On issue of Service Tax applicability on free of cost (FOC) supplies by the service recipient of construction service to the service provider (assessee), we are sharing with you a landmark judgement of the Hon’ble Supreme Court, decided in favour of the assessee, in the case of Commissioner of Service Tax Vs. M/s Bhayana Builders (P) Ltd.Issue:
The main question before the Apex Court was:
- Whether the value of goods or material supplied by the recipient of service, FOC to the service provider, which is used by service provider for providing the taxable service of construction, is to be included in the gross consideration, for the valuation purpose under Section 67 of the Finance Act, 1994 (the Finance Act) for the chargeability of Service Tax?
Facts & Background:
The Respondents in the case are engaged in the business of construction services, known as ‘Commercial or Industrial Construction Services’.
It is a matter of common knowledge that for undertaking construction projects, the assessee not only renders services, lot of materials/ goods are also used in the construction of building or civil structure etc. For valuation of taxable services, the material/ goods element has to be excluded. In order to make the things easier for the assessee as well as the Assessing Officers (AOs), the Government issued the Notification No. 15/2004-ST dated September 10, 2004 (“NN. 15/2004”) as per which Service Tax is to be calculated on the value which is equivalent to 33% of the gross amount charged from any person by such commercial concern for providing the taxable service. This notification was amended vide another Notification No. 4/2005-ST dated March 01, 2005 whereby an explanation was added to the original notification. This explanation mentions that the ‘gross amount charged’ shall include the value of goods and material supplied and provided or used by the provider of construction services for providing such service. It is made optional for the assessee to take advantage of the aforesaid notification and get the value calculated as per the aforesaid formula provided therein. The assessee under Civil Appeal Nos. 1335-1358 of 2015 availed the benefit and paid the Service Tax @ 33% of the gross amount, which they have charged from the persons for whom construction was carried out, i.e., the service recipients. It so happened that in all these cases where the construction projects were undertaken by the assessee, some of the goods/ materials (particularly, steel and cement) were supplied or provided by the service recipients. As these materials were to be utilised in the projects meant for service recipients themselves, obviously, no costs thereof were charged from the assessee. The Department wanted that value of such goods/materials evenwhen supplied or provided free should be included, while calculating the “gross value” and 33% thereof be treated as value for the purpose of levying Service Tax.
Observations of the Hon’ble Supreme Court:
The bench comprising of Justice AK Sikri and Ashok Bhushan observed as under:
