Taxable value and Cenvat credit principles: free supplies excluded from service tax value, and credit allowed on tippers.

Free supplies of diesel and explosives provided by the service recipient were held not to form part of the taxable value under section 67 of the Finance Act, 1994 because only the gross amount charged for the service is taxable consideration; the demand on that basis was unsustainable. Cenvat credit on tippers was also held admissible where service tax had been discharged on cargo handling and site formation services, and there was no evidentiary basis to deny the nexus between the capital goods and the output services. The contrary finding of artificial splitting of the contract was treated as unsupported, and the credit denial was therefore unsustainable.

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Issues: (i) Whether the value of free supplies of diesel and explosives provided by the service recipient was includible in the taxable value for service tax. (ii) Whether Cenvat credit of central excise duty paid on tippers was admissible when the assessee discharged service tax under cargo handling services and site formation services.

Issue (i): Whether the value of free supplies of diesel and explosives provided by the service recipient was includible in the taxable value for service tax.

Analysis: The valuation under section 67 of the Finance Act, 1994 turns on the gross amount charged for the service. Free supplies made by the recipient do not constitute consideration received by the service provider and therefore cannot be added to the taxable value. The issue stood covered by the Supreme Court decision relied upon by the assessee.

Conclusion: The value of free supplies of diesel and explosives was not includible, and the demand on this ground was unsustainable.

Issue (ii): Whether Cenvat credit of central excise duty paid on tippers was admissible when the assessee discharged service tax under cargo handling services and site formation services.

Analysis: The adjudicating authority had accepted that service tax was discharged under cargo handling services as well as site formation services. Cargo handling services are classified under section 65(105)(zr) of the Finance Act, 1994, and on the facts recorded there was no basis to deny the linkage between the input capital goods and the output services. The adverse finding that the contract had been artificially split was treated as unsupported by evidence. The issue was also covered by earlier tribunal and High Court decisions relied upon by the assessee.

Conclusion: Cenvat credit on tippers was admissible, and the demand on this ground was also unsustainable.

Final Conclusion: The impugned orders were set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: Free supplies by the service recipient are not part of the taxable consideration under section 67, and Cenvat credit cannot be denied where the assessee has discharged tax on the relevant output service and the denial rests on unsupported presumptions.

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