In a landmark judgment, the larger bench of the Hon’ble Tribunal, New Delhi has held in the case of Ms Bhayana Builders (P) Ltd., & Others Vs CST, Delhi & Others 2013 (9) TMI 294 CESTAT New Delhi that value of free supplies by service recipient do not comprise the gross amount charged under notification No.15/2004 under Construction of Commercial or Industrial Complex service. Etymologically the words supplied and provided are closely associated words. Provided also means to supply; furnish. Supply bears a similar connotation. The word used is structurally associated (in the Explanation) with the earlier two words and the three words are employed to define the meaning of the expression gross amount charged, an expression that occurs in the preamble to Notification No. 15/2004-ST. The issue on valuation was referred to this bench in view of the earlier conflicting decisions in two division benches in the case of Ms.Cemex Engineers Vs. Commissioner of Service Tax 2011-TIOL-866-CESTAT-BANG and Ms.Jaihind Projects Vs CST, Ahmedabad 2010 (10) –TMI-926 CESTAT Ahmedabad.
Relevant Legal provisions:
After the amendment w.e.f. 18.04.2006, Section 67 of the Finance Act reads:
“SECTION 67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, —
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation. — For the purposes of this section, —
(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;
[(b) * * * ]
(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and [book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise].]”
Exemption Notification No. 15/2004-ST dated 10.09.2004.
“13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (refer Notification No. 15/2004-S.T., dated 10-9-2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-S.T.) of exemption towards cost of goods are availed”.
Revenue relied on the decision in M/s N.M. Goel and Co. vs. Sales Tax Officer, Rajnandgaon and Another (1989) 1 SCC 335 . Also reliance was placed on the judgment of the Supreme Court in Bharat Sanchar Nigam Limited vs. Union of India 2006 (2) STR 161 (SC) and the decision of this Tribunal in Naresh Kumar & Co. Pvt. Ltd. vs. Commr. of Service Tax, Kolkata 2008 (11) STR 578 (Tri. Kolkata) to contend that where there is a nexus between the expenses incurred and the service provided, the value of such expenditure should also be included in the value of the service. These judgments, in our considered view do not assist resolution of the issue referred. There could be no dispute that free supplies by the recipient for use in construction services have a nexus; and an integral nexus for that matter with the construction activity. The essential question is however whether such free supplies by the recipient would constitute consideration accruing to the economic benefit of the service provider so as to be includible in the “gross amount charged” for the service provided, for the purpose of computation of the taxable value under Section 67; or as a case may be ought to be included in the “gross amount charged” for availing the benefits under Notification No. 15/2004-ST, as comprehended within the meaning of the expression “used” in the Explanation thereto.
The Appellants have strongly quoted the principles applied in “ejusdem generis” and “noscitur” in a plethora of decisions. Elaborating on the noscitur principle it is contended that the expression “used” in the Explanation to Notification No. 15/2004-ST (to explain the meaning of “gross amount charged”, an expression in the preamble to the Notification), cannot be construed, in so far as language permits, as be inconsistent with the meaning of the expression “gross amount charged” in the preamble to the Notification. In substance, the contention is that the Notification exempts service tax to the extent of the tax leviable on 67% of the “gross amount charged”, in relation to construction service; Section 67 (a provision dealing with valuation of taxable services for charging tax) enacts that the value of any taxable service shall be the “gross amount charged”; and “gross amount charged” under Section 67 would not include the value of free supplies. We have also concluded that that is the position; that implicit in this legislative architecture (of Section 67) is the concept that any value to constitute a consideration, whether monetary or otherwise should have flown or should flow from a service recipient to a service provider and should accrue to the benefit of the later; and that this is a precondition of taxability under Section 67. On this syllogism, in defining to explain the meaning of “gross amount charged”, the Explanation could not be construed as expanding the scope of “gross amount charged” in the preamble to the Notification, is the contention.
Revenue contended that even if one of the literal meanings of the expression used, namely free supplies used is considered as the legal meaning as well, construction service providers may not be handicapped as they may seek benefits under Notification No. 12/2003-ST. In our view however the fact that the assessee have an alternative recourse to avoiding the rigour cannot be the criterion for interpreting the Explanation. This contention by Revenue proceeds on a fallacious comprehension of Notification No. 12/2003-ST.
The benefits under this Notification are only in respect of the value of goods and materials sold by a service provider to the recipient of a taxable service. In the case of free supplies by the recipient there is no sale or transfer of title in the goods and materials in favour of the service provider, at any point of time. Therefore when free supplied goods and materials are incorporated into the construction would be no sale by the provider to the recipient either. Notification No. 12/2003-ST would therefore be inapplicable.
Board Circular dated 16.02.2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-ST) and in the context of an identical Explanation introduced in Notification No. 18/2005-ST, clarified that gross amount charged shall include the value of goods and materials supplied. This circular constitutes contemporanea expositio of the meaning of the Explanation in Notification No. 18/2005-ST.
Conclusion: The question was well answered by the larger bench in the following way:
Goods and materials, supplied/ provided/ used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/ provision / use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/ goods incorporated or otherwise, would alone constitute the gross amount charged., This is not to say that an exemption Notification cannot enjoin a condition that the value of free supplies must also go into the gross amount charged for valuation of the taxable service. If such intention is to be effectuated the phraseology must be specific and denuded of ambiguity.
(a) 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, 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, 1994; and
(b) Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST.
And hence commodities like steel, cement etc., supplied by the ultimate service receiver do not constitute the term “consideration” as these materials are delivered again to the service recipient in a construction industry and therefore such free supplies do not comprise the gross amount for valuation purpose.