Free Material Supplied by NTPC for Maintenance Services Cannot Be Included in Gross Value for Service Tax Abatement: CESTAT [Read Order]

The Hyderabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that free material supplied by NTPC (National Thermal Power Corporation) for maintenance services cannot be included in the gross value for calculating service tax abatement.

Utility Powertech Ltd, the appellant, was providing maintenance and repair services for NTPC’s thermal power stations under long-term agreements. The company paid service tax under “Construction Services” after claiming abatement on 67 percent of the value while excluding the cost of materials that NTPC supplied free of charge for the projects.

The department issued a show cause notice demanding service tax on the value of free materials, arguing that these should be included in the gross value for abatement calculation. The adjudicating authority confirmed the demand along with interest and penalties, classifying the services under “Management, Maintenance or Repair Services” (MMRS) and denying the claimed abatement.

The appellant's counsel argued that under the Supreme Court’s judgment in Bhayana Builders, the value of free materials supplied by the service recipient cannot be included for calculating service tax or abatement. The counsel also argued that the appellant acted in good faith under the interpretation of the law and there was no intention to evade tax, making the penalty and extended period demand unsustainable.

The revenue counsel argued that the services provided by the appellant were correctly classified under MMRS, and the value of free materials provided by NTPC should be included for calculating the service tax liability since these materials formed part of the consideration for the services.

The two-member bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) agreed with the appellant’s arguments regarding the exclusion of free materials. The tribunal observed that the Supreme Court’s ruling in Bhayana Builders settled the law that free materials provided by the service recipient cannot be added to the gross value for the purpose of service tax abatement. The tribunal also observed that there was no deliberate suppression by the appellant, making penalties and the extended period demand unjustified.

The tribunal explained that while the classification under MMRS was correct, the inclusion of free material value for abatement was legally incorrect, and the penalty under Section 78 could not be imposed in the absence of willful suppression. The appeal was partly allowed, setting aside the demand related to the inclusion of free material value and the penalty, while upholding the correct service classification under MMRS.

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