2018 (2) TMI 1325 - SC - Service Tax

Free recipient-supplied goods excluded from taxable service value under Section 67; no addition when no amount charged

SC held that materials/goods supplied free of cost by a service recipient are not includible in the gross amount charged for valuation of taxable service ... Valuation of taxable services under Section 67 - Gross amount charged and consideration nexus - 33% abatement under Notification No.15/2004 ST as amended by Notification No.4/2005 ST - Inclusion of value of goods supplied by the service recipient - Explanation to Notification - inclusion of provider supplied goods - Exemption under Section 93 - scope limited to taxable servicesValuation of taxable services under Section 67 - Gross amount charged and consideration nexus - Inclusion of value of goods supplied by the service recipient - 33% abatement under Notification No.15/2004 ST as amended by Notification No.4/2005 ST - Explanation to Notification - inclusion of provider supplied goods - Value of goods/materials supplied or provided free of cost by a service recipient and used in construction is not includible in the computation of the 'gross amount charged' for valuation of the taxable service and for availing the benefit of Notification No.15/2004 ST as amended by Notification No.4/2005 ST. - HELD THAT: - The Court held that Section 67 requires valuation to be the 'gross amount charged by the service provider for such service provided or to be provided by him', thereby importing two essential requirements: (a) the amount must be charged by the service provider, and (b) it must be consideration 'for such service provided'. Amounts which are not charged by the service provider and have no nexus with the taxable service cannot form part of the gross amount. Explanation 3 to Section 67 clarifies that the gross amount includes amounts received before, during or after provision of service, which further supports that only receivables/consideration are to be included. The inclusive definition in Explanation (c) to Section 67 relates to modes or forms in which consideration may be discharged (cheque, credit card, book adjustments, credits/debits in accounts, etc.) and does not expand the statutory concept to include gratuitous supplies from the recipient where no amount is credited or debited. Notification No.15/2004 ST (with the Explanation inserted by Notification No.4/2005 ST) grants an optional abatement by reference to 33% of the gross amount 'charged' by the commercial concern; the Explanation to that notification deals with goods/materials supplied by the provider, not goods supplied gratuitously by the recipient. As exemption notifications under Section 93 can operate only within the scope of taxable services, and absent any legislative or notification language expressly including recipient supplied free materials, their value cannot be added to the contract value to determine service tax. The Court endorsed the Larger Bench of CESTAT and relied on principle that service tax is leviable on 'service' contracts simpliciter and that additions beyond the contract consideration are impermissible in the present scheme. [Paras 13, 15, 16, 18, 21]Value of goods/materials supplied free by the service recipient is not includible in the 'gross amount charged' for valuation under Section 67 nor for computing the 33% under Notification No.15/2004 ST as amended; the Department's appeals are dismissed.Final Conclusion: The Supreme Court affirmed the Larger Bench of CESTAT, held that gratuitous supplies by service recipients are not part of the 'gross amount charged' for valuation of construction services and for the optional 33% abatement under the notifications, and dismissed the Revenue appeals (with an incidental note of abatement in Civil Appeal No. 3247 of 2015). 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.