Tanessa Puri*

This paper is an analysis of the case of Commissioner of Service Tax v. Bhayana Builders (P) Ltd.  (Supreme Court) based on service tax notifications 15/2004-ST dated: 10/09/2004 and 4/2005-ST dated 01/03/2005.

It is divided into two parts.

In the first part- it shall lay down the background and explain the case law and in the second part- it shall underscore a lacunae of reasoning observed. The paper shall end by discussing another CESTAT case on a similar issue, which toes a different line of reasoning.

Sub-sections (1) and (2) of Section 93 of the Finance Act allow the Central Government to pass a notification or a special order in Public Interest which would exempt the payment of Service Tax, completely or in part, on any taxable service as may be prescribed by the said notification or special order.

Pursuant to the above parent statute, the Central Government came out with Notifications Number 15/2004-ST by which- a commercial concern in relation to a construction service had to pay service tax on thirty-three percent of the gross amount charged by the Service Provider to the Service Recipient. This was an exemption compared to the usual twelve percent of taxable service’s value to be paid as Service Tax under Section 66 of the Act.

Later, notification 4/2005-ST was issued. This explained the meaning of the term “Gross Amount Charged” as inclusive of the “value of goods and materials supplied or provided or used by the provider of construction service for providing such services” to the recipient.

A Supreme Court Judgment of Commissioner of Service Tax v. Bhayana Builders (P) Ltd followed these notifications.[1] Bhayana Builders was providing the service of commercial construction. Based on the above notification 15/2004-ST, Bhayana, the assessee was required to pay service tax equivalent to the value of thirty-three percent of the ‘Gross Amount Charged’ from any person availing the services of Bhayana Builders. The controversial fact in this case was that the service recipient provided Bhayana Builders with some of the goods and materials themselves. Bhayana did not include the value of these goods and materials while calculating the ‘Gross Amount Charged.’

The question before the Court was whether the value of goods and materials supplied free of cost by the service recipient was to be included in the computation of gross amount charged for the valuation of taxable service?

The Counsel for Revenue argued that the value of such goods and materials supplied by the service recipient should be included in the computation of Gross Amount Charged relying on the following two reasons:

1) If the assesses i.e. Bhayana Builders did not want to include the value of the free goods and materials supplied by the service recipient, then they were not entitled to the benefit under the aforesaid notifications. The benefit was explained as follows: It was said that since construction is a kind of service that includes both services rendered as well as goods and materials supplied. Therefore, the entire cost had to be divided, so that Service tax is levied only on the service rendered and not on the goods and materials. And hence, only thirty-three percent of the value of the Gross amount charged was the amount of service tax the assessee was expected to pay. The Court dismissed this as attractive on first brush but invalid on the ground of no material to show such logic adopted in issuing the notifications.

2) According to Explanation (c) to Section 67 (4), the term “gross amount charged” had to include any form of payment such as any amount credited or debited. And since, the value of goods and services supplied free of cost is also a form of payment; it must be included in computing the “gross amount charged”. This was dismissed by the Supreme Court on the ground that although the definition of “gross amount charges” in the explanation was an inclusive one. However, the ambit of an inclusive definition of something with the very word, “charged” cannot be expanded to include goods and materials which have been procured free of cost by merely implicating that free of cost is also a kind of cost incurred.

The Supreme Court decided the case in favour of Bhayana Builders, thereby imputing that the value of goods and materials supplied free of cost need not be included while computing the “Gross Amount Charged” on the following four grounds:

a. Since, these free goods and materials were provided by the service recipient to the service provider and the service provider himself had not included them in the cost of services rendered to the recipient, the Department could not go beyond its jurisdiction and include any and every cost associated including goods and materials for which no cost was incurred or charged.

b. The Gross Amount Charged was only that amount which was charged as consideration for taxable services provided. Therefore, a nexus can be seen between amount charged as consideration received for taxable service under Section 67 of the Finance Act. In the given case, since there is no nexus of these free goods and materials supplied by the recipient with the amount charged, therefore, their value cannot be included in the computation of Gross Amount Charged.

c. On a reading of Section 67 of the Finance Act, Gross Amount “Charged” cannot include the value of free goods and materials since these goods and materials have been supplied free of cost and their value has not been charged.

d. The Court read the words, “for such service provided or to be provided by the service provider/assessee” and said that in respect of good and materials supplied free of cost by the recipient, no service is provided by the assessee or Service Recipient i.e. Bhayana Builders and so the value of these free goods and materials must not be included.


a. There is a conspicuous lack of a reading of the Explanation to the Notifications 15/2004-ST which came out after the said Notification. This explanatory notification explained the scope and meaning of the term “Gross Amount Charged” as used in the Notifications 15/2004-ST, which was the notification from which the legal point in question emanated. According to this explanatory notification the “value of goods and materials supplied or provided or used by the provider of construction service for providing such services” had to be included in computing the Gross Amount Charged. Therefore, even though in the above case, the service recipient provided the goods and materials in question free of cost, since they were “used” by the service provider, they ought to be included in the computation of Gross Amount Charged.

b. The explanation also uses the word, “supplied.” However it does not specify the source of such supply. Therefore, irrespective of whether such goods or materials came from the service provider or the recipient or a third party supplier, it is imperative that the value of such goods and materials ought to be included while computing the “Gross Amount Charged.”

c. These notifications in question were issued “in exercise of powers conferred by sub-section (1) of section 93 of the Finance Act, 1994.” However by the use of words such as “supplied”, “provided” and “used” to define the term “Gross Amount Charged,” it can be read as an Executive attempt to supersede the space of claim occupied by the statute under Explanation (c) of Section 67 (4). To be able to understand this judgment in its entirety, the conflict between the definitions employed by the statute on one hand and that used by the notification should have been discussed.

In a CESTAT- Mumbai order, called ABL Infrastructure Pvt. Ltd. v. Commissioner of Customs, Excise and Service Tax, Nashik [2]– a similar question came up where the legal question was whether the value of goods and material supplied free of cost should be included in computing the value of “Gross Amount Charged” for a works contract? The notification number 32/2007-ST, which governs a Works Contract for “Gross Amount Charged”, is worded almost the same as the notification in the above discussion apart from the amount of tax levied viz. in this case is two percent of the Gross Amount Charged. There is also an identically worded explanatory notification 23/2009-ST. However, the CESTAT differentiated ABL from the Bhayana Builders case as a case under Works Contract and not that under the type decided by Bhayana. The CESTAT ruled in favour of the Department of Revenue, by ordering inclusion of the value of free goods and materials into the “gross amount charged” on the basis of the explanatory notification which included the value of goods and materials “used” in the calculation of Gross Amount Charged, irrespective of the cost or the lack of cost of such goods and materials. However, Bhayana Builders remains a Supreme Court judgment, decided on reasons although logical, but not legal.

[1]  (2018) 3 SCC 782

[2] 2018[11] G.S.T.L. 106

*(Author is 4th year B.A. LLB Student of Jindal Global Law School)

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Qualification: Student- Others
Company: Jindal Global Law School, O.P. Jindal Global University
Location: Maharashtra, IN
Member Since: 21 Nov 2018 | Total Posts: 5

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  1. unnikrishnan vasudevan says:

    Basic issue is that the levy is on the “Service portion ” of the WCS and when viewed from this angle , the abatement @ 33% as per notification by loading other elements without any norms cannot be justified.
    If the …Dept had any papers for arriving at the abatement formula , it was different when read with the Explanation below notification. Still the question / notification an can override Section 67 would apply.

  2. Manish Gandhi says:

    The judgment appears as ambiguous and resulting in loss of crores of govt. Revenue.

    Section 77 is for valuation of service only and when issue is not limited to service only but with material also, Notification is issued for the purpose of exclusion of approx part of goods which is optional. For this aspect of central excise valuation only is applicable to arrive value of WCS and then abatement is applied. It give way to avoid tax on WCS for WCS value of 100 consist service of 33 and goods of 67.

    On 33 St comes 4.08.
    Now considering judgment, they consider as WCS with supply of goods of 67 and abated value on 33 comes to 10.89 only on which ST comes only 1.34.

    Thus judgment required to be reviewed

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