2023 (8) TMI 797 - AT - Service Tax

Tribunal rules service tax applies from 01.06.2007, free supplies excluded. Multiple show-cause notices impermissible.

The Tribunal ruled in favor of the appellants, finding that service tax was only applicable from 01.06.2007 onwards due to the nature of their contracts. ... Non-payment of Service tax - non-inclusion of service tax in respect of the advance received from M/s Areans and M/s A.K.M (MBD) - non-inclusion value of free supply material while calculating the tax liability - HELD THAT:- It is not in dispute in the impugned case that the contracts entered into by the appellants involve material as well as service component. As such, the service rendered by the appellants is taxable only from 01.06.2007. Moreover, in view of the decision in COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. [2018 (2) TMI 1325 - SUPREME COURT], the value of free supply items cannot be included in the assessable value for the purpose of calculation of service tax. Merits apart, it is found that the show-cause notice and thus, the impugned order are not sustainable on the question of limitation. It is not disputed that repeated show-cause notices have been issued to the appellants on the very same issue and on the basis of very same objections raised by the Audit. It is not permissible in view of the Hon’ble Supreme Court judgment in the case of NIZAM SUGAR FACTORY VERSUS COLLECTOR OF CENTRAL EXCISE, AP [2006 (4) TMI 127 - SUPREME COURT]. It was followed in a number of decisions by the Hon’ble High Courts and the Tribunal. The impugned order is not sustainable and is liable to be set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether services rendered under contracts involving both material and service components (composite/works contracts) are taxable prior to 01.06.2007. 2. Whether the value of freely supplied materials by the service recipient is includible in the assessable value for service tax on construction/works contract services. 3. Whether repeated overlapping show-cause notices based on the same audit objection/pre-existing departmental knowledge permit invocation of the extended period of limitation for assessment/penalty. 4. Whether settlement of certain show-cause notices under a statutory settlement scheme bars the Department from invoking extended limitation in subsequently issued overlapping show-cause notices. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of composite/works contracts prior to 01.06.2007 Legal framework: Service tax law distinguishes between taxable services and transfer of goods; composite/works contracts with both material and service components were the subject of judicial interpretation determining when such contracts fall within taxable service categories. Precedent Treatment: The Court applied the Supreme Court's ruling that indivisible composite contracts can be subjected to service tax only with effect from 01.06.2007. Interpretation and reasoning: The Tribunal observed that the contracts under scrutiny involved both material and service components. Applying the authoritative pronouncement limiting the temporal scope of taxation for indivisible composite contracts, the Tribunal concluded that the service component became chargeable only from 01.06.2007; any demand for earlier periods is not sustainable. Ratio vs. Obiter: Ratio - the holding that composite/works contracts containing material component are taxable only from 01.06.2007 as per the cited authoritative decision; the Tribunal applied this ratio to invalidate pre-01.06.2007 demands. No obiter on this point. Conclusions: Demand of service tax for periods prior to 01.06.2007 on the composite contracts in question is not sustainable. Issue 2 - Inclusion of value of freely supplied material in assessable value Legal framework: Sections governing valuation for service tax require determination of taxable value; the treatment of materials supplied free by the service recipient affects assessable value under those provisions and related rules. Precedent Treatment: The Tribunal followed a prior authoritative decision (rendered by higher judicial fora) holding that the value of free supply items by the recipient cannot be included in the assessable value for service tax on construction services. Interpretation and reasoning: Relying on the binding treatment limiting valuation, the Tribunal held that the value of freely supplied materials is not includible when computing service tax liability; therefore, inclusion of such value by the adjudicating authority was erroneous. Ratio vs. Obiter: Ratio - exclusion of value of free-supply materials from assessable value for service tax on construction/works contract services, as applied to the facts. No obiter commentary beyond application. Conclusions: Inclusion of the value of freely supplied items in the tax base is incorrect; demands computed on that basis are unsustainable. Issue 3 - Permissibility of invoking extended limitation where repeated overlapping show-cause notices were issued Legal framework: Limitation principles in indirect tax assessment/penalty proceedings prohibit fresh invocation of extended limitation if the Department has earlier issued show-cause notices on the same issue such that the matter has been within departmental notice; judicial precedents govern the effect of repeated/overlapping notices on limitation. Precedent Treatment: The Tribunal relied on the Supreme Court principle that repetition of notices on the same issue, based on identical audit objections, precludes fresh invocation of extended limitation; that precedent has been followed by multiple High Courts and Tribunals. Interpretation and reasoning: The Tribunal found factually that multiple show-cause notices were issued repeatedly on the same issue and founded upon the same audit objections. Given this repetition, the Department cannot treat a later notice as a fresh initiation to justify extended limitation. The Tribunal concluded that the impugned order is unsustainable on limitation grounds irrespective of merits. Ratio vs. Obiter: Ratio - repetition of overlapping SCNs on identical objections negates Department's ability to invoke extended limitation; applied decisively to set aside the order. Observational remarks that the principle has been followed in subsequent decisions are obiter and supportive context. Conclusions: Extended period of limitation could not be validly invoked where earlier overlapping SCNs on the same audit objections had already put the Department on notice; the impugned demand fails on limitation grounds. Issue 4 - Effect of prior settlements under a statutory settlement scheme on later invocation of extended limitation Legal framework: Settlement schemes permit parties to settle specified show-cause notices; the interaction between settled notices and later departmental action depends on whether subsequent proceedings relate to the same matters and whether settlement estops Departmental claims. Precedent Treatment: The Tribunal noted the appellants' contention that several earlier SCNs had been settled under a statutory settlement scheme and that such settlement should prevent subsequent invocation of extended limitation; the Tribunal did not rest its decision solely on settlement but treated settlement as part of the factual matrix demonstrating repeated departmental action. Interpretation and reasoning: While the Tribunal acknowledged settlements of certain notices, its principal limitation analysis focused on the multiplicity and overlap of show-cause notices issued on the same audit objection. The existence of settlements reinforced the conclusion that the Department was repeatedly on notice, thereby weakening any claim to extended limitation for subsequent notices. The Tribunal did not hold that settlement alone automatically bars extended limitation, but treated settlements as corroborative of continuous departmental awareness. Ratio vs. Obiter: Obiter in part - the Tribunal did not lay down a general rule that settlement of earlier SCNs always bars later invocation of extended period; rather, it used the settlement facts as part of the limitation analysis. The decisive ratio remains the prohibition on invoking extended limitation where repeated overlapping SCNs have been issued. Conclusions: Settlement of certain earlier notices contributed to the factual finding of repeated departmental action; on the established principle regarding repeated overlapping SCNs, the Department could not sustain extended-period demands in the later SCN. Overall Disposition The Tribunal set aside the impugned adjudicatory order, holding that (a) composite/works contract services were taxable only from 01.06.2007; (b) value of freely supplied materials is not includible in assessable value; and (c) repeated overlapping show-cause notices based on the same audit objections preclude invocation of the extended period of limitation, rendering the impugned order unsustainable. The appeal was allowed.