2025 (11) TMI 1703 - AT - Service Tax

Service tax appeal partly succeeds: pre-1.6.2007 works contracts, free supplies excluded, no penalties on GTA RCM

M/s. Technocon Builders Versus Commissioner of Service Tax, Bangalore

CESTAT Bangalore partly allowed the service provider's appeal. It held that services prior to 01.06.2007 were classifiable as works contract following SC ... Calculation of benefit of abetment under N/N. 1/2006 - inclusion of value of material freely supplied for the calculation of benefit ot not - liability of service tax on mobilization advance received for providing taxable services during the period of 01.04.2006 to 31.12.2007 - levy of service tax on expenditure incurred while availing GTA services on RCM basis. Calculation of benefit of abetment under N/N. 1/2006 - inclusion of value of material freely supplied for the calculation of benefit ot not - HELD THAT:- The Commissioner in the impugned order has observed as follows ‘the assessee’s claim for classification of the impugned service under works contract is only an afterthought, on issue of notice for denial of benefit of notification No.1/2006 and hence all submissions made in the context of works contract service in the instant case are to be rejected as non-maintainable ’However this issue now stands settled in favour of the appellant by the supreme court in the case of Commissioner of C. EX. & CUS., Kerala Vs. Larsen & Toubro Ltd. [2015 (8) TMI 749 - SUPREME COURT] followed by the decision of this Tribunal in the matter of M/s M Far construction (supra) hence the demand prior to 01.06.2007 cannot be sustained. Moreover, the supreme court in the case of Commissioner of Service Tax Versus Bhayana Builders (P) Ltd. [2018 (2) TMI 1325 - SUPREME COURT] held that value of free supply needs to be excluded, accordingly the demand of differential tax on this ground is set aside. Demand of service tax on mobilization advances received for providing taxable services during the period of 01.04.2006 to 31.12.2007 - HELD THAT:- Since it is held that prior to 01.06.2007 the appellant is not liable to discharge service tax the question of sustaining the demand on mobilisation advances for that period does not arise. Therefore, the appellant is liable to pay service tax along with interest on advances received only after 01.06.2007. A Service tax on the GTA services - HELD THAT:- Since the entire amount is paid before issue of show cause notice, penalty imposed by Adjudication authority is unsustainable. The appeal is partially allowed by confirming the demand against the appellant for the period after 01.06.2007 allowing the benefit of Notification No.1/2006 dated 01.03.2006, demand on GTA services is upheld and service tax on mobilization advances received for the period after 01.06.2007 is also upheld. All penalties stand set aside. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether construction activities executed under composite contracts were liable to service tax under pre-existing taxable categories prior to 01.06.2007, and whether benefit of abatement under Notification No. 1/2006-ST could be denied on that basis. 1.2 Whether the value of goods/materials supplied free of cost by the service recipient was includible in the 'gross amount charged' for determining taxable value and eligibility to abatement under Notification No. 1/2006-ST. 1.3 Whether mobilization advances received in relation to construction/works contracts during 01.04.2006 to 31.12.2007 were liable to service tax, and to what extent, having regard to the non-taxability of works contracts prior to 01.06.2007. 1.4 Whether the assessee was liable to penalty in respect of service tax payable on GTA services under reverse charge when the entire tax with interest had been paid prior to issuance of show cause notice. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Classification of composite construction contracts; effect on taxability prior to 01.06.2007; inclusion of free-supply materials and entitlement to Notification No. 1/2006-ST Legal framework discussed 2.1 The Tribunal referred to the legal position settled by the Supreme Court regarding taxability of composite works contracts prior to 01.06.2007 and to the principle that works contract is a distinct taxable category introduced w.e.f. 01.06.2007. The Tribunal also relied upon the Supreme Court's interpretation of 'gross amount charged' under Section 67 of the Finance Act, 1994, and the scope of inclusion of free-supply materials. Notification No. 1/2006-ST dated 01.03.2006 governing abatement for construction services was considered. Interpretation and reasoning 2.2 The Adjudicating Authority had rejected the assessee's plea of classification under 'works contract service' as an afterthought and denied the benefit of Notification No. 1/2006-ST, treating the activities under earlier construction categories and including the value of free supplies. 2.3 The Tribunal held that the issue of taxability of composite works contracts prior to 01.06.2007 stands settled by the Supreme Court in the decision concerning composite contracts (Larsen & Toubro), as followed by the Tribunal in the cited decision regarding similar construction activities (M/s M Far Construction). On that basis, composite construction/works contracts were not liable to service tax under the then existing categories prior to 01.06.2007. 2.4 With respect to inclusion of the value of free-supply materials, the Tribunal applied the Supreme Court judgment interpreting 'gross amount charged' (Bhayana Builders), which held that: (a) 'Gross amount charged' in Explanation (c) to Section 67 specifies modes of payment or book adjustment and does not permit adding value of free-supply goods over and above contract value. (b) Consideration for taxable service is confined to the contract value actually charged by the service provider; value of materials supplied free of cost by the service recipient, not forming part of the contractual consideration, is irrelevant for determining the value of taxable services. 2.5 Based on this, the Tribunal concluded that the Department could not add the value of materials supplied free of cost by the recipient to the assessable value either for valuation or for denying abatement under Notification No. 1/2006-ST. Conclusions 2.6 Demands pertaining to the period prior to 01.06.2007 on composite construction/works contracts were held unsustainable in law. 2.7 The demand of differential tax on the ground of non-inclusion of the value of free-supply materials in the assessable value was set aside, and it was held that such free-supply value must be excluded for determining tax liability and abatement under Notification No. 1/2006-ST. Issue 3 - Service tax on mobilization advances for the period 01.04.2006 to 31.12.2007 Legal framework discussed 3.1 The Tribunal considered Section 67(3) of the Finance Act, 1994, which provides that 'gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.' The factual context that mobilization advances in the construction industry are typically for procurement of machinery, materials and equipment, later adjusted against running bills, was noted through submissions and contracts. Interpretation and reasoning 3.2 The assessee argued that: (i) in view of non-taxability of works contracts prior to 01.06.2007, advances relating to such contracts for the pre-01.06.2007 period could not be taxed; and (ii) mobilization advances were, in substance, for materials and capital goods rather than 'towards the taxable service'. 3.3 The Tribunal first determined that, since composite works contracts themselves were not liable to service tax prior to 01.06.2007, any demand of service tax on mobilization advances relatable to that period could not survive. 3.4 For the period after 01.06.2007, the Tribunal held that the assessee was liable to pay service tax on mobilization advances along with interest, treating such amounts as part of the taxable value once the service (works contract) became taxable and the amounts were received in connection with the taxable service. Conclusions 3.5 Demand of service tax on mobilization advances relating to the period prior to 01.06.2007 was held unsustainable. 3.6 Service tax, with interest, on mobilization advances received for the period after 01.06.2007 was upheld. Issue 4 - Service tax and penalty in respect of GTA services under reverse charge Legal framework discussed 4.1 The Tribunal proceeded on the admitted position that liability under reverse charge for GTA services was on the assessee and that the entire service tax with interest had been paid before issuance of the show cause notice. The controversy before the Tribunal was confined to the imposition of penalty. Interpretation and reasoning 4.2 It was noted that the show cause notice itself recorded that the assessee had engaged transporters for carriage of materials such as sand and jelly. The assessee initially contended that these transporters acted as operators and not as 'goods transport agencies', but ultimately did not press the dispute regarding the GTA tax demand, confining its challenge to penalty since the tax and interest had been fully paid pre-notice. 4.3 Taking into account that the liability had been discharged in full before issuance of the show cause notice, the Tribunal held that the penalty imposed by the Adjudicating Authority in respect of GTA services was not sustainable. Conclusions 4.4 The demand of service tax on GTA services was upheld. 4.5 Penalties imposed in relation to GTA services, as well as all other penalties under the impugned order, were set aside. Overall disposition 5.1 The appeal was partially allowed: (a) demands prior to 01.06.2007 on composite construction/works contracts and on mobilization advances for that period were set aside; (b) differential tax demand based on inclusion of free-supply materials was set aside; (c) service tax demands for the period after 01.06.2007, including on mobilization advances and GTA services, were upheld with the benefit of Notification No. 1/2006-ST; and (d) all penalties were set aside, with consequential relief as per law.