Free supply costs excluded from service tax calculation for pre-July 2009 contracts

CESTAT Kolkata held that for contracts entered prior to 07.07.2009, the value of cost of free supply should not be included in determining gross amount for service tax purposes. Following its earlier decision in the same appellant's case, the Tribunal ruled that the appellant had already discharged service tax liability on gross value of works contract (Contract II) and Contract I value was not includible in assessable value. The demand was unsustainable, impugned order was set aside, and penalties on all appellants were also set aside. Appeal allowed.

---

---

Issues Involved:
1. Inclusion of value of goods sold under Contract I in the gross amount charged under Contract II for the purposes of payment of service tax under the Composition Scheme.
2. Applicability of extended period of limitation for demanding service tax.
3. Validity of penalties imposed on the appellants.

Summary:

Issue 1: Inclusion of Value of Goods Sold under Contract I in Gross Amount Charged under Contract II

The main appellant, M/s. TRF Limited, executed two separate contracts: Contract I for the sale of goods and Contract II for the provision of services along with the supply of goods, qualifying it as a "works contract." The appellant paid service tax on Contract II under Rule 3 of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Show cause notices demanded service tax on the gross value of both contracts, alleging that the value of goods sold under Contract I should be included in the gross amount charged under Contract II. The Tribunal referred to previous judgments and CBEC Circular No. 150/1/2012-ST dated 08.02.2012, which clarified that for contracts entered prior to 07.07.2009, the value of free-of-cost supplies should not be included in the gross amount for service tax purposes. The Tribunal concluded that the appellant correctly discharged their service tax liability on the gross value of Contract II and that the value of Contract I should not be included.

Issue 2: Applicability of Extended Period of Limitation

The show cause notices invoked the extended period of limitation. However, the Tribunal did not specifically address this issue in detail, as the primary issue of including the value of Contract I in the gross amount charged under Contract II was resolved in favor of the appellant.

Issue 3: Validity of Penalties Imposed on the Appellants

Given that the demand for service tax on the gross value of both contracts was set aside, the Tribunal also waived the penalties imposed on the appellants. The penalties were deemed unsustainable as the appellant had already discharged their service tax liability correctly.

Conclusion

The Tribunal set aside the impugned order, allowed the appeals, and granted consequential relief to the appellants. The penalties imposed were also set aside.

---