2008 (5) TMI 19 - HC - Service Tax

Court rules free materials not taxable in service supply.

The court ruled in favor of the petitioner, holding that pending adjudication, the respondents should not include the supply of free material in ... Gross amount charged - value of goods supplied free by client - service tax valuation - Explanation to Serial No. 7 in General Exemption No. 10 - adjudication subject to final orderGross amount charged - value of goods supplied free by client - service tax valuation - Whether the value of goods and materials supplied free of charge by the client can be included in the 'gross amount charged' for determining service tax on construction services. - HELD THAT: - The petitioner relied on the statutory definition of 'gross amount charged' in Section 67(3) of the Finance Act, 1994 to contend that materials supplied free by NTPC cannot form part of the gross amount charged. The Court observed prima facie that materials supplied free of charge by the client should not be included in the gross amount charged for levy of service tax. The Court noted a contemporaneous prima facie view taken by the Madras High Court in M/s. Larsen and Toubro Ltd. that insistence on including the value of goods supplied free by the client for calculating taxable service is not permissible. In consequence, while the departmental adjudication may continue, the respondents were directed not to apply the Explanation to Serial No. 7 of the Notification dated 1st March, 2006 so as to include the free supply of materials to the detriment of the petitioner pending final disposal of the writ petition. [Paras 10, 11, 12, 13]Prima facie the value of goods and materials supplied free of charge by the client shall not be included in the 'gross amount charged' for the purpose of determining the taxable service; adjudication may proceed but the Explanation to Serial No. 7 shall not be applied to the petitioner's detriment pending final orders.Final Conclusion: Interim relief granted restraining respondents from including the value of materials supplied free by the client in the gross amount charged for service-tax calculation; departmental adjudication to continue and the order is subject to final determination in the writ petition. Issues: Challenge to Explanation in Notification regarding service tax on free materials supplied by contracting party.In this judgment, the petitioner challenged the Explanation to Serial No. 7 in a Notification dated 1st March, 2006, regarding the inclusion of free materials supplied by NTPC in the gross amount charged for determining Service tax. The petitioner argued that only the service element in the contract should be considered for taxation, excluding the value of materials provided free of cost. The petitioner contended that as per Section 67(3) of the Finance Act, 1994, the 'gross amount charged' should not include materials supplied free of charge. A show cause notice was issued proposing to include the free supply of material in the taxable service, but the matter was not yet adjudicated.The court noted the definition of 'gross amount charged' in Section 67(3) and prima facie agreed with the petitioner that free materials should not be included in the taxable service. Referring to a similar case in the Madras High Court, the court observed that the value of goods supplied free by the client should not be insisted upon for calculating taxable service. Consequently, the court held that pending adjudication, the respondents should not include the supply of free material in determining the taxable service, thereby ruling in favor of the petitioner. This decision was made subject to final orders in the writ petition, and the application was disposed of accordingly.