India: Taxable Construction Services: Discussing The Scope Of Goods Supplied Free Of Cost In Light Of The Recent Judicial Decisions

Article by Shipra Makkar Devgun and Akshay Mehta¹

Service tax has assumed significance in recent years as one of the major contributors to the Government exchequer. The law has expanded its reach to cover most transactions of services and now pervades all sectors of the economy. Whether the valuation of goods or materials supplied free of cost by the service recipient to the service providers for providing the Taxable Construction Services of commercial/industrial complex, must be included in the computation of the gross amount charged, for valuation under Section 67 of the Finance Act, 1994, has been a contentious issue. The question which needs to be highlighted is that

whether the disclosure of such free supplies in Construction Services is mandatory or not, in order to avail benefits under the Notifications so made by the Central Government in light of its powers under Section 93 of the Finance Act, 1994.

The Construction services other than residential complex, including commercial/industrial buildings or civil structures² , which is also referred to as Declared Services³, have become taxable after 1st July 2010 including the flats⁴. In case of a Commercial or industrial construction service⁵, there has been a long debate in order to bring about more clarity to the contentious issue that whether the value of goods supplied free of cost by the service recipient to the service provider should be included for service tax valuation purpose, for availing benefits under notifications ("the issue") so made by the Central Government. The value of taxable services has been dealt under Section 67 of the Finance Act, 1994, which states that the value of taxable services includes both monetary and non-monetary consideration. However, the judiciary took a different stand from the literal interpretation of the explanation to Section 67 in the case of Jaihind Projects Ltd. v. CST, Ahmedabad⁶ , which was conflicting to the judicial point of view in the case of Cemex Engineers v. CST, Cochin⁷. Hence it becomes important to highlight the judicial stand on this contentious issue.

JUDICIAL PRECEDENTS

On the above mentioned issue, there have been conflicting decisions by the Judiciary. In the case of Cemex Engineers v. CST, Cochin⁸ , the court had held that:

"the value of goods supplied and provided by the service recipient cannot be included for calculating service tax and the inclusion of the cost of materials supplied by the service recipient, would be contrary to Section 67 of the Finance Act."

However, the conflicting view was seen in the case of Jaihind Projects Ltd. v. CST, Ahmedabad⁹ , wherein the court held that:

"the value of the material supplied by the service recipient, being an essential component required for providing the service, must be treated as consideration other than in the form of money, and hence, the value of such material must be included in the gross amount charged."

The decision in the above mentioned case was criticized by the larger bench of CESTAT, Delhi in the case of Bhayana Builders (P) Ltd v. CST, Delhi¹⁰ . The larger bench criticized the decision of Jaihind Project Ltd v. CST, Ahemdabad¹¹, by stating that the observation of the Tribunal was a flawed interpretation of Section 67 of the Act 1994. In this case the court applied the principle of noscitur a sociis and concluded that the goods are supplied or provided by the service provider or used when supplied or provided by the service provider would comprise of the gross amount charged by the service provider.

The Larger Bench addressed res-integra issue and held that 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 nonmonetary

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 as per Section 67 of the Act, 1994. It was further observed by the Larger Bench that the value of free supplies does not comprise the gross amount charged in terms of the explanation to Notification No 15/2004.

Nevertheless, in the case of Intercontinental Consultants and Technocrats Pvt. Ltd¹²., the Hon'ble Delhi High Court observed that in case of Construction under Section 67(1), when a monetary consideration has been determined under a contract then that shall be the gross amount charged for the purpose of valuation for service tax.

It is submitted that under Notification No. 15/2004-ST ¹³, an abatement of 67% was granted on the gross amount charged for the purpose of computing service tax. Finally on 9.05.2014, the Principal Bench of CESTAT, in the case of M/s Hindustan Steel Works Construction Ltd v. Commissioner of Central Excise, Raipur¹⁴, went a step ahead and discussed the importance of disclosing the value of free supplies as part of gross consideration received for rendition of taxable construction services, to be entitled to the benefits of notification 1/2006-ST¹⁵ . This case was an appeal by Hindustan Steel Works Construction Ltd (assessee) arising out of Commissioner, Central Excise & Customs, order¹⁶. The reason of appeal was that the commissioner had directed recovery of interest and penalty under Section 76 and 77 of the Act, 1994. The assessee in this matter was asked to disclose the value of the free supplies by the recipient of the service, for availment of benefits under Notification No. 1/2006-ST and hence, this appeal was allowed.

CONCLUSION

The issue of whether free cost materials supplied by the service recipient to the service provider, has long been a bone of contention between the Department and tax payer. The decision of the larger bench should go a long way in the interpretation of Section 67 on the question of the inclusion of the free supplies from the service recipient for purpose of service tax.

In light of the above judicial precedents it is evident that disclosure of the value of free supplies as part of gross consideration received is important in order to avail any benefits under the Notification¹⁷. At present in Service Tax, value of goods and materials supplied free of cost by service recipient to provider of taxable construction service would be outside taxable value or gross amount charged¹⁸. Whereas, in case of monetary consideration received, it will be the gross amount charged for the purpose of valuation of service tax. Moreover, as per Notification No. 26/2012-ST, the conditions for Taxable Construction Services are¹⁹:

Footnotes

1. 5th Year, ITM Law School, Gurgaon.

2. Section 61(zzq) of the Finance Act, 1994

3. Section 66E(b) of the Finance Act, 1994

4. Central Board of Excise and Customs Circular No. 108/02/2009-ST, dated 29.01.2009

5. Section 65(25b) r/w Section 65(105)(zzq)

6. 2010 (18) STR 650 (Tri-Ahmd.), 2010-TIOL-124-CESTAT-AHM

7. 2010 (17) STR 0534 (Tri-Bang.), 2009-TIOL-2208-CESTATBANG

8. 2010 (17) STR 0534 (Tri-Bang.), 2009-TIOL-2208-CESTATBANG

9. 2010 (18) STR 650 (Tri-Ahmd.), 2010-TIOL-124-CESTAT-AHM

10. (32) S.T.R. 49 (Tri.– LB), 2013-TIOL-1331-CESTAT-DEL-LB

11. 2010 (18) STR 650 (Tri-Ahmd.), 2010-TIOL-124-CESTAT-AHM

12. 2013 (29) STR 9 Del

13. http://www.servicetax.gov.in/notifications/notfns-2k4/st15-2k4.htm

14. 2014-TIOL-946-CESTAT-DEL

15. http://www.servicetax.gov.in/notifications/notfns-2k6/st0106.pdf

16. Order-in-Original No. Commissioner/RPR/54/2008 Dated: 17.7.2008

17. M/s Hindustan Steel Works Construction Ltd v. Commissioner of Central Excise, Raipur, 2014-TIOL-946-CESTAT-Del

18. Bhayana Builders (P) Ltd v. CST, Delhi, (32) S.T.R. 49 (Tri.– LB), 2013-TIOL-1331-CESTAT-DEL-LB

19. http://www.servicetax.gov.in/notifications/notfns-2012/st26-2012.htm

20. Section 67 of the Finance Act, 1994

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.