Valuation of Taxable services｜Service Tax ｜Bhayana Builders Case Analysis

This is with reference to the judgment pronounced by Honorable Supreme Court of India in case of Commissioner of Service Tax vs. Bhayana Builders P Ltd dated 19^th February 2019 whereby the apex court has considered/analyzed the arguments given the Revenue legal counsel on the aspect of valuation of taxable services under Service Tax where goods/material is supplied free of cost by the service recipient and dismissed the revenue contention that the value of free supplies not to be included while valuation of taxable services under Service tax under section 67.

Brief facts of the case

• The respondents herein are engaged in the business of construction and, in the process, providing the services known as ‘Commercial or Industrial Construction Service’. This service is leviable to service tax as per the provisions of Section 65(105) (zzq) of the Finance Act, 1994;
• The dispute over here is regarding valuation of taxable service under section 67 of the Finance Act 1994;
• Under ‘Commercial or Industrial Construction Service’ while providing service, the goods part is along involved and hence in order to the provide the mechanism for valuation of service the Government issued Notification No 15/2004 dated 010^th September 2004 for deriving the value of taxable service i.e. 33% of the “gross amount charged’. Further, an explanation was inserted vide Notification no 04/2005 dated 1^st March 2005 which 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.
• The question which has fallen here is whether the value of goods/material supplied free of cost by the recipient and used for providing the such service is to be included in computation of gross amount (charged by the service provided) for valuation of taxable service u/s 67 in order to arrive at taxable value as per above referred Notification??;
• There was ambiguity as the different CESTAT (benches) had given contradictory judgements and hence the matter was referred to the Larger bench of CESTAT. The bench hold the matter in favour of assessees (together) dated 06^th September 2013;
• Hence, the above appeal was preferred before the higher courts by the revenue (petitioner)

Findings/ Ruling in the case

1. The Supreme Court has observed and emphasized on the below legal points:

2. Service tax is payable on the gross amount charged:- the words “gross amount” only refers to the entire contract value between the service provider and the service recipient. The word “gross” is only meant to indicate that it is the total amount charged without deduction of any expenses. Merely by use of the word “gross” the Department does not get any jurisdiction to go beyond the contract value to arrive at the value of taxable services. Further, by the use of the word “charged”, it is clear that the same refers to the amount billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider to the service recipient, it does not enter into the equation for determining the value on which service tax is payable.

3. The amount charged should be for “for such service provided”: Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words “for such service provided” the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount “charged” by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined.

4. Further, a plain meaning of the expression ‘the gross amount charged by the service provider for such service provided or to be provided by him’ would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the ‘gross amount’ simply, because of the reason that no price is charged by the assessee/service provider from the service recipient in respect of such goods/materials Again, obviously, in respect of the goods/materials supplied by the service recipient, no service is provided by the assessee/service provider

5. Further, Explanation 3 to subsection (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee.

6. Section 67 sub-section (4) which provides the determination of value which is subject to provisions of (1), (2), (3). The revenue has taken the basis of this sub-section and tried builting up the case, whereas the no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value

7. The Supreme Court added that “…the definition of “gross amount charged” given in Explanation (c) to Section 67 only provides for the modes of the payment or book adjustments by which the consideration can be discharged by the service recipient to the service provider. It does not expand the meaning of the term “gross amount charged” to enable the Department to ignore the contract value or the amount actually charged by the service provider to the service recipient for the service rendered.

8. Lastly, emphasis was given on Section 93, whereby the Central Government is empowered to grant exemption from the levy of service tax either wholly or partially, which is leviable on any ‘taxable service’ defined in any of sub-clauses of clause (105) of Section 65. Thus, exemption under Section 93 can only be granted in respect of those activities which the Parliament is competent to levy service tax and covered by sub-clause (zzq) of clause (105) and sub-clause (zzzh) of clause (105) of Section 65 of Chapter V of the Act under which such notifications were issued.

9. Hence, the conclusion was given that the Bench is in agreement with the view taken by the Full Bench of CESTAT in the impugned judgment dated September 6, 2013, and accordingly Revenue appeals stands dismissed.

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