Retreading of tyre- Service tax Applicability, before & w.e.f 1st July 2012

What is tyre retreading?

Tyre retreading is a process where the TREAD (the portion of the tyre which meets the surface of road) of an old tyre is replaced/ repaired using a vulcanizing solution to give fresh lease of life to the tyre. When a tyre is manufactured it is estimated that approximately 75%-80% of the manufacturing cost is incurred in tyre body and remaining 20%-25% in the TREAD, and by retreading the tyre is reusable at a cost which is less than 50% of the price of a new tyre.

Whether a manufacture/service?

CBEC in the month of Feburary,2012, in their circular CBEC F.No.137/125/2011-ST. have addressed the issue and relied on the judgment of Hon’ble Supreme Court in the case of M/s P.C. Cheriyan v. Mst. Barfi Devi. The context is as below:

“ In the said judgment, Hon’ble Supreme Court has observed that-

“The retreading of old tyres does not bring into being a commercially distinct or different entity. The old tyre retains its original character, or identity as a tyre. Retreading does not completely transform it into another commercial article, although it improves its performance and serviceability as a tyre. Retreading of old tyres is just like resoling of old shoes.”

Though this judgment is given in the context of Transfer of Property Act, however, the basic principle behind “manufacture” of coming into existence of a commercially different and distinct entity is equally applicable to Central Excise Act and has been relied upon by the Tribunal in certain cases while interpreting ‘manufacture’ under section 2(F) of the Central Excise Act. “

The clarification has concluded and rightfully so, that the activity of retreading of tyre fails the test of Manufacturing as defined in section 3 of Central Excise Act and well settled parameters led down by numerous cases .

Hence with this it was settled to be considered as a service.

Categorisation of Service?

Past Position under Service Tax

As discussed, tyre retreading is a process which involves repairing of tyres, for which the job work of retreading is carried out on old tyres, and during the same transfer of property of goods involved in the process also takes place. The activity was treated as Work Contract under VAT regime.

Before 1.7.2007, as we all are aware the categorisation of Service was of importance to ascertain the taxability of the service under service tax regime, and the same was required for Tyre retreading.

The erstwhile definition of works contract under Finance Act 1994 effective upto 30.06.2012 provided.

“Works contract service to be  a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures……………. ………..commissioning (EPC) projects;” 

The above definition did not include activity involved in repair, alteration, maintenance of moveable goods and hence retreading of tyres could not have been clubbed under this category even though it was taxable as works contract under VAT .

Section 65 (64) of the Finance Act 1994 defined “management, maintenance or repair” as any service provided by—

(i) any person under a contract or an agreement; or

(ii) a manufacturer or any person authorised by him, in relation to,………………………………….c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle;

Hence the activity of retreading of tyres was taxable under the head “Management , Maintenance and Repair Service” under service tax and as works contract under Vat.

CBEC in the month of Feburary,2012  via same Circular CBEC F.No.137/125/2011-ST has clarified that retreading of tyre is liable to service tax under the head “ Management , Maintenance and Repair Service”.

Changes under Negative list of services w.e.f. 01.07.2012

The tsunami of changes in the service tax notified w.e.f 01.07.2012 has changed the classification for purpose of valuation, method of valuation and onus of tax liability in the tyre retreading industry.

But before seeing the changes it may once again be seen whether retreading of tyre will fall under the definition of service as it has been defined for the first time w.e.f. 01.07.2012.

Service has been defined under section 65(B) (44) of the Finance Act , 1994  as:

“ any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- ……………….Constitution; or. ………” 

The list of declared service under section 66E includes service portion in the execution of works contract.

Since the process of retreading of tyres does not qualify as a process of manufacture and it is not specifically falling under the negative list nor it is included in the mega exemption list, it is liable to service tax.

The definition of works contract as effective from 01.07.2012 provides:

“works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;  

The above definition includes repair, maintenance, renovation, alteration of any moveable or for carrying out any other similar activity or a part thereof in relation to such property. Hence the activity of retreading tyre in my opinion falls within the ambit of the amended definition of works contract service and to that extent the clarification issued by CBEC in February 2012 is ineffective w.e.f 01.07.2012.

 Valuation for service tax purpose before and from 1.7.2012

Past Position under Service Tax

Before 1.7.2012 the service as discussed was categorised under “ Management , Maintenance and Repair Service”.  At the time of ascertainment of value to be taxed for the same, the service provider could rightfully avail the exemption under Notification No. 12/2003, whereby reducing the value of sale of materials taking place. Therefore the amount equal to resale value of materials used in retreading is admissible as deduction. In “Abirami Retreading Co. v. Commissioner of Central Excise, Salem-2009 (13) str 679 ( Tri Chennai) the Tribunal also placed consideration on the same.

Current Method of Valuation

Works Contract valuation has been revised via Notification No. 18-ST dated 1st June2 012 of Service Tax.

OPTION 1:

Where actual value of goods transferred in the execution of works contract is available with the Company

Value of service is:

Gross amount charged for the works contract

Less: Actual value of property in goods transferred in the execution of the works contract

Less: Value added tax charged 

Service tax will be charged on the value of service as computed above.

OPTION 2:

Where the Service provider is not able to determine the value of service then for such cases work contract has been classified as below:

Sl.No.	Category	Value on which amount of service tax is payable	Effective Service tax rate
1.	ORIGINAL WORKS(i.e. new constructions, additions, alterations to damaged structure to make the same workable, erection, commissioning or installation of plant, machinery, equipment or structures.)	40% of total amount charged for the work contract	=4.944% of work contract value.
2.	WORK CONTRACT FOR MAINTENANCE, REPAIR, RECONDITIONING,RESTORATION OR SERVICING OF GOODS	70% of total amount charged for the work contract	=8.652% of work contract value.
3.	OTHERS (APART FROM A&B)	60% of total amount charged for the work contract	=7.416% of work contract value.

The total amount for computing the above have been defined as below:

Gross amount charged for the works contract (A)

Add: Fair market value of all goods and services supplied in or in relation to the execution of works contract (B)

Less: Amount charged for such goods or services (C)

Less: Value added tax or sales tax (D)

Total Amount = A+B-C-D

Retreading of tyre will be classified under type B mentioned above and hence taxable value will be 70% of the total amount charged.

So depending upon the option exercised, the taxable value has to be determined. It may be noted that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

Onus of Tax liability

Before 1.7.2012, the onus of discharging the tax liability upto 100% was on the Service provider.

But from 1.7.2012, the scenario is not left out simple for the service recipient.in terms of notification no: 30/2012 dated 20.06.2012 in a works contract service, the liability of payment of service tax in case where  any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, provides service to a business entity registered as body corporate will be jointly on  the service provider and the service recipient. Both the service provider and receiver will have to discharge 50% of the service tax payable.

The discussions made above are summarized in the comparison table below for ready reference:

Sl.No.	Point Of Discussion	Before 1.7.2012	W.E.F 1.7.2012
1	Categorisation of Service	Management , Maintenance and Repair Service	Declared Service and falls under Work Contract Category
2	Valuation for service tax purpose	Gross  ValueLess: Value of Goods sold in the process ( as permitted via deduction under Notification No. 12/2003)	Option 1: Where actual value of goods transferred in the execution of works contract is available with the CompanyValue of service is: Gross amount charged for the works contractLess: Actual value of property in goods transferred in the execution of the works contract Less: Value added tax charged Option 2: Where the Service provider is not able to determine the value of service then 70% of TOTAL AMOUNT charged for the work contract.
3	Onus of Tax liability	Service Provider -100%	Where  any individual, Hindu Undivided Family or partnership firm (whether registered or not), including association of persons, provides service to a business entity registered as body corporate will be jointly on  the service provider (50%) and the service recipient (50%), In other cases, Service Provider-100%.

The Change in Service Tax regime has brought in significant changes which the tyre retreading companies needs to adapt and take it forward in practice. 

C.A. Ekta Gupta

Manager (C&C Constructions limited)

ektakath@rediffmail.com 

Disclaimer: These are my personal interpretation and the reader may draw inferences/make judgments on their case with respect to the applicable statute of their state and circumstances.