2026 (1) TMI 1441 - AT - Service Tax

Demand of service tax on free supply materials held not includable and extended period invocation barred; demand set aside

Demand concerned exclusion of free supply materials from assessable value and invocation of extended limitation. The tribunal found no intention to evade ... Demand of service tax - Non-inclusion of value of free supply materials in assessable value - limitation and extended period of limitation - invocation of proviso to Section 73(1) - audit objection and absence of suppression - Notification No. 23/2009-ST - Work Contract Service - HELD THAT:- The appellant have no intention to evade the payment of service tax and they have complied with the audit as soon as the issue was pointed out to them. Thus, we find merit in the submission of the appellant that they have no intention to evade the payment of service tax by excluding the value of free supply materials in the assessable value. It is observed the said notice was issued for the period 2009-10 to 2011-12 under ‘Section 73(1)’ of the said Act and not under the ‘proviso’ to Section 73(1) of the said Act, which is required in case of demands raised for the extended period. It is also pertinent to note that the notice was issued after one year and five month from the date of audit. Therefore, the demand raised without invoking the proviso to Section 73(1) of the said Act, is barred by limitation. We also take note of the fact that during the relevant period when the notice was issued, the notice for normal period could be issued for a maximum period of 18 months from the relevant date. Thus, we hold that the demand confirmed by invoking extended period of limitation in the impugned order is not sustainable and hence we set aside the same. From the facts of the case, we observe that the decision of the Larger Bench of the Tribunal in the case of Bhayana Builders (P) Ltd. [2013 (9) TMI 294 - CESTAT NEW DELHI-LB] is squarely applicable in this case. Further, it is seen that the above decision of the Larger Bench has been affirmed by the Hon’ble Apex Court [2018 (2) TMI 1325 - SUPREME COURT], wherein it has been laid down that the value of free supply materials is not includable in the assessable value. Thus, by relying on the decision cited supra, we hold that the value of free supply materials is not includable in the assessable value for determining the service tax liability of the appellant. Accordingly, we hold that the demand of Service Tax confirmed in the impugned order is not sustainable on merits, Consequently, we set aside the same. As the demand of Service Tax against the appellant is not sustained, the question of demanding interest or imposing penalty does not arise. In the result, we set aside the impugned order and allow the appeal filed by the appellant, with consequential relief, if any, as per law. Issues: (i) Whether the demand of service tax confirmed by invoking the extended period of limitation is sustainable; (ii) Whether the value of free supply / free issue materials is includable in the assessable value for determination of service tax liability.Issue (i): Whether the demand confirmed by invoking the extended period of limitation is sustainable.Analysis: The appellant filed ST-3 returns and the return for the half year ending September 2009 was scrutinised on 10.11.2009 without any note about non-inclusion of free supply material value. The audit raising the objection was conducted on 09/10.02.2011 and communicated by Audit query dated 10.02.2011; the Show Cause Notice was issued on 12.07.2012. The impugned notice invoked the extended period but was issued under Section 73(1) rather than under the proviso to Section 73(1) required for extended-period demands. The Tribunal finds no suppression of facts by the appellant and notes that the notice was issued after one year and five months from audit.Conclusion: The demand confirmed by invoking the extended period of limitation is barred and not sustainable; in favour of the assessee on limitation.Issue (ii): Whether the value of free supply / free issue materials is includable in the assessable value for service tax.Analysis: The Tribunal examined applicability of Notification No.23/2009-ST (07.07.2009) and relied on the Larger Bench decision in Bhayana Builders (P) Ltd., which the Supreme Court has affirmed, holding that the value of free supply materials is not part of the contract value and is not relevant in determining the value of taxable services. The appellant had paid tax after audit and there was no intention to evade tax. The Larger Bench and the Apex Court's reasoning that free supply goods' value cannot be added over and above contract value to arrive at taxable service value is held applicable.Conclusion: The value of free supply / free issue materials is not includable in the assessable value; the demand is unsustainable on merits and decided in favour of the assessee.Final Conclusion: The appeal is allowed; the impugned order confirming service tax, interest and penalty is set aside and consequential reliefs, including refund if any, are to follow as per law.Ratio Decidendi: A demand based on non-inclusion of free supply materials is unsustainable where the extended period is not properly invoked under the proviso to Section 73(1), and the value of free supply materials is not includable in the assessable value for determining service tax liability.