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Service recipient not liable to pay service tax on free supply of material

In the instant case, Ahluwalia Contracts (India) Ltd. (the Appellant) provided ‘Commercial or Industrial Construction service’ and ‘Construction of Complex service’ and availed the benefit of Notification No.1/2006-ST dated March 1, 2006 (the Abatement Notification) claiming abatement of 67%. Further, while availing of the Composition Scheme to pay Service tax under the Works

Value of free supply of material by service recipient is not required to be included in the gross amount for chargeability of Service tax

In the instant case, Ahluwalia Contracts (India) Ltd. (the Appellant) provided ‘Commercial or Industrial Construction service’ and ‘Construction of Complex service’ and availed the benefit of Notification No.1/2006-ST dated March 1, 2006 (the Abatement Notification) claiming abatement of 67%. Further, while availing of the Composition Scheme to pay Service tax under the Works contract service, the Appellant utilized Cenvat credit on Inputs and Input services.

Furthermore, the Appellant also did not pay Service tax on the Construction services rendered to DDA, BSNL and NDMC, Reliance, Dr. B.L Kapur Memorial Hospital project and Jassaram Hospital project on the ground that these were not Commercial or Industrial Constructions and the Construction of flats for DDA being for DDA’s use were not liable to Service tax under ‘Construction of Complex service’.

The Adjudicating Authority disallowed the benefit of the Abatement Notification on the ground that the value of the free supplies had not been included in the gross value for the purpose of claiming the abatement. Further, the Composition Scheme benefit was also disallowed on the ground that the Appellant had started taking the benefit of Composition Scheme in respect of projects which were on-going before June 1, 2007 and also because the Appellant had utilized Cenvat credit on Inputs and Input services.

As regards the Construction services rendered to BSNL, NDMC, Reliance, Dr. B.L. Kapur Memorial Hospital etc., the Adjudicating Authority held that the buildings qualified to be Commercial or Industrial Construction. It was further held that Construction of residential buildings for DDA is also exigible to Service tax as they were not meant for self-use (i.e. for use of DDA or its employees).

Accordingly, vide Order-in-Original dated May 31, 2013, Service tax demand of Rs.30,59,07,287/- for the period April, 2010 to March, 2011 was confirmed along with interest, Cenvat credit amounting to Rs.49,25,935/- was disallowed and ordered to be recovered as inadmissible Cenvat credit and the suo-moto adjustment of Service tax amounting to Rs.2,60,910/- was also disallowed. Penalties under Section 76 and Section 77 of the Finance Act, 1994 (the Finance Act) were also imposed on the Appellant. Being aggrieved, the Appellant preferred an appeal before the Hon’ble CESTAT, Delhi.

The Hon’ble CESTAT, Delhi after elaborate discussion, remanded the matter for de novo adjudication on following findings:

  • As regards disallowance of abatement of 67% under the Abatement Notificationon ground that the value of free supplies was not included in the gross amount charged, the Larger Bench of the Tribunal in the case of Bhayana Builders (P) Ltd. Vs. CST, Delhi [2013-TIOL-1331-CESTAT-DEL-LB] (Bhayana Builders case), has held that the value of free supplies by the service recipient to service provider is not required to be included in the gross amount charged for the purpose of availing the benefit of the Abatement Notifications. Hence the matter needs to be reconsidered in the light of the said decision;
  • While the Composition Scheme is not available to the Appellant in respect of on-going projects which commenced prior to June 1, 2007 and on which Service tax was paid prior to that date, the Appellant should be allowed in the light of decision in the case of Nagarjuna Construction Co. Ltd. Vs. GOI [2012-TIOL-107-SC-ST], to make a claim for the benefit of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 or any other Exemption Notification and if such a claim is made, the benefit claimed should be extended if the Appellant is found to be eligible therefor;
  • As regards impugned Cenvat credit and suo-moto adjustment, the issue should be reconsidered and clear reasons for inadmissibility (or otherwise) should be recorded;
  • In respect of the Construction services rendered to DDA, BSNL, NDMC, Reliance, Dr. B.L. Kapur Memorial Hospital etc., findings of the Adjudicating Authority were upheld.

Our Comments:Provision of free supply of goods during the course of rendering Works Contract Services, Repairs and Maintenance Service, Construction Service, etc., has always been a point of dispute, both on the issue of taxability as well as valuation thereof.

In terms of Section 67 of the Finance Act, Service tax is payable on gross value of taxable services, which includes both monetary and non-monetary consideration.It is an area of litigation whether value of goods supplied free of cost by the service recipient to the service provider should be included for Service tax valuation purpose.

The Larger bench of the Hon’ble Tribunal in Bhayana Builders case has held that the value of goods and materials supplied free of cost by a service recipient to the provider of the taxable Construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, and would be outside the taxable value or the gross amount charged, within the meaning of the later expression in Section 67 of the Finance Act.

However, it is worthwhile to note here that the Larger Bench decision was in the context of ‘Construction services’ and that too for the period prior to the Negative List regime of Service tax. Interestingly, under the Negative List regime of Service tax (w.e.f July 1, 2012), the Abatement Notification No. 26/2012-ST dated June 20, 2012 (effective from July 1, 2012) defines the amount charged shall be the sum total of the amount charged for the service including the fair market value of all goods and services supplied by the recipient(s) in or in relation to the service, whether or not supplied under the same contract or any other contract, after deducting-

(i) the amount charged for such goods or services supplied to the service provider, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

Similarly, for valuation of ‘Works contract services’ in terms of Rule 2A of the Service tax (Determination of Value) Rules, 2006, duly amended vide Notification No. 24/2012-ST dated June 6, 2012 where the tax payer has an option to pay Service tax on a specified percentage of the total amount charged, which also includes fair market value of all goods and services supplied in or in relation to the execution of the Works contract after deducting-

(i) the amount charged for such goods or services, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

Though the Larger Bench decision in Bhayana Builders case and the present judgment of the Hon’ble CESTAT, Delhi gives relief to various pending litigations for the period prior to July 1, 2012, but the stated matter requires to be legally examined and tested for the period post facto July 1, 2012.

(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)

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