Larger Bench of CESTAT holds that material supplied free of cost by service recipient is not includible in value of service

 

The larger bench of the CESTAT Delhi bench (“LB”), in this recent judgment held that the value of materials supplied free of cost by the service recipient (“free supplies”) is not includible in the ‘gross amount charged by the service provider’ for the purpose of 67% abatement under Notification No 15/2004 dated September 10, 2004. We have summarized the ruling of the LB below.

Facts of the case

· The taxpayers in question vis a vis this LB decision were engaged in providing the taxable service of ‘commercial or industrial construction’ (“construction service”). In the course of providing the service the taxpayer was in receipt of certain free supplies which were used for providing the construction service.

· The taxpayers availed the benefit of abatement under the Notification No 15/2004 dated September 10, 2004 (“Abatement Notification”). However, the taxpayers did not include the value of free supplies in the ‘gross amount charged’ for the purpose of valuation of taxable service provided by them under the Section 67 of the Finance Act.

· An explanation was added to the Abatement Notification vide Notification 4/2005-ST dated, March 1, 2005 (“Amended Notification”) which defined gross amount charged, inter alia, to include the value of goods “supplied or provided or usedby the” service provider for providing the construction service.

· The expression ‘gross amount charged’ and its scope in the Abatement Notification led to two contrary decisions of the Tribunal ie., Cemex Engineers v CST, Cochin[#_edn1][i] (“Cemex”) and Jaihind Projects Limited v CST Ahmedabad[#_edn2][ii] (“Jaihind”). Accordingly, a reference was made to the larger bench of Tribunal

Issue before the LB

The questions framed for the consideration of the Larger Bench were whether:

· The value of free supplies should be included in the ‘gross amount charged’ by the service provider for the purpose of valuation of taxable service being provided by them under the Section 67 of the Finance Act.

· Such value of free supplies was required to be included in the gross amount charged for availing the benefit under the Abatement Notification.

Contentions of the Revenue

The Revenue relied primarily on the following grounds to support the inclusion of value of free supplies in the gross amount charged by the service provider:

· Section 67 of the Finance Act provides that the value includes both monetary and non-monetary consideration. Thus, non-monetary consideration ie free supplies, is also a consideration.

· The meaning of the expression ‘used’ in the definition of ‘gross amount charged’ in explanation to the Amended notification should not be restricted either by reference to the other two expressions viz ‘supplied’ and ‘provided’, or by reference to the meaning of the expression ‘gross amount charged’ under section 67 of the Finance Act.

Decision of the LB

· Section 67 of the Finance Act does not require inclusion of free supplies in the ‘gross amount charged’ for computation of value of taxable services. Any consideration, whether monetary or otherwise, should flow from the service recipient to the service provider.

· Non monetary consideration must still be a consideration accruing to the benefit of the service provider, from the service recipient and for the services provided. Value of free supplies incorporated into the construction would not form a part of the non-monetary consideration as the same is supplied back to the service recipient and no part of the same is retained by the service provider.

· Sales tax is leviable on the consideration charged by the seller from the buyer, unlike in the case or excise duty where the levy is event based and irrespective of whether goods are sold or captively consumed. Sales tax principles would equally apply to service tax and the liability to service tax is on the consideration received for service under. Decision of the Hon’ble Supreme Court in the case of Moriroku UT India Private Limited v State of UP wherein the Court held that the value of moulds supplied free of cost by the customer is not includible in the sale price of the auto components was relied on.

· The agreement between the parties does not provide for recovering the cost of free supplies by the service recipient from the consideration to be paid to the service provider and thus the decision in the case of NM Goel and Co vs Sales tax officer[#_edn3][iii] relied upon by the Revenue would not apply.

· The expression ‘used’ in the explanation to the Amended Notification is inherently ambiguous and liability to tax could not be inferred based on a doubtful provision. Therefore, the benefit of such an ambiguity should be given to the service provider. Decision in Govind Saran Ganga Saran v Commissioner of Sales Taxrelied on.

· The explanation to the Abatement Notification (vide the Amended Notification) cannot expand the meaning of the expression ‘gross amount charged’ beyond the scope of Section 67 of the Finance Act since the expression ‘gross amount charged’ was already employed in the preamble to the Abatement Notification.

· Applying the principle of ‘Noscitur A Sociis’, the term ‘used’ in the explanation to the Amended Notification would mean only those goods and materials which belong to the provider for which the service recipient is charged and the value thereof is received by the service provider to accrue to his benefit.

The LB held that the value of free supplies should not be included in the ‘gross amount charged’ by the service recipient as it is neither monetary nor non-monetary consideration bringing any benefit to the service provider. Also, the value of free supplies does not comprise a part of the ‘gross amount charged’ for availing the benefit under the Abatement Notification.