2025 (8) TMI 334 - AT - Service Tax

Vague Show Cause Notice Violates Natural Justice; Free Materials Excluded from Taxable Value Under Service Tax Rules

The CESTAT held that the show cause notice (SCN) was vague, lacking specific details on the quantum and classification of service tax demand across ... Classification of services - classifiable under Commercial or industrial construction service or Construction of Complex Service (CCS)/Works Contract Service (WCS)? - appellant had received free of cost materials like cement, pipe etc. but has not provided the details regarding the same - denial of benefit of concessional notifications like N/N. 01/2006-ST dated 01/03/2006, N/N. 12/2003-ST dated 20.06.2003 - SCN is a vague document - violation of principles of natural justice - Extended period of limitation - HELD THAT:- The SCN does not specify the amount/segregate the quantum of alleged demand of service tax pertaining to each of the service categories i.e., CICS, CCS and WCS. The period of demand includes pre-negative list as well as post negative list regime. For the disputed period pertaining to the pre-negative list regime, the department was under an obligation to propose the subject demand of service tax under the specific service category - The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific on the contrary, are vague and lack details that is sufficient to hold that the assessee was not given proper opportunity to meet the allegations indicated in the show cause notice. Such show cause notice is liable to be rejected. It is also observed that Commissioner (Appeals) has been silent regarding the contentions raised by the appellant for wrong classification. There is no denial, even in the show cause notice, that the appellant had received free construction material from one of its client i.e. M/s Parsvnath Developers Ltd. but, apparently, the value thereof is included in the taxable value for want of details regarding the same. The issue of inclusion of value of free material stands already decided by the Hon’ble Apex Court in Bhayana Builders case [2018 (2) TMI 1325 - SUPREME COURT]. It was held that where service provider receives free of cost goods/material from the service recipient and no amount is charged for such goods/material, The value thereof cannot be included in the taxable value. Extended period of limitation - HELD THAT:- It is a well-settled law that for invocation of extended period, the material facts are required to be suppressed or mis-stated with intention to evade payment of tax/duty. However, in the instant case, as per above observations, there appears no malafide intention nor any suppression of facts on the part of the Appellant that too to evade the payment of service tax. The appellant is already exonerated from the charges based whereupon the adjudicating authority below had confirmed the demand. Therefore, invocation of extended period of limitation in the present case does not sustain at all. The impugned order is set aside - appeal allowed. ISSUES: 1. Whether the show cause notices (SCNs) were valid and specific in alleging service tax liability under the correct service categories, including Commercial or Industrial Construction Service (CICS), Construction of Complex Service (CCS), and Works Contract Service (WCS). 2. Whether the value of free of cost materials supplied by the service recipient should be included in the taxable value of services. 3. Classification of composite contracts executed by the appellant prior to and after 1st June 2007 under the appropriate taxable service category for service tax purposes. 4. Whether the extended period of limitation for service tax demand is invokable in absence of willful suppression or intent to evade tax. RULINGS / HOLDINGS: 1. The SCNs were held to be vague and non-specific as they did not segregate the quantum of service tax liability under each service category (CICS, CCS, WCS), thus failing to provide the appellant proper opportunity to meet the allegations; such SCNs are liable to be rejected. 2. Following the Apex Court ruling in Bhayana Builders and CBIC circulars, the value of free of cost materials supplied by the service recipient cannot be included in the taxable value of services; hence, tax demand on such value is unsustainable. 3. The appellant's composite contracts prior to 1st June 2007 cannot be classified as taxable under Commercial or Industrial Construction Service; post 1st June 2007, such composite contracts are liable to be classified under Works Contract Service only, and demand under any other category cannot be sustained. 4. Extended period of limitation cannot be invoked absent willful suppression or intent to evade tax; mere failure to correctly declare or assess service tax does not amount to willful suppression. RATIONALE: The Court applied the statutory framework under the Finance Act, 1994, particularly definitions under Section 65(105) for taxable services and valuation provisions under Section 67. It relied on precedent from the Apex Court including the landmark Larsen & Toubro Ltd. judgment clarifying classification of composite contracts and the Bhayana Builders ruling on valuation of free materials. The Court emphasized that the show cause notice is foundational and must specify allegations clearly to afford a fair opportunity, citing the Apex Court decision in Brindavan Beverages Pvt. Ltd. Regarding valuation, the Court referred to CBIC circulars and prior CESTAT decisions that exclude free materials from taxable value, consistent with principles under Section 12(2)(b) of the CGST Act. The Court noted the absence of any attempt by the department to segregate non-service elements from composite contracts, reinforcing the correct classification under WCS post 1.6.2007. On limitation, the Court applied settled legal principles that extended period applies only where there is willful suppression or evasion, referencing authoritative Supreme Court decisions in Cosmic Dye Chemical and Anand Nishikawa Co. Ltd.