2024 (6) TMI 1185 - AT - Service Tax

Free materials supplied by service recipients need not be included in taxable service value under Section 67

The CESTAT Chandigarh allowed the appeal, setting aside the service tax demand. The tribunal held that free materials supplied by service recipients need ... Violation of principles of natural justice - SCN issued without conducting investigation - Entitlement to concessional rate of service tax under the Composition Scheme - non-inclusion of free materials supplied by service recipients in taxable value - non-filing of service tax returns for the periods 2007-08 and 2008-09 - extended period of limitation - penalty. Non-inclusion of free materials supplied by service recipients in taxable value - SCN issued without conducting investigation - HELD THAT:- This issue has now been settled by the Hon’ble Apex Court in the case of CST vs. Bhayana Builders (P) Ltd [2018 (2) TMI 1325 - SUPREME COURT] wherein the Hon’ble Apex Court while referring the valuation provision under the Finance Act, 1994, and also referring the provisions of “such service”, has held 'though it took care of the value of goods and materials supplied by the service provider/assessee by including value of such goods and materials for the purpose of arriving at gross amount charged, it did not deal with any eventuality whereby value of goods and material supplied or provided by the service recipient were also to be included in arriving at 'gross amount charged.' Further, it is noted that in this case, the entire demand has been raised and confirmed merely by relying upon Form 26AS, Balance Sheet and ST-3 Returns, which is not permitted under law in view of the various decisions relied upon by the appellant - reference made to the decision in the case of Kush Constructions [2019 (5) TMI 1248 - CESTAT ALLAHABAD], wherein the Division Bench of the Tribunal has held 'Revenue cannot raise the demand on the basis of such difference without examining the reasons for said difference and without establishing that the entire amount received by the appellant as reflected in said returns in the Form 26AS being consideration for services provided and without examining whether the difference was because of any exemption or abatement, since it is not legal to presume that the entire differential amount was on account of consideration for providing services.' All the documents furnished by the appellant in this regard have not been considered by the Adjudicating Authority, hence, the impugned finding in this regard is not sustainable in law. Extended period of limitation - HELD THAT:- In the facts and circumstances of the present case, extended period cannot be invoked as the appellant has been registered with the service tax and has been paying service tax and filing returns which has been acknowledged by the Adjudicating Authority in the impugned order. Further, in the case of Infinity Infotech Parks Ltd vs. UOI & Ors [2014 (12) TMI 36 - CALCUTTA HIGH COURT], it has been held that when the extended period of limitation is not invokable, the demand cannot be confirmed for the normal period of limitation for some of the same transactions. Though, there is the amendment in Section 73 made by the Finance Act, 2013 w.e.f. 10.05.2013 by inserting sub-section (2A); but period of dispute in the present case is prior to that. Therefore, this amendment will not be applicable in the present case. Penalty - HELD THAT:- When the extended period is not invokable, the penalty under Section 78 of the Act is also not leviable since ingredients for invoking extended period and levying penalty under Section 78 are same. The impugned order is not sustainable in law and therefore set aside - appeal allowed. Issues Involved:1. Extended period of limitation for demand of service tax.2. Inclusion of free materials supplied by service recipients in taxable value.3. Eligibility for concessional rate under the Composition Scheme.4. Applicability of service tax on non-commercial construction.5. Validity of the show cause notice and investigation process.6. Imposition of penalties under Sections 77 and 78 of the Finance Act, 1994.Issue-wise Detailed Analysis:1. Extended Period of Limitation for Demand of Service Tax:The appellant contended that the extended period of limitation was wrongly invoked. The show cause notice alleged non-registration and non-filing of returns, which were found incorrect by the Adjudicating Authority. The Tribunal noted that the demand was based on an audit, and as per settled law, an audit-based show cause notice cannot invoke the extended period. The Tribunal cited multiple decisions, including *Sunshine Steel Industries vs. CGST, Jodhpur* and *Pushpam Pharmaceuticals Company vs. Collector of Central Excise, Bombay*, emphasizing that suppression must be deliberate to invoke the extended period. The Tribunal concluded that the extended period was not applicable, thus nullifying the demand for the extended period and associated penalties.2. Inclusion of Free Materials Supplied by Service Recipients in Taxable Value:The main allegation was the appellant's failure to include the value of free materials supplied by service recipients in the taxable value, thus disqualifying them from the concessional rate under the Composition Scheme. The Tribunal referred to the Supreme Court's decision in *CST vs. Bhayana Builders (P) Ltd*, which clarified that the value of goods and materials supplied by the service recipient should not be included in the taxable value. Therefore, the Tribunal held that the appellant was entitled to the concessional rate, and the demand based on non-inclusion of free materials was unsustainable.3. Eligibility for Concessional Rate Under the Composition Scheme:The Department argued that the appellant wrongly availed the concessional rate of 4% under the Composition Scheme. The appellant countered that they had paid service tax on free materials with interest before the show cause notice. The Tribunal found that the appellant was eligible for the Composition Scheme as the work executed was a 'works contract' and the service tax on free materials was duly paid. The Tribunal held that the appellant had the option to choose between the Composition Scheme and Rule 2A of the Service Tax (Determination of Value) Rules, 2006, thus confirming the eligibility for the concessional rate.4. Applicability of Service Tax on Non-commercial Construction:The appellant argued that construction for schools or foundations, being non-commercial, was not taxable. The Adjudicating Authority had rejected this claim, stating that educational institutions charging fees were commercial. The Tribunal disagreed, emphasizing that the construction for schools and foundations set up under trusts, exempt from income tax, should not be considered commercial. The Tribunal found the Adjudicating Authority's rejection based on surmise and conjecture, thus holding that non-commercial construction was not taxable.5. Validity of the Show Cause Notice and Investigation Process:The appellant pointed out infirmities in the show cause notice, including incorrect allegations and lack of proper investigation. The Tribunal noted that the show cause notice was issued without conducting a proper investigation and contained false allegations, as found by the Adjudicating Authority. Citing the Supreme Court's decision in *CCE, Bangalore vs. Brindavan Beverages P Ltd*, the Tribunal emphasized that a vague and unintelligible show cause notice deprives the noticee of a proper opportunity to defend. Therefore, the Tribunal held the show cause notice invalid.6. Imposition of Penalties Under Sections 77 and 78 of the Finance Act, 1994:The appellant argued against the penalties, citing Section 80 of the Act, which allows waiver of penalties. The Tribunal noted that since the extended period was not invokable, penalties under Section 78 were also not leviable. The Tribunal also considered the appellant's compliance and the lack of willful suppression, thus setting aside the penalties under Sections 77 and 78.Conclusion:The Tribunal set aside the impugned order, allowing the appeal with consequential relief. The judgment emphasized the invalidity of the extended period of limitation, the improper inclusion of free materials in taxable value, the eligibility for the Composition Scheme, the non-taxability of non-commercial construction, and the invalidity of the show cause notice. The penalties under Sections 77 and 78 were also annulled.