2017 (10) TMI 407 - AT - Service Tax

Inclusion of Free Supply Material in Works Contract Gross Value Upheld

The tribunal upheld the inclusion of free supply material in the gross value of works contract service for service tax calculation. The demand for service ... Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 - inclusion of value of goods supplied free in gross amount charged for works contract - value of goods 'supplied for a consideration or otherwise' to be included in gross value of works contract - contractual disclosure and effect on assessability of service tax - suppression of facts and invocation of extended period of limitation - penalty under Section 78 of the Finance Act for suppressionWorks Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 - inclusion of value of goods supplied free in gross amount charged for works contract - value of goods 'supplied for a consideration or otherwise' to be included in gross value of works contract - Whether the value of materials supplied free of cost must be included in the gross value of works contract for computation of service tax under the Works Contract Rules, 2007. - HELD THAT: - The Tribunal examined the Explanation to the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, which defines 'gross amount charged for the works contract' to include the value of all goods used in or in relation to the execution of the works contract 'whether supplied under any other contract for a consideration or otherwise.' Applying this provision, the Tribunal held that materials supplied free of cost by the service recipient fall squarely within the expression and must be added to arrive at the gross value of the works contract. The Tribunal rejected the appellant's reliance on authorities dealing with abatement under Notification No.15/2004-ST as inapplicable, since those decisions address a different statutory scheme and factual matrix. As the statutory Explanation is clear and unambiguous, the demand on merit for omission of value of free-supply material is sustainable. [Paras 4]Value of free-supply material is includible in the gross value of works contract and the demand is sustainable on merits.Contractual disclosure and effect on assessability of service tax - value of free issue materials specified in contract - Whether the existence of a contractual clause expressly stating that service tax is applicable on the value of free-issue materials affects the question of disclosure and assessability. - HELD THAT: - The Tribunal noted the contract between the parties expressly stated that service tax would be applicable on the value of free-issue materials. This term in the contract demonstrates the appellant's knowledge that such value was required to be included for service-tax computation. The omission of that value from returns and nondisclosure to the department undermines the appellant's contention of confusion of law and indicates that the facts were known to the appellant. [Paras 4]The contractual clause confirming applicability of service tax on free-issue materials militates against appellant's claim of ignorance; nondisclosure supports the demand.Suppression of facts and extended period of limitation - penalty under Section 78 of the Finance Act for suppression - Whether the extended period of limitation can be invoked and whether penalty under Section 78 is imposable in view of suppression of facts concerning free-supply material. - HELD THAT: - Having found that the Explanation in the Works Contract Rules clearly required inclusion of free-supply material and that the contract expressly provided for service tax on such material, the Tribunal concluded there was suppression of material facts and nondisclosure in returns. In these circumstances the Tribunal held that the extended period for raising demand was invocable. For the same reason, invoking Section 78 for imposition of penalty was legally sustainable. The Tribunal rejected the appellant's contention that the issue was subject to bona fide doubt and therefore not deserving of extended-period treatment or waiver of penalty. [Paras 4]Extended period is invocable for the demand and penalty under Section 78 is sustainable on the finding of suppression.Final Conclusion: The appeal was dismissed: the value of free-supply materials is includible in the gross value of works contract under the Works Contract Rules, the nondisclosure and contractual terms justified invocation of the extended period, and the penalty under Section 78 was lawfully imposed. Issues:- Whether free supply material should be included in the gross value of works contract service for the purpose of service tax calculation.- Whether the demand for service tax and penalty under Section 78 of the Finance Act is sustainable.Analysis:1. Inclusion of Free Supply Material in Gross Value:- The appellant argued that free supply material should not be included in the gross value of works contract service based on various judgments, including Bhayana Builders Pvt. Ltd. case.- The appellant contended that service tax should only be charged on consideration received in money, citing the decision of Intercontinental Consultants & Technocrats Pvt. Ltd. Vs. UOI.- The tribunal examined the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, which clearly state that the value of all goods used in the execution of the works contract should be included in the gross value, whether supplied for consideration or not.- The tribunal upheld that the value of free supply material should indeed be added to the gross value of works contract, making the demand for service tax sustainable on merit.2. Sustainability of Demand and Penalty:- The Revenue argued that there was no ambiguity regarding the inclusion of free supply material as per the contract terms and the Works Contract Rules.- The tribunal noted that the contract explicitly stated that service tax would be applicable on the value of free issue materials, indicating the appellant's awareness of this requirement.- It was observed that the appellant did not disclose the value of free supply material in their returns, indicating suppression of facts.- The tribunal found no legal ambiguity in the provision regarding the inclusion of free supply material, leading to the conclusion that the demand for an extended period and penalty under Section 78 were legally justified.- Consequently, the tribunal upheld the impugned order, dismissing the appeal and affirming the sustainability of the demand and penalty.In conclusion, the tribunal ruled in favor of including free supply material in the gross value of works contract service for service tax calculation. The demand for service tax and penalty under Section 78 of the Finance Act was deemed sustainable due to the lack of ambiguity in the legal provision and the appellant's failure to disclose the value of free supply material. The impugned order was upheld, and the appeal was dismissed on 28/09/2017.