Free supplies not includible in service tax valuation for construction services; demand, interest and penalty fail on settled valuation principle.

For construction services, the value of cement and TMT bars supplied free of cost by the service recipient was not includible in the assessable value for service tax, because valuation is confined to the consideration actually charged under the contract and not the value of free supplies. The settled Supreme Court principle on gross amount charged governed the computation, and the notification-based valuation mechanism did not justify adding such free materials. As the service tax demand was unsustainable on valuation, the consequential demand of interest and penalty also could not survive.

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Issues: Whether the value of goods and materials supplied free of cost by the service recipient was includible in the assessable value for levy of service tax on construction services, and whether the consequential demand of interest and penalty could survive.

Analysis: The dispute concerned construction of complex and commercial or industrial construction services where the recipient supplied cement and TMT bars free of cost. The Tribunal applied the settled principle that, for valuation under the service tax regime, the amount chargeable is the consideration received under the contract and not the value of free supplies made by the recipient. The Supreme Court had already held that such free supply materials do not form part of the gross amount charged and therefore cannot be added to the taxable value. Once the service tax demand itself was unsustainable, the consequential penalty could not stand. The departmental reliance on the notification-based valuation mechanism did not alter this position in view of the binding ruling on valuation.

Conclusion: The value of free supply materials was not includible in the assessable value, and the demand of service tax, interest, and penalty was unsustainable.

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