2013 (9) TMI 294 - AT - Service Tax

Free Supplies by Service Recipient Excluded from Taxable Value Under Section 67 of Finance Act, 1994

M/s Bhayana Builders (P) Ltd. & Others Versus CST, Delhi & Others.

CESTAT New Delhi-LB held that the value of free supplies provided by the service recipient to the construction service provider does not form part of the ... Valuation of the taxable service - inclusion of value of free supply - construction of commercial or industrial complex - section 67 - benefits under Notification No. 15/2004-ST, dated 10.09.2004 as amended by Notification No. 4/2005-ST dated 01.03.2005 - contemporanea expositio - Held that:- Etymologically the words supplied and provided are closely associated words. Provided also means to supply; furnish. Supply bears a similar connotation. The word used is structurally associated (in the Explanation) with the earlier two words and the three words are employed to define the meaning of the expression gross amount charged, an expression that occurs in the preamble to Notification No. 15/2004-ST. The word use variously means cause to act or serve for a purpose; avail oneself of; exploit for one’s own ends; the right of power of using. The word use therefore has multiple connotation and bears different meanings depending upon the context. The word used is therefore per se ambiguous or obscure. Since in its preambular context, the expression gross amount charged (as our analysis has concluded) means an amount charged on the service recipient, received by the provider and accruing to the benefit of the later in relation to the taxable service provided and the Explanation seeks to define gross amount charged, an expression occruing in the preamble, by employing three words to contextualise the definition – supplied, provided, used, we are satisfied that application of the noscitur principle could be gainfully employed to identify the legal meaning of the word used from several grammatical/ literal meanings of the said word, by employing the associational context. It is true, as contended by Revenue, that even if one of the literal meanings of the expression used, namely free supplies used is considered as the legal meaning as well, construction service providers may not be handicapped as they may seek benefits under Notification No. 12/2003-ST. In our view however the fact that the assessee have an alternative recourse to avoiding the rigour cannot be the criterion for interpreting the Explanation. This contention by Revenue proceeds on a fallacious comprehension of Notification No. 12/2003-ST. The benefits under this Notification are only in respect of the value of goods and materials sold by a service provider to the recipient of a taxable service. In the case of free supplies by the recipient there is no sale or transfer of title in the goods and materials in favour of the service provider, at any point of time. Therefore when free supplied goods and materials are incorporated into the construction would be no sale by the provider to the recipient either. Notification No. 12/2003-ST would therefore be inapplicable. Board Circular dated 16.02.2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-ST) and in the context of an identical Explanation introduced in Notification No. 18/2005-ST, clarified that gross amount charged shall include the value of goods and materials supplied. This circular constitutes contemporanea expositio of the meaning of the Explanation in Notification No. 18/2005-ST. The value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, would be outside the taxable value or the gross amount charged, within the meaning of the later expression in Section 67 of the Finance Act, 1994; Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST. Issues Involved:1. Whether the value of goods/material supplied or provided free by a service recipient and used for providing the taxable service of construction of commercial or industrial complex must be included in the computation of the gross amount for valuation of the taxable service under Section 67 of the Finance Act, 1994.2. Interpretation of the 'Explanation' to Notification No. 15/2004-ST as amended by Notification No. 4/2005-ST.Issue-wise Detailed Analysis:1. Whether the value of goods/material supplied or provided free by a service recipient and used for providing the taxable service of construction of commercial or industrial complex must be included in the computation of the gross amount for valuation of the taxable service under Section 67 of the Finance Act, 1994:The Tribunal examined the scope of Section 67 of the Finance Act, 1994, both pre and post-amendment, which stipulates that the value of any taxable service shall be the gross amount charged by the service provider for such service. It was noted that the value of 'free supplies' by a service recipient does not constitute a non-monetary consideration accruing to the benefit of the service provider. The Tribunal emphasized that Section 67 deals with the valuation of taxable services and intends to define what constitutes the value received by the service provider as 'consideration' from the service recipient for the service provided. The Tribunal concluded that 'free supplies' incorporated into construction would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service.2. Interpretation of the 'Explanation' to Notification No. 15/2004-ST as amended by Notification No. 4/2005-ST:The Tribunal analyzed the 'Explanation' introduced by Notification No. 4/2005-ST, which states that the 'gross amount charged' shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service. It was argued that the expression 'used' should be interpreted in the context of the other expressions 'supplied' and 'provided' to mean goods and materials supplied or provided by the service provider and used for providing the construction service. The Tribunal applied the principle of 'Noscitur a sociis,' which posits that a statutory term is recognized by its associated words, to conclude that the expression 'used' should be understood in the context of the other two expressions. The Tribunal held that the value of goods and materials supplied free of cost by the service recipient does not form part of the 'gross amount charged' under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST.Conclusion:The Tribunal concluded that the value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service does not constitute monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of the service provider. Therefore, it would be outside the taxable value or the gross amount charged within the meaning of Section 67 of the Finance Act, 1994. Consequently, the value of free supplies by the service recipient does not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation introduced by Notification No. 4/2005-ST.