Service tax not payable on material supplied free of cost by service recipient during construction: CESTAT [Read Order]

The Ahmedabad bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax not payable on material supplied free of cost by service recipient during construction. It was viewed that the consideration which is not received by the service provider shall not form part of taxable value under the term gross amount charged under Section 67 of the Finance Act, 1994 for levy of service tax.

Aneri Construction Pvt. Limited, that appellant are a service provider under the category of services such as Erection, Commissioning and Installation Service, Commercial and Industrial Construction Services and Maintenance and Repair Services, Supply of Tangible goods, Manpower Recruitment Agency Service, Works Contract services etc. and they are duly registered with Service Tax registration under Section 69 of the Finance Act, 1994.

During the audit of financial record of the appellant, it was observed by the department that the appellant has opted for composition scheme for taxation of service tax under Works Contract service but they have not included the value of free supply materials such as steel pipes, valves etc.

 It has been the contention of the department that during the Financial Year 2010-11 and 2011-12, the appellant has provided Works Contract service to M/s. GSPC Gas Company Limited wherein steel pipes and valves were provided by the service recipient and as per the provisions of Notification No.

23/2009-ST dated 07.07.2009, the value of the free supplied materials should have been included in the assessable value for discharging service tax liability under the composition service tax rate of 4%.

A show cause notice dated 26.08.2013 came to be issued to the appellant whereunder the service tax demand of Rs. 61,06,366/- has been demanded under Section 73(1) of the Finance Act, 1994, interest and penal provisions as per Finance Act, 1994 has also been invoked. The matter has been adjudicated by the impugned order-in-original where under all the charges as leveled in the show cause notice have been confirmed.

The appellant stated that he has entered into various contracts with M/s. GSPC Gas Company Limited for laying, testing and commissioning of steel pipeline network and station piping for upcoming CNG stations. As per the scope of the work detailed in the aforesaid contracts the appellant was required to undertake the activities such as project management, detailed engineering, procurement, manufacturing, inspection, testing, storage, erection, installation and pipe laying work including site-preparation and site restoration etc.

It was contended  that the word “gross amount charged” as mentioned in the Notification No. 23/2009-ST dated 07.07.2009 should be interpreted in accordance with the provisions of Section 67 of Finance Act, 1994. It was argued that only the value of services and the goods supplied by the service provider need to be included in the taxable value for the purpose of discharging service tax as per the provision of Section 67 of the Finance Act, 1994.

In the case of CCE vs. Bhayana Builders (P) Limited – 2018 (2), the Apex Court categorically held that for the purpose of valuation of taxable service, under the provisions of Section 67 of Finance Act, 1994 the mention of “the gross amount charged” by the service provider for such service provided or to be provided by him on which tax should be discharged include the amount charged by the service provider from the service recipient and the value of materials/ goods supplied free of cost by the service recipient to the service provider cannot be included to arrive at the “gross amount charged for such services”.

It was  submitted that department has wrongly interpreted the explanation inserted vide Notification No. 23/2009-ST dated 07.07.2009 that since pipeline and valve provided by M/s. GSPC Gas Company Limited should have been included in the gross amount charged is a gross violation of provisions of Section 67 of the Finance Act, 1994. As Section 67 of Finance Act, 1994 provided that “the value of taxable services shall be gross amount charged by service provider for such service provided or to be provided by him”.

A two-member bench comprising Mr Ramesh Nair, Member (Judicial) and Mr C L Mahar Member (Technical) observed that “no material is produced before us to justify that aforesaid basis of the formula was adopted while issuing the notification. In the absence of any such material, it would be anybody’s 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.”

Further viewed that 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.

“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 Tribunal viewed.

In light of the decision of Apex Court,the CESTAT set aside the order and allowed the appeal.

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