No service tax on free materials supplied by service recipients in Construction projects. Value of such goods not included in computation of gross amount under Notification No. 15/2004-ST-Supreme Court
ABCAUS Case Law Citation:
ABCAUS 2213 (2018) (02) SC
In construction projects the builder assessees not only render services but lot of materials/goods are also used in the construction of building or civil structure etc. For valuation of taxable services, for the purpose of levy of service tax, the material/goods element has to be excluded.
The CBEC had issued the Notification No. 15/2004-ST dated September 10, 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 assessees to take advantage of the aforesaid notification and get the value calculated as per the aforesaid formula provided therein.
The respondents were builders engaged in the business of construction and, in the process, providing the services known as ‘Commercial or Industrial Construction Service’ which was exigible to service tax as per the provisions of Section 65(105) (zzq) of the Finance Act, 1994 (‘Act’).
The respondents assessees have 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. However, in these projects, 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 was charged from the assessees.
The Service Tax Department included the value of such goods/materials even when supplied or provided free while calculating the “gross value” and 33% thereof for the purpose of levying service tax.
The different benches of the Customs, Excise and Service Tax Appellate Tribunal ( ‘CESTAT’) had given conflicting views on the aforesaid question and, therefore, the matter was referred to the Larger Bench which by impugned judgment decided the issue in favour of the assessees by holding that the value of the goods/materials cannot be added for the purpose of aforesaid notification
The sole question that fell for the consideration of the Hon’ble Supreme Court was as to whether, the value of goods/material supplied or provided free of cost by a service recipient and used for providing the taxable service of construction or industrial complex, is to be included in computation of gross amount (charged by the service provider), for valuation of the taxable service, under Section 67 of the Act and for availing the benefits under Notification No. 15/2004-ST dated September 10, 2004 as amended.
The Hon’ble Supreme Court observed that 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.
The Hon’ble Court observed that 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. It has no nexus whatsoever with the taxable services for which value is sought to be determined.
The Hon’ble Supreme Court opined that a plain meaning of the expression ‘the gross amount charged by the service provider for such service provided or to be provided by him’ leads 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.
The Hon’ble Supreme Court rejected the argument of the Revenue that that payment received in ‘any form’ and ‘any amount credited or debited, as the case may be…’ is to be included for the purposes of arriving at gross amount charges and is leviable to pay service tax and thus the value of goods/materials supplied free is a form of payment and, therefore, should be added. The Court opined that a plain reading of Explanation (c) which makes the ‘gross amount charges’ inclusive of certain other payments would make it clear that the purpose is to include other modes of payments, in whatever form received; be it through cheque, credit card, deduction from account etc. It is in that hue, the provisions mentions that any form of payment by issue of credit notes or debit notes and book adjustment is also to be included. Therefore, the words ‘in any form of payment’ are by means of issue of credit notes or debit notes and book adjustment. With the supply of free goods/materials by the service recipient, no case is made out that any credit notes or debit notes were issued or any book adjustments were made. Likewise, the words, ‘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 accounts of a person liable to pay service tax’ would not include the value of the goods supplied free as no amount was credited or debited in any account. In fact, this last portion is related to the debit or credit of the account of an associate enterprise and, therefore, takes care of those amounts which are received by the associated enterprise for the services rendered by the service provider.
Rejecting the plea of the Revenue attempting to explain the purpose to bifurcate the component of goods and services into 67% : 33% and to provide a ready formula for payment of service tax on 33% of the gross amount, the Hon’ble Supreme Court observed that in the absence of any such material, it was just a guess as to what went in the mind of the Central Government in issuing these notifications and prescribing the service tax to be calculated on a value which is equivalent to 33% of the gross amount.
The Hon’ble Supreme Court observed that the language itself wipes the argument of the Revenue as it says ‘33% of the gross amount ‘charged’ from any person by such commercial concern for providing the said taxable service’. According to these notifications, service tax is to be calculated on a value which is 33% of the gross amount that is charged from the service recipient. Obviously, no amount is charged (and it could not be) by the service provider in respect of goods or materials which are supplied by the service recipient. It also makes it clear that valuation of gross amount has a causal connection with the amount that is charged by the service provider as that becomes the element of ‘taxable service’.
The Hon’ble Court observed that even when the explanation was added vide notification dated March 01, 2005, it only explained that the gross amount charged shall include the value of goods and materials supplied or provided or used by the provider of construction service. Thus, though it took care of the value of goods and materials supplied by the service provider/assessee by including value of such goods and materials for the purpose of arriving at gross amount charged, it did not deal with any eventuality whereby value of goods and material supplied or provided by the service recipient were also to be included in arriving at gross amount ‘gross amount charged’
The Division Bench of the Hon’ble Supreme Court expressed agreement with the view taken by the Full Bench of CESTAT and accordingly dismiss appeals filed by the Revenue.