2018 (2) TMI 1325 - SC - Service Tax

Free goods supplied by service recipient cannot be included in gross amount for service tax valuation under Section 67

Commissioner of Service Tax Etc. Versus M/s. Bhayana Builders (P) Ltd. Etc.

The SC ruled that the value of goods/materials supplied free of cost by a service recipient to a service provider cannot be included in computing the ... Valuation of taxable service - works Contract - inclusion of FOC material - Section 67 of Finance Act - Commercial or Industrial Construction Service - lot of materials/goods are also used in the construction of building or civil structure - includibility of material/goods element - N/N. 15/2004-ST dated September 10, 2004 - whether the value of goods/materials supplied or provided free of cost by a service recipient and used for providing the taxable service of construction or industrial complex, is to be included in computation of gross amount charged by the service provider, for valuation of taxable service? Held that: - For valuation of taxable service, provision is made in Section 67 of the Act which enumerates that it would be ‘the gross amount charged by the service provider for such service provided or to be provided by him’. Whether the value of materials/goods supplied free of cost by the service recipient to the service provider/assessee is to be included to arrive at the ‘gross amount’, or not is the poser. On this aspect, there is no difference in amended Section 67 from unamended Section 67 of the Act and the parties were at ad idem to this extent. Explanation 3 to subsection (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the provisions of sub-sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value. The service tax is to be levied in respect of ‘taxable services’ and for the purpose of arriving at 33% of the gross amount charged, unless value of some goods/materials is specifically included by the Legislature, that cannot be added - exemption under Section 93 can only be granted in respect of those activities which the Parliament is competent to levy service tax and covered by sub-clause (zzq) of clause (105) and sub-clause (zzzh) of clause (105) of Section 65 of Chapter V of the Act under which such notifications were issued. The value of the goods/materials cannot be added for the purpose of aforesaid notification dated September 10, 2004, as amended by notification dated March 01, 2005 - appeal dismissed - decided against Revenue. Issues Involved:1. Valuation of taxable service under Section 67 of the Finance Act, 1994.2. Inclusion of value of goods/materials supplied free of cost by the service recipient in the computation of gross amount charged.3. Interpretation of exemption notifications No. 15/2004-ST and No. 4/2005-ST.4. Conflicting views by CESTAT and the correctness of the Larger Bench's decision.Issue-wise Detailed Analysis:1. Valuation of Taxable Service under Section 67 of the Finance Act, 1994:The respondents are engaged in providing 'Commercial or Industrial Construction Service' which is taxable under Section 65(105)(zzq) of the Finance Act, 1994. The dispute revolves around the valuation of taxable services provided by them. Section 67 of the Act deals with the valuation and specifies that it shall be the 'gross amount charged by the service provider for such service provided or to be provided by him.'2. Inclusion of Value of Goods/Materials Supplied Free of Cost by the Service Recipient:The main question is whether the value of goods/materials supplied free of cost by the service recipient should be included in the computation of the gross amount charged by the service provider. The court observed that the value of such goods/materials is not to be included as no price is charged by the service provider for these goods/materials. The explanation to Section 67 clarifies that the gross amount charged includes any amount received towards the taxable service before, during, or after provision of such service. Since no amount is charged or received for the free goods/materials, they are not to be included in the gross amount.3. Interpretation of Exemption Notifications No. 15/2004-ST and No. 4/2005-ST:Notification No. 15/2004-ST dated September 10, 2004, exempts service tax on a value equivalent to 33% of the gross amount charged for providing taxable service. Notification No. 4/2005-ST added an explanation that the 'gross amount charged' includes the value of goods and materials supplied or provided or used by the provider of the construction service. The court held that this explanation only includes goods/materials supplied by the service provider and not those supplied free by the service recipient.4. Conflicting Views by CESTAT and the Correctness of the Larger Bench's Decision:Different benches of CESTAT had conflicting views on whether the value of free goods/materials should be included in the gross amount charged. The Larger Bench decided in favor of the assessees, holding that the value of such goods/materials cannot be added for the purpose of the notification dated September 10, 2004, as amended by the notification dated March 01, 2005. The Supreme Court agreed with this view, stating that the value of free goods/materials has no nexus with the taxable service and cannot be included in the valuation.Conclusion:The Supreme Court dismissed the appeals of the Revenue, agreeing with the Larger Bench of CESTAT that the value of goods/materials supplied free of cost by the service recipient should not be included in the computation of the gross amount charged by the service provider for the purpose of levying service tax. The court emphasized that the valuation should be based on the amount charged by the service provider for the service provided, and free supplies by the service recipient do not form part of this amount.