land pronounced under Article 141 of the Constitution cannot be ignored.

18. The true nature of Annual Maintenance Contract was also considered by the Supreme Court in the case of M/s. Xerox Modi Corporation vs. State of Karnataka (142 STC 209), wherein the Supreme Court held that the fact that the value of material or parts replaced cannot be ascertained in the beginning of the period involved in the agreement, did not make it non-taxable, if at the end of the year it was revealed that certain parts were replaced. In that case, the tax would be leviable as a transaction of indivisible works contract to the extent of value of the parts so replaced. Considering that law on the point, it is now incorrect to infer that preventive maintenance contracts are liable on the gross amount under the Service Tax law inclusive of the value of the spare parts so replaced. In that view of the matter, the querists can very well exclude the value of the parts replaced and pay service tax only on the balance amount.

19. As regards the second query, the Parliament being supreme, it can for a specific enactment define the term “works contract” differently under the service tax from the definition under any other enactment.

20. Turning to Query No. 3, I am of the opinion that the service tax cannot be demanded on the gross value of the contract without deducting the value of the goods utilized in the execution of the concerned Annual Maintenance Contract.

21. In view of the discussion in great detail, I may clarify that the ratio of the judgment in the case of B.S.N.L. and other cases referred to by me will have its bearing and impact while deciding the actual quantum on which service tax is payable by the querists.
    
    In view of the above position, I recommend that in case the Commissioner of Service Tax do not agree to the submissions for excluding the value of the goods so replaced; the querists you may submit a writ petition before the Bombay High Court under Article 226.
    
    I opine accordingly.