2025 (9) TMI 64 - AT - Service Tax

Service tax excludes value of free-supplied raw materials unless statute so provides; assessors to recompute tax from 01.07.2010

M/s. Madhumita Constructions Pvt. Ltd. Versus Commissioner of Service Tax, Kolkata

M/s. Madhumita Constructions Pvt. Ltd. Versus Commissioner of Service Tax, Kolkata - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the value of goods/materials supplied free of cost by the service recipient is includible in the 'gross amount charged' for valuation of taxable construction services under Section 67. 2. Whether benefit of Notification No.1/2006-ST (abatement of 67%) can be availed when goods/materials are supplied free by the service recipient and not charged by the service provider. 3. Whether services rendered to Government/ULB projects under JNNURM/BSUP are exempt for periods prior to the effective date of exemption Notification No.28/2010-ST (01.07.2010). 4. Whether the proviso to Section 73(1) (extended period of limitation for suppression) was correctly invoked; i.e., whether there was willful suppression of facts attracting extended limitation. 5. Whether separate work orders for ancillary activities (road, drainage, car-parking, plumbing, etc.) preclude treating those activities as part of a single composite 'construction of complex' service. 6. Whether penalties under Sections 76, 77 and 78 can be imposed concurrently and whether imposition of penalty under Section 76 is permissible when Section 78 proviso applies. 7. Whether the adjudicating authority's demand, interest and penalties require re-quantification in light of legal determinations and available documentary evidence (including CA certificate). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of free supply materials in 'gross amount charged' Legal framework: Valuation for service tax is governed by Section 67 - value is 'the gross amount charged by the service provider for such service provided or to be provided by him', with Explanation(s) and prescription for manner of determination. Precedent Treatment: The judgment follows and relies on the Supreme Court decision (Bhayana Builders) holding that value of goods/materials supplied free by the service recipient is not part of 'gross amount charged' since no amount is charged by the service provider for such goods; Explanation (c) to Section 67 does not expand gross amount to include free supplies unless reflected as charged/credited in accounts. Interpretation and reasoning: The Court reasoned that 'gross amount charged' refers to amounts charged/billed by the service provider and requires nexus between amount charged and the taxable service. Free supply materials involve no charge by the provider and therefore lack that nexus; inclusions listed in Explanation (c) relate to modes of payment/book adjustments and do not convert free supplies into charged consideration. If no amount is charged, it cannot be included in valuation; legislative scheme and linked precedents (including Larsen & Toubro discussion) support this. Ratio vs. Obiter: Ratio - free supply by service recipient not includible in gross amount charged for valuation under Section 67. Obiter - commentary on Explanation (c) and policy considerations supporting the ratio. Conclusion: Demand premised on inclusion of free supply raw materials must be reworked excluding the value of such materials; matter remanded for recomputation with that deduction considered (including appellant's CA certificate). Issue 2 - Applicability of Notification No.1/2006-ST (abatement) Legal framework: Notification No.1/2006-ST prescribes abatement (67%) for construction contracts subject to satisfaction of its conditions; valuation and abatement operate vis-à-vis gross amount 'charged'. Precedent Treatment: Interpreted in light of Section 67 principles and Bhayana; the notification applies only to the gross amount charged by the service provider and cannot be used to claim abatement if the gross amount is inflated by inclusion of values not charged. Interpretation and reasoning: Since Notification No.1/2006-ST fixes abatement as a percentage of the gross amount 'charged', and because free supply materials are not part of gross amount charged, denial of abatement on account of failure to include value of recipient-supplied materials is not tenable if those materials were, in fact, not charged. Conversely, where provider has irregularly availed abatement while documentary evidence shows that supplied materials were includible in gross billed amounts, abatement is inadmissible. Ratio vs. Obiter: Ratio - entitlement to abatement depends on actual gross amount charged by provider; if materials were charged or included, abatement cannot be availed irregularly. Obiter - policy observations on basis of the 67%/33% split. Conclusion: Abatement claims must be evaluated after correct determination of gross amount charged; where abatement was irregularly availed based on exclusion of includible material value, demand is justified; where free supplies were not charged, abatement may stand - recomputation required on remand. Issue 3 - Exemption Notification No.28/2010-ST and pre-notification period Legal framework: Exemption notifications are construed strictly; burden lies on assessee to show applicability; exemption operates only from its effective date unless the notification language or antecedent instrument suggests retrospective application. Precedent Treatment: The Tribunal cites principle that exemption notifications are to be strictly construed and Himalayan Co-op decision does not permit extending exemption backwards beyond notification date; reference to authoritative guidance (Dilip Kumar & Co.) on strict interpretation. Interpretation and reasoning: The exemption under Notification No.28/2010-ST took effect from 01.07.2010. Services provided to JNNURM/BSUP projects prior to that date are not covered unless a previous notification expressly provided exemption; no such prior exemption was shown. The fact that projects were for public welfare does not create a legal basis to extend exemption retrospectively. Ratio vs. Obiter: Ratio - exemption notification applies prospectively as expressed and cannot be extended to earlier periods absent express provision. Obiter - policy sympathy for public projects does not alter statutory construction rules. Conclusion: Exemption cannot be read to cover periods prior to 01.07.2010; demands for pre-notification period stand unless specific prior exemption is proved by assessee. Issue 4 - Extended period of limitation (Section 73 proviso) and suppression Legal framework: Proviso to Section 73(1) allows extended limitation where tax or duty has been 'suppressed'; suppression entails failure to disclose material facts with intent to evade tax. Precedent Treatment: Tribunal applied settled principles distinguishing bona fide errors/valuation disputes from suppression; relied on facts showing non-disclosure of recipient-supplied materials until DGCEI investigation. Interpretation and reasoning: The adjudicating authority found evidence of suppression: material facts regarding free supply of materials were not disclosed in returns/registrations and surfaced only on investigation. The noticee's reliance on interpretation disputes and interim orders was rejected as not amounting to bona fide disclosure. Accordingly, invocation of extended period was held proper. Ratio vs. Obiter: Ratio - where assessee suppresses material facts (non-disclosure of taxable services/values), extended limitation applies. Obiter - discussion of relevance of bona fide belief and interim orders. Conclusion: Extended period invocation sustained on facts showing suppression; limitation defence fails where suppression and intent to evade are established; however re-quantification on remand may affect amounts but not the applicability of extended limitation given suppression findings. Issue 5 - Composite contract treatment of ancillary work (roads, drainage, etc.) Legal framework: Determination of whether ancillary works are part of composite 'construction of complex' depends on contractual terms, work order descriptions and whether activities are inseparable from entire project. Precedent Treatment: The authority examined work orders and applied CBEC circular guidance (para 14.4/14.5) and treated integral road/ancillary works executed within complex as part of composite contract even if separate work orders issued. Interpretation and reasoning: The Tribunal held that separate work orders for road/drainage within integrated township did not ipso facto render those works distinct where work orders, bills of quantities and scope show those activities are integral and inseparable from the construction of the complex; hence service tax leviable on composite contract gross value. Ratio vs. Obiter: Ratio - ancillary activities integral to a composite construction contract are taxable as part of construction of complex notwithstanding separate work orders. Obiter - remarks on evidentiary weight of work order descriptions. Conclusion: Demand on account of integral ancillary works (roads etc.) is justified; genuinely distinct public road construction exempt must be identified and excluded during recomputation. Issue 6 - Penalties under Sections 76, 77 and 78 Legal framework: Section 76 (penalty for contravention), Section 77 (penalty for failure to register/file returns/maintain accounts), Section 78 (penalty for suppression and failure to pay) with proviso affecting concurrent imposition. Precedent Treatment: Tribunal followed the settled position that penalty under Section 76 cannot be imposed where Section 78 is attracted post-proviso; cited authority to that effect. Penalty under Section 77 is maintainable where returns/accounts irregularities proved. Section 78 penalty sustainable where willful suppression with intent to evade is found. Interpretation and reasoning: Because the SCN was issued after the proviso to Section 78 came into force, simultaneous imposition of Section 76 and Section 78 penalties is improper; however Section 78 penalty is appropriate on suppression findings and Section 77 is appropriate for failures to register/file/maintain accounts as demonstrated. Ratio vs. Obiter: Ratio - cannot impose both Section 76 and Section 78 penalties concurrently where proviso prohibits; Section 78 and 77 may be applied as per facts. Obiter - quantification to follow recomputed tax liability. Conclusion: Penalties under Section 78 and Section 77 sustainable on facts; penalty under Section 76 vacated. Penalties set aside for re-consideration and quantification after remand (to reflect recomputed tax). Issue 7 - Re-quantification, interest and remand Legal framework: Interest under Section 75 chargeable on determined tax; admitted/paid amounts are appropriable; adjudicating authority may re-compute demand when legal errors in valuation are identified. Precedent Treatment: Tribunal remanded for de novo consideration to recompute demand excluding value of free supplies, to consider CA certificate, to exclude legitimately exempt road works, and to re-quantify penalties and interest based on final tax figure. Interpretation and reasoning: Given the legal correction on inclusion of free supplies and need to identify exempt portions and documentary inputs, the Tribunal found remand necessary for accurate computation and fair application of penalties and interest. Appropriation of amounts already deposited remains subject to verification. Ratio vs. Obiter: Ratio - where legal error affects valuation, remand for recomputation is appropriate; penalties and interest must be re-assessed on final tax. Obiter - timelines and administrative directions. Conclusion: Matter remanded to original authority for de novo re-computation within three months, taking into account exclusions for free supply materials, CA certificate, exempt road construction where applicable, prior payments/appropriations and consequent recalculation of interest and penalties (with Section 76 penalty set aside and Section 77/78 re-quantified as appropriate).