Service tax limitation and valuation: free issue materials excluded, and extended period failed absent suppression or intent to evade.

Service tax demand was held time-barred because the assessee had filed regular ST-3 returns, the department had scrutinised the relevant return, and the record did not show suppression of facts or intent to evade; invocation of the extended period was therefore unsustainable. Free issue materials supplied by the service recipient were also held not includible in the assessable value for service tax, as the amended Notification No. 23/2009-ST did not override the principle affirmed in Bhayana Builders that free supply goods do not form part of the taxable value. The demand, interest and penalty were consequently held unsustainable.

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Issues: (i) Whether the demand of service tax was barred by limitation, including invocation of the extended period, in the absence of suppression or intent to evade; (ii) Whether the value of free issue materials was includible in the assessable value for service tax purposes under Notification No. 23/2009-ST dated 07.07.2009.

Issue (i): Whether the demand of service tax was barred by limitation, including invocation of the extended period, in the absence of suppression or intent to evade.

Analysis: The appellant had filed regular ST-3 returns and the relevant return had been scrutinised by the department without any objection regarding non-inclusion of free issue materials. The subsequent demand originated from audit, and the appellant had responded and later paid tax in the manner pointed out. On these facts, the record did not support suppression of facts or any intention to evade tax. The notice was also issued by invoking the extended period, and the demand could not be sustained on that basis.

Conclusion: The demand was time-barred and the invocation of the extended period was unsustainable, in favour of the assessee.

Issue (ii): Whether the value of free issue materials was includible in the assessable value for service tax purposes under Notification No. 23/2009-ST dated 07.07.2009.

Analysis: The amendment to Notification No. 23/2009-ST did not justify inclusion of the value of materials supplied free of cost by the service recipient in the taxable value. The decision of the Larger Bench in Bhayana Builders, as affirmed by the Supreme Court, was treated as governing the issue. The governing principle was that the value of free supply goods has no bearing on the contract value or the taxable value of services, and therefore cannot be added to the assessable value.

Conclusion: The value of free issue materials was not includible in the assessable value, in favour of the assessee.

Final Conclusion: The demand of service tax, along with the related interest and penalty, was held unsustainable and the appeal succeeded with consequential relief.

Ratio Decidendi: For service tax valuation, free supply materials provided by the recipient are not part of the taxable value, and a demand founded on extended limitation cannot stand absent suppression of facts or intent to evade tax.

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