CA Manoj Nahata 
Recently, the Larger Bench of Hon’ble Delhi Tribunal in a landmark judgment has finally settled the two conflicting decisions of the co-ordinate benches of Bangalore Tribunal & Ahmadabad Tribunal. The matter was with regards to the levy of Service Tax on value of FOC material supplied by the service recipient to the service provider under the erstwhile service tax regime i.e before introduction of negative list regime.
The Division Bench of Bangalore Tribunal in case of Cemex Engineers v. CST, Cochin (2009-TIOL-2208-CESTAT-BANG) held that that the value of goods supplied and provided by the service recipient to the service provider cannot be included in the value of taxable services for calculating service tax, in terms of section 67 of the Finance Act .On the other hand in case of in Jaihind Projects Ltd. v. CST, Ahmedabad (2010-TIOL-124-CESTAT-AHM), it was held that the Explanation provided that the value of goods used for providing output services had to be included in the gross amount charged for the services. Thus, the value of FOC goods supplied by the service recipient to the service provider and used by the service provider for providing output services would be included in the gross amount charged for providing such services.
Summary of the present Judgment:
On reference, the larger bench of the Delhi Tribunal in case of Bhayana Builders (P) Ltd & Others v. CST, Delhi, 2013-TIOL-1331-CESTAT-DELHI-LB while observing that the judgment of the division bench in Jaihind Projects (Supra) was incorrect and thus held that in terms of section 67 of the Finance Act, the value of FOC material supplied by the service recipient to the service provider cannot be included in the gross amount charged for the taxable services. 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.
Brief facts of the case & Judgment thereon:
Taxpayers were engaged in providing the taxable services of “Commercial and Industrial Construction service” and were availing the benefit of 67% abatement under the Abatement Notification. Notification No. 4/2005-ST dated March 01, 2005 had added an explanation to the Abatement Notification (“Explanation”) which provided that the expression ‘gross amount charged’ would include “the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service.
The issue before the Division Bench of Tribunal was with respect to inclusion of value of FOC goods supplied by a service recipient to provider of taxable construction service, in the taxable value or gross amount charged, for levy of service tax under the Abatement Notification. There were two previous conflicting judgments on the matter as discussed above in case of Cemex Engineers and Jaihind Projects Ltd. Hence the matter was referred to the larger Bench for consideration.
The Tribunal examined the scope of section 67 of the Finance Act, 1994 in both pre & post amendment situation. After the amendment, which substitutes Section 67 with effect from 18-04-2006, where service tax is chargeable on any taxable service with reference to its value then such value shall, in a case when the provision of service is for consideration in money, be the gross amount charged by the service provider for such service [sub-clause (i)]. Where provision of service is for a consideration not wholly or partly consisting of money, the value shall be such amount in money as, with the addition of service tax charged, is equivalent to the consideration [sub clause (ii)]; and where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
Revenue has contended that the value of “free supplies” to a construction service provider ought to be included in the value of taxable services for determination of the liability to tax under Section 67 of the Act in view of sub-clause (ii) of section 67(1). Sub-clause (ii) applies where a taxable service is provided for a consideration which is not either wholly or partly, for money. Therefore the non-monetary consideration must still be a consideration accruing to the benefit of the service provider, from the service recipient and for the service provided.
Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient.
In the light of the clear Legislative text, the unambiguous provisions of sections 66 and
67 of the Act and in the light of the judgment of Delhi High Court in Intercontinental Consultants and Technocrats Pvt Ltd., the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. It was also argued that since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Reliance was placed on the judgment in M/s Gannon Dunkerley and Co. and Others vs. State of Rajasthan and Others; and State of Andhra Pradesh and Others vs. Larsen & Toubro Limited and Others, to buttress this contention.
Since Section 67 of the Act, as currently structured does not, require inclusion of free supplies in the gross value charged, for computation of the value of taxable services; and as this is the only issue presented (on Section 67 of the Act); the tribunal find no justification for a wider analysis of a speculative theatre, of potential conflict.
From the several aids to interpretation, referred to (supra) it was concluded that 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.
In conclusion the Tribunal answered the reference as follows:
(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.
Author’s Comments:
The above judgment delivered in context of pre-negative list era will surely help in settling the most unsettled issue in construction industry. The long pending controversy is now answered in favour of the assessee. Since the said judgment is delivered by Larger Bench, it would apply to all disputes on the issue, pending at the various Benches. However it is really difficult to examine the applicability of this judgment in the present negative list regime. Let us test the same.
Applicability of judgment in present scenario
The Service Tax Valuation Rules for works contract under the present scheme of law (i.e rule 2A of the Service Tax Valuation Rules) provides for inclusion of fair market value of all goods supplied in relation to a works contract. Thus on this basis the tax department is demanding service tax even on the value of free supply of goods & material by service recipient to the service provider. However it is pertinent to know that rule 2A of Service Tax Valuation Rules are subject to section 67 of the Finance Act. Thus in author’s view the inclusion of value of FOC materials supplied by the service recipient, for the valuation of works contract service may be challenged, in the light of the instant decision of the larger bench.
Further notification no: 26/2012-ST dated 20.07.2012, providing for abatement to construction service specifically provides for inclusion of fair market value of all goods and services provided by the service recipient to the provider, in the value of taxable services. Thus it needs to be examined whether this judgment would apply to the abatement notification in the present regime also.
PUNCH LINES
| The value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. |
*The author can be reached at: manoj_nahata2003@yahoo.co.in
