Taxable value excludes free supplies; composite works contracts and service-tax timing must follow the rendering of service.

Free of cost materials supplied by the service recipient do not form part of taxable value under section 67, so abatement cannot be denied on that basis, and service tax is chargeable at the rate prevailing when the service is rendered rather than when payment is received. A composite contract involving both goods and services cannot be reclassified and taxed as commercial or industrial construction service for the relevant period. Denial of Cenvat credit requires proper factual verification of the ST-3 return details and any alleged procedural omission, so the credit issue was remanded for fresh examination.

---

---

Issues: (i) Whether abatement could be denied and service tax under the composition scheme could be recomputed on the basis of free of cost material and on the rate prevailing on receipt of payment; (ii) Whether the demand under the third show cause notice could be sustained under commercial or industrial construction service when the activity was a composite works contract; (iii) Whether the denial of cenvat credit under the fourth show cause notice required reconsideration.

Issue (i): Whether abatement could be denied and service tax under the composition scheme could be recomputed on the basis of free of cost material and on the rate prevailing on receipt of payment.

Analysis: The value of taxable services cannot be inflated by adding the value of free supplies made by the service recipient, because such supplies do not form part of the contract value actually charged for the service. The relevant legal position is that the taxable value under section 67 does not include free of cost material merely because it was used in execution of the work. The applicable rate of service tax is the rate in force when the service is rendered, since rendition of service is the taxable event and not receipt of payment.

Conclusion: The denial of abatement on account of free of cost material was unsustainable, and the demand could not be recomputed at the higher rate merely because payment was received later. The finding was set aside in favour of the assessee.

Issue (ii): Whether the demand under the third show cause notice could be sustained under commercial or industrial construction service when the activity was a composite works contract.

Analysis: The demand was founded on classification of the activity as commercial or industrial construction service, but the materials on record showed that the contract was composite in nature involving supply of goods as well as provision of service. Such a composite contract could not be broken up and taxed under the pre-works contract service category for the relevant period. The demand was therefore inconsistent with the governing legal position on composite contracts and works contracts.

Conclusion: The demand under the third show cause notice could not be sustained and was set aside in favour of the assessee.

Issue (iii): Whether the denial of cenvat credit under the fourth show cause notice required reconsideration.

Analysis: The controversy turned on whether the assessee had actually enclosed the relevant details with the ST-3 returns and whether the omission in column 5B was only a procedural lapse. The record was not examined on that basis by the adjudicating authority, and the factual foundation for denial of credit was therefore incomplete. The issue required fresh factual scrutiny before any final conclusion could be reached.

Conclusion: The matter relating to the fourth show cause notice was remanded for re-examination, and no final adjudication on the merits of the cenvat credit dispute was made.

Final Conclusion: The impugned order was set aside insofar as the first three show cause notices were concerned, while the dispute relating to the fourth show cause notice was sent back for fresh consideration.

Ratio Decidendi: Free supplies of material by the service recipient do not form part of the taxable value of services, and service tax is attracted at the rate prevailing on rendition of service, not on the date of payment.

---