Whether the value of the material supplied by the recipient of the taxable service free of cost (viz. “free supplies”) should be included, for availing the benefit of abatement under Notification No. 15/2004-ST, dated 10.09.2004 as amended/substituted ?
Held
Value of goods and materials supplied free of cost by a service recipient to provider of taxable construction service is not a consideration paid by or flowing from service recipient, accruing to benefit of service provider and not includible in value of services determined under section 67
In view of ambiguous explanation in Notification No. 15/2004-ST, only value of goods or materials belonging to service provider and used/supplied/provided by him against consideration can only form part of ‘gross amount charged’ for computation of abatement; free supplies by buyer cannot be so included
CESTAT, NEW DELHI BENCH (LARGER BENCH)
Bhayana Builders (P.) Ltd.
v.
Commissioner of Service Tax, Delhi
G. RAGHURAM, PRESIDENT
SAHAB SINGH AND MANMOHAN SINGH, TECHNICAL MEMBER
APPEAL NOS. ST/247 OF 2008 & OTHERS
APPLICATION NOS. ST/STAY/1846 – 1847 OF 2010
SEPTEMBER 6, 2013
V. Laxmikumaran, Ms. Swati Gupta, P.K. Sahu, Prashant Shukla, J.K. Mittal, Jeetu Gupta, Nitesh Garg, Prakash Shah,Dr. G.K. Sarkar, Prashant Srivastava, A.K. Batra, S.K. Gupta, S.K. Sarwal, Mukul Chandra, Ayush Mehrotra, A.K. Mishra, Mayank Garg, Harpreet Singh and Sanjay Grover for the Appellant. S.K. Sinha, Govind Dixit and Amresh Jain for the Respondent.
ORDER
G Raghuram, President – By the order dated 05.04.2013 in ST/629/2008, a Division Bench of this Tribunal, noticing a conflict between decisions of two Division Benches; (a) in Cemex Engineers v. CST [2009] 23 STT 389 (Bang.-Cestat), and (b) in Jaihind Projects Ltd. v. CST [2010] 25 STT 196 (Ahd. – Cestat) referred, for the consideration of a Larger Bench the issue:
“(i)
Whether the value of goods/material supplied or provided free by a service recipient and used for providing the taxable service of construction of commercial or industrial complex, must be included in computation of the gross amount (charged by the service provider), for valuation of the taxable service, under Section 67 of the Finance Act, 1994 (the Act). We notice at the hearing of these appeals however, that the issue specifically is: whether the value of the material supplied by the recipient of the taxable service free of cost (hereinafter, for convenience referred to as “free supplies”) should also be included, for availing the benefits under Notification No. 15/2004-ST, dated 10.09.2004 as amended by Notification No. 4/2005-ST dated 01.03.2005. The later Notification added an “Ëxplanation” to Notification No. 15/2004-ST.”
2. For the purposes of the issues referred to the Larger Bench, the several assessees/appellants; had provided commercial or industrial construction service, a taxable service enumerated in Section 65(105)(zzq). Commercial or Industrial Construction service means any service provided or to be provided to any person, by any other person, in relation to commercial or industrial construction service.
3. Relevant Provisions
(a)
Section 65(25b) defines construction or industrial construction service to mean:
“(a)
construction of a new building or a civil structure or a part thereof; or
(b)
construction of pipeline or conduit; or
(c)
completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and meal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d)
repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is—
(i)
used, or to be used, primarily for; or
(ii)
occupied, or to be occupied, primarily with; or
(iii)
engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams; “
(b)
Valuation of taxable services :
Since the amendment w.e.f. 18.04.2006, Section 67 reads:
’67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, —
(i)
in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii)
in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii)
in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation. — For the purposes of this section, —
(a)
“consideration” includes any amount that is payable for the taxable services provided or to be provided;
(b)**
**
**
(c)
“gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and 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 account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’
(c)
Prior to substitution w.e.f. 18.04.2006 by the Finance Act, 2006, Section 67 read as follows:
’67. Valuation of taxable services for charging service tax.— For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him.
Explanation 1.— For the removal of doubts, it is hereby declared that the value of a taxable service, as the case may be, includes,—
(a)
the aggregate of commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker;
(b)
the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuits;
(c)
the amount of premium charged by the insurer from the policy holder;
(d)
the commission received by the air travel agent from the airline;
(e)
the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;
(f)
the reimbursement received by the authorised service station from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; and
(g)
the commission or any amount received by the rail travel agent from the Railways or the customer,
but does not include—
(i)
initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;
(ii)
the cost of unexposed photography film, unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service;
(iii)
the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles;
(iv)
the airfare collected by air travel agent in respect of service provided by him;
(v)
the rail fare collected by rail travel agent in respect of service provided by him;
(vi)
the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service;
(vii)
the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service; and
(viii)
interest on loans.
Explanation 2.— Where the gross amount charged by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged.
Explanation 3.— For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(i)
in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii)
in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii)
in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation.— For the purposes of this section.—
(a)
“consideration” includes any amount that is payable for the taxable services provided or to be provided;
(b)
“money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;
(c)
“gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and 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 account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’
4. Exemption Notifications :
A. Notification No. 12/2003-ST dated 26.06.2003 (sic), issued by the Central Government, exercising powers under Section 93(1) of the Act exempted the value of goods and materials sold by a service provider to a recipient of service from the tax leviable thereon, subject to documentary proof specifically indicating the value of such goods and material. This notification was specified to come into force w.e.f. 01.07.2013 (sic)
B. By Notification No. 15/2004-ST dated 10.09.2004, a further exemption was granted in respect of taxable service provided by a commercial concern to any person in relation to construction service. This Notification reads:
“In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service provided by a commercial concern to any person, in relation to construction service, from so much of the service tax leviable thereon under section 66 of the said Act, as is in excess of the service tax calculated on a value which is equivalent to thirty-three per cent. of the gross amount charged from any person by such commercial concern for providing the said taxable service :
Provided that this exemption shall not apply in such cases where —
(i)
the credit of duty paid on inputs or capital goods has been taken under the provisions of the Cenvat Credit Rules, 2004; or
(ii)
the commercial concern has availed the benefit under the notification of the Government of India, in the Ministry of Finance, (Department of Revenue) No. 12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503(E), dated the 20th June, 2003].”
C. Notification No. 4/2005-ST was issued on 01.03.2005, introducing an Explanation at the end of Notification No. 15/2004-ST. This Explanation reads:
‘Explanation. — For the purposes of this notification, the “gross amount charged” shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service.’
At this stage it may be noticed that the expression “gross amount charged” occurs in the preamble to Notification No. 15/2004-ST and the percentage of abatement specified in the Notification is clearly in relation to the taxable value computable under Section 67.
D. Notification No. 19/2005-ST dated 07.06.2005 introduced amendments, inter alia to Notification No. 15/2004-ST. According to this amendment, in Notification No. 15/2004-ST:
‘(i)
for the words “construction service”, occurring at two places, the words “commercial or industrial construction service” shall be substituted;
in the proviso, for clause (ii), the following shall be substituted, namely :—
(ii)
“(ii) the commercial concern has availed the benefit under the notification of the Government of India, in the Ministry of Finance, (Department of Revenue) No. 12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503 (E), dated the 20th June, 2003]; or
(iii)
the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance Act, 1994″.’
E. Further amendments were made by Notification No. 1/2006-ST dated 01.03.2006, including in respect of commercial or industrial construction service. Accordingly, in respect of commercial or industrial construction service, abatement of 67% of the tax was reiterated subject to the conditions specified in column (4) of the table to this Notification. The stipulated conditions provided that the exemption (abatement) would not apply where the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in Section 65(25b)(c) of the Act. The explanation to this condition stated that the gross amount charged shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service. The Notification also incorporated a proviso (applicable to all taxable services covered by the Notification) which specified that the exemption notification would not apply where:
“(a)
cenvat credit of duty on inputs and capital goods or cenvat credit of service tax on input services, used for providing such taxable service, has been taken under the provisions of the Cenvat Credit Rules, 2004; or
(b)
the service provider had availed benefits of Notification No. 12/2003-ST dated 20.06.2003.”
F. By Notification No. 18/2005-ST dated 07.06.2005, exemption of 67% of the service tax leviable in respect of construction of complex service was granted subject to the conditions specified. Under the proviso to this Notification apart from excluding benefits of exemption where cenvat credit is availed or where the service provider has availed benefits under Notification No. 12/2003-ST, benefit of the exemption was also excluded where the taxable services provided is only completion and finishing services in relation to residential complex, specified in Section 65(30a) (b) of the Act. An explanation to the Notification clarified that the gross amount charged shall include the value of goods and material supplied or provided or used for providing the taxable service by the service provider.
5. Board Circulars:
(i)
Consequent on introduction of new taxable services by the Finance Act 2004, including construction services, the Board issued a circular dated 17.09.2004 clarifying the scope of these services. Paragraph 13 of this circular deals with construction services. Paragraph 13.1 clarifies:
“13.1 Services provided by a commercial concern in relation to `construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done, by a building or civil contractor. Estate builders who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a labourer engaged directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax”.
Paragraph 13.5 of this circular explains the reasons for issue of exemption Notification No. 15/2004-ST dated 10.09.2004.
“13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (refer Notification No. 15/2004-S.T., dated 10-9-2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-S.T.) of exemption towards cost of goods are availed “.
(ii)
Our attention is also invited to a Board circular dated 16-02-2006. This circular purports to clarify the scope of construction of complexes – a taxable service specified in Section 65(30a) read with Section 65 (105) (zzzh) of the Act. To the extent relevant and material for the purposes of this reference, para 8 of this circular clarifies that in the construction business, different practices and financial arrangements concerning promoters, developers and builders, land owners, contractors and buyers exist; these practices influence the “taxable value” under the construction of complex services; and therefore in all such situations, the taxable value under section 67 shall be the gross amount charged by the service provider (builder in this case) for such services provided or to be provided by him. The circular further states that this circumstance read with Notification No.18/2005-ST dated 07-06-2005 entitles abuilder/contractor, abatement of 67% on the gross amount charged, which shall include the value of goods and materials supplied; and further that no deductions/exemptions are provided for computation of such taxable value in the composite contract.
(iii)
It requires to be noticed that Notification No.18/2005-ST also contains an ‘Explanation’, identical to the ‘Explanation’ to Notification No.15/2004-ST (as amended by notification No.04/2005-ST), namely that for the purposes of the Notification, the “gross amount charged” shall include the value of goods and materials supplied or provided or used for providing the said taxable service provided by the said service provider.
6. Conflict of opinion, leading to the present reference:
(i)
In Cemex Engineers (supra) the appellant was engaged in providing both commercial and industrial construction and construction of complex – taxable services and paid service tax availing abatement of 67%, in terms of Notification Nos. 15/2004-ST; 18/2005-ST and 1/2006-ST, for the period 01.10.2005 to 31.03.2006. Proceedings were initiated contending that the value of materials supplied free of cost by the recipient for incorporation in the taxable services was not offered to tax and could not be excluded if benefit was claimed under the Notifications. Challenging the adjudication order, confirming demand of service tax, interest and penalties, the appellant approach the Tribunal. Allowing the appeal and relying on an observation of the High Court of Madras in an interim order in Larsen & Toubro Ltd. v. Union of India [2007] 11 STT 27, we held that the value of goods supplied and provided by the client cannot be included for calculating service tax; that insisting on including cost of materials supplied by the service receiver would be contrary to Section 67 of the Act, (which specifies that the value of taxable service shall be gross amount charged by the service provider for such service); and therefore cost of materials supplied by the service receiver would not therefore be covered, in terms of Section 67.
(ii)
In a subsequent judgment, in Jaihind Projects Ltd. (supra), a contrary view is expressed. The appellants were engaged for laying pipelines and providing (commercial or industrial construction) service to State instrumentalities like ONGC, GAIL, IOCL etc. apart from providing services of sand blasting, coating and painting of pipelines to another recipient Essar Projects Limited. Under the agreements with recipients, the appellant was required to supply various materials such as cement, steel, cables valves, etc. The pipes were however, provided by the service recipient. The appellant availed the benefit of Notification No. 15/2004-ST and remitted service tax on 33% of the gross amount charged from the service recipient. Revenue, on the basis of the explanation to Notification No. 15/2004-ST (introduced by Notification No. 4/2005-ST) alleged that the appellant must have included the value of the free supply of material (pipes) provided by the service recipient, to avail the benefits of Notification No. 15/2004-ST. Having suffered an adverse adjudication order the appeal was preferred to this Tribunal. The Tribunal held that even under Section 67 of the Act read with Rule 3 of the Service Tax (Determination of Value) Rules, 2006, the pipes being an essential component and essentially required for providing the pipeline service (though supplied free of cost by the service recipient), must be treated as consideration other than in the form of money; and the value of such pipes must be included in the gross value to be offered for taxation. Dealing with the “Explanation” to Notification No. 15/2004-ST, the Tribunal held that the ‘Explanation’ has explained that the meaning of “gross amount charged” and once an assessee opts for the benefits of abatement under the said Notification he must include the value of the goods for the purpose of the contract used for the service provided; without availing cenvat credit on inputs of capital goods; without availing the benefit of exclusion if the goods were sold; and even though some goods are supplied or provided by the service provider (free of cost), including the value of such free supplies as well. Another reason recorded by the Tribunal for holding in favour of Revenue and against the appellant is that discriminatory results would ensue between two pipeline service providers; where one such provider uses pipes provided by himself and the other uses pipes provided by the service recipient. According to the Tribunal, where goods or material are supplied free of cost by a third party or the recipient, the expression “used” comes into play and the objective of the explanation and the proviso is to ensure that in different situations the liability to service tax would remain the same. This decision negatived the contention by the appellant based on Board Circular No. 80/10/2004-ST dated 17.09.2004, by holding that the ‘Explanation’ (to Notification No. 15/2004-ST) was not in existence when this Board circular was issued; and was inserted later, on 01.03.2005.
7. Before we deal with the issue referred to us namely, whether the ‘Explanation’ to Notification No.15/2004-ST enjoins inclusion of the value of “free supplies” used by the service provider, in the ‘gross amount charged’ for the service provided and such inclusion is mandatory for availment of benefits under Notification No.15/2004-ST, the scope of section 67 requires to be considered.
8. Scope of Section 67 of the Act:
(i)
We have earlier extracted the pre and post amended provisions of Section 67. This provision, both prior and subsequent to the amendment enacts that the value of any taxable service shall be the gross amount charged by the service provider for such service. Explanation 1. of the pre-amended provision specified various components that are included in the value of a taxable service; such as the aggregate commission or brokerage charged by a broker on the sale/purchase of securities; the commission received by the travel agent from the airline; the reimbursement received by the authorized service station from the manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; etc. Explanation 1. also enumerated components which are to be excluded from the value of taxable service, such as an initial deposit made by the subscriber while applying for telephone a connection; or pager or facsimile; the cost of unexposed photography film or unrecorded magnetic tape; the cost of parts or accessories or consumables such as lubricants and coolants, if any sold to the customer during the course of service or repair of motor cars; air fare or rail fare collected by an air/rail the travel agent in respect of service provided; the cost of parts or other materials, if any sold to the customer during the course of providing maintenance or repair services, etc.
(ii)
After the amendment, which substitutes Section 67 with effect from 18-04-2006, where service tax is chargeable on any taxable service with reference to its value then such value shall, in a case when the provision of service is for consideration in money, be the gross amount charged by the service provider for such service [sub-clause (i)]. Where provision of service is for a consideration not wholly or partly consisting of money, the value shall be such amount in money as, with the addition of service tax charged, is equivalent to the consideration [sub-clause(ii)]; and where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. The Explanation to the amended Section 67 purports to define the expressions “consideration”, “money” and “gross amount charged”.
(iii)
Though Revenue has contended that the value of “free supplies” to a construction service provider ought to be included in the value of taxable services for determination of the liability to tax under Section 67 of the Act in view of sub-clause (ii) of section 67(1), we are not persuaded that this is the appropriate construction of the provision. Sub-clause (ii) applies where a taxable service is provided for a consideration which is not either wholly or partly, for money. Therefore the non-monetary consideration must still be a consideration accruing to the benefit of the service provider, from the service recipient and for the service provided.
(iv)
The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not defined in the U.P. Act, its meaning as derived from the definition of the expression in Section 2(d) of the Contract Act, 1872 could be considered. After considering the definition of the expression in the Contract Act and referring to Black’s Law Dictionary; other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court held that: the in escapable conclusion that follows is that consideration means a reasonable equivalent for other valuable benefit passed on by the promisor to the promisee or by the transfer of to the transferee.
(v)
Clearly, Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient.
(vi)
In Intercontinental Consultants & Technocrats (P.) Ltd. v. Union of India [2012] 38 STT 75/28 taxmann.com 213, the Delhi High Court was essentially considering a challenge of the validity of Rule 5 of the Service Tax (determination of value) Rules, 2006. This provision was challenged to the extent it includes reimbursement of expenses in the value of taxable services for the purpose of levy of service tax. Apart from the challenge to its constitutionality, the provision was challenged on the ground that it is ultra vires the provisions of Sections 66 and 67 of the Act. The High Court held that section 66 of the Act levies tax only on the taxable services; that this is an inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of Section 67; that on construing the provisions of Sections 66 and 67 (1)(i) together and harmoniously, it is clear that the value of taxable service shall be the gross amount charged by the service provider; and nothing more and nothing less than the consideration paid as a quid pro quo for the service can be brought to charge. The High Court further held that the common thread that runs through Sections 66 and 67 and 94 (the Rule making power), manifests that only the service actually provided by the service provider can be valued and assessed to tax. The High Court concluded that the provisions of Rule 5(i) of the valuation Rules are repugnant to Sections 66 and 67 of the Act since the provision purport to tax not, what is due from the service provider under the charging section, but seeks to extract something more from him by including in the valuation of the taxable service other expenditure and costs which are incurred by the service provider in the course of providing taxable service.
(vii)
In the light of the clear Legislative text, the unambiguous provisions of sections 66 and 67 of the Act and in the light of the judgment in Intercontinental Consultants & Technorats (P) Ltd. (supra), the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. Whether the legislature may enact that the value of “free supplies” should be included in the value of the service provided for levy of tax; and within its legislative competence, is an aspect that is speculative for the nonce and outside the purview of either the substantive appeals or the issue referred to us. In this view of the matter it is not necessary to consider the contention on behalf of the assessees that an interpretation that Section 67 of the Act enables or mandates inclusion of the value of goods and materials incorporated into construction services (whether provided by the service provider or as a free supplies by the service recipient) would render the legislative provision unconstitutional, since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Ld. Counsel placed reliance on the judgment in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 66 Taxman 229 (SC) and State of Andhra Pradesh v.Larsen & Toubro Ltd. [2008] 9 SCC 191, to buttress this contention.
(viii)
Since Section 67 of the Act, as currently structured does not, in our view require inclusion of free supplies in the gross value charged, for computation of the value of taxable services; and as this is the only issue presented (on Section 67 of the Act); we find no justification for a wider analysis of a speculative theatre, of potential conflict.
(ix)
On the above analysis, we hold that the conclusion in Jaihind Projects Ltd. that section 67 itself mandates inclusion of the value of “free supplies” by service recipients for incorporation into the service, for valuation of the taxable service, is with respect, incorrect. Similarly, the analysis in para 24 of Jaihind Projects Ltd., that since goods supplied by service recipients are essential components for providing the agreed service, these must be treated as non-monetary consideration and included in the value of the taxable service, proceeds on a flawed interpretation of the provisions of Section 67. In para 27 another reason offered is that the explanation is intended to bring parity among all service providers providing such services. In the words of the judgment:
“Basically, the objective of the explanation is to bring parity among all the service providers providing such services. Let us take a case of two pipe laying service providers. In one case, the pipes are provided by the service receiver free of cost and in such case, the service receiver leaves it to the provider to supply the pipes or sell the pipes to him. In latter case, the value of the services would include the value of the pipes. In the former case, the value of the pipes gets excluded just because of the service receiver has provided the same free” …………….. The objective of the explanation and the proviso is to ensure that in different situations, the liability of Service tax would remain the same and it is very difficult to find fault with this objective”.
It would appear that this part of the Jaihind Projects Ltd. analyses was endeavouring to identify equities in a fiscal legislation (the Act) or in an exemption Notification issued thereunder. In Union of India v. Bombay Tyre International Ltd. 1983 (14) ELT 1986 (SC) the Court negated the assessee’s, contention that uniformity of incidence is a basic character of excise (tax/duty). The contention was that the principle of uniformity of taxation requires exclusion of post – manufacturing expanses and profits, a factor which would vary from one manufacturer to another. Rejecting this contention the Court held that levy in this country has the status of a constitutional concept and the point of collection is located where the statute declares it will be and the legislature is free to adopt any standard for determining the value. Further, in Union of India v. Nitdip Textile Processors (P.) Ltd. [2011] 203 Taxman 1/15 taxmann.com 59 (SC) the Court ruled that advantages or disadvantages to individual assessees are accidental, inevitable and inherent in every taxing Statute. The relevant observations are:
“Advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing Statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line. The point is illustrated by two decisions of this Court. In Khandige Sham Bhat v. Agricultural Income tax Officer, Kasaragod and Anr. (AIR 1963 SC 591). Tranvancore Cochin Agricultural Income Tax Act was extended to Malabar area on November 01, 1956 after formation of the State of Kerala. Prior to that date, there was no agricultural income tax in that area. The challenge under Article 14 was that the income of the petitioner was from areca nut and pepper crops, which were harvested after November in every year while persons who grew certain other crops could harvest before November and thus escape the liability to pay tax. It was held that, that was only accidental and did not amount to violation of Article 14. In Jain Bros. v Union of India (supra), Section 297 (2)(g) of Income Tax Act, 1961 was challenged because under that Section proceedings completed prior to April, 1962 was to be dealt under the old Act and proceedings completed after the said date had to be dealt with under the Income Tax Act, 1961 for the purpose of imposition of penalty. April 01, 1962 was the date of commencement of Income Tax Act, 1961. It was held that the crucial date for imposition of penalty was the date of completion of assessment or the formation of satisfaction of authority that such act had been committed. It was also held that for the application and implementation of the new Act, it was necessary to fix a date and provide for continuation of penalty proceedings. It was also held that the mere possibility that some officer might intentionally delay the disposal of a case could hardly be a ground for striking down the provision as discriminatory”.
(x)
In Moriroku UT India (P.) Ltd. v. State of U.P. 2008 (224) ELT 365 (SC) the issue for consideration was whether Revenue could impose sales tax on the value of moulds (toolings) supplied by appellant’s customer i.e. Honda Siel Cars India Ltd., free of cost, under Section 3. of the UP Trade Tax Act 1948. In particular, the question considered was whether the amortization cost of toolings was includable in the sale price of auto components as in the case of excise duty under Central Excise Act, 1944; and whether Revenue was right in equating sales tax to excise duty. After considering the provisions of Sections 2(h), 2(i) and 3 of the 1948 Act, the Supreme Court explained the principle and the concepts, under excise duty and sales tax, as follows:—
“19. U.P. Trade Tax Act, 1948 is a self-contained code for levy of tax on sale or purchase of goods in Uttar Pradesh. Clause (bb) of Section 2 defines the expression “trade tax” to mean a tax payable under the Act. Clause (h) of Section 2 defines the expression “sale” to include transfer of the right to use any goods for any purpose for cash or deferred payment or other valuable consideration. In this case we are concerned only with Section 3 and not with Section 3-F of the 1948 Act. Section 3 inter alia provides that every dealer shall for each assessment year pay a tax at the rates provided under Section 3-A, Section 3-D or Section 3-H on his turnover of sales or purchases or both, as the case may be. which shall be determined in such manner as may be prescribed. Section 3-F provides for tax on transfer of right to use any goods or goods involved in execution of works contract. The definition of “sale” in Section 2(h) is in two parts. The first part covers the normal sale and the second part covers deemed sales. In the present case, we are concerned with sale of auto components to the buyer. It is a normal sale. The aggregate amount for which these auto parts/components are sold constitutes the turnover relating to such sales within the meaning of turnover in Section 2(i). Therefore, it is on such turnover that liability of tax under Section 3 of the 1948 Act has to be determined. Therefore, sales-tax or trade-tax under the 1948 Act is leviable on sale, whether actual or deemed, and for every sale there has to be a consideration. On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event-based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of raw material or finished goods (as in the case of job workers). Excise duty, therefore, is independent of ownership (see: Ujagar Prints & Ors. v. Union of India & Ors. also reported in [(1989) 3 SCC 488] = (2002-TIOL-03-SC-CX). Therefore, for sales-tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales-tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty on manufacture. The provisions relating to measure (Section 4 of 1944 Act read with Excise Valuation Rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose Rule 6 makes a deeming provision by providing for notional additions. Such deeming fictions and notional additions in excise law are totally irrelevant for sales-tax purposes”.
From the above decision, the principle is clear that for the purposes of levy of sales tax it is the consideration for the transfer of the property in goods from the seller to the buyer, that has to be taken into consideration and tax must be levied on the consideration for the transfer of property, unlike in the case of excise duty where the levy is event based and irrespective of whether goods are sold or captively consumed, the liability inheres even where the manufacturer is not the owner of the raw material or finished goods. This principle is equally applicable to the levy of service tax under the provisions of the Act and in particular in the context of the specific language in Section 67 of the Act.
(xi)
Shri Lakshmi Kumaran for the assessees referred to the concept of “consideration” expounded in Goods and Service Tax Rulings 2001/6, in the context of Australian GST Legislation, as providing generic guidance for identifying consideration which is liable to be taxed. This GSTR also explains the concept, of when non-monetary consideration would be taxable for levy of tax. In the area of non-monetary consideration, GSTR emphasises that the definition of a taxable supply requires, among other things that a supply is made for consideration. Thus, there must be a supply; a payment; and the necessary nexus between the supply and the payment. Thus, where one party makes monetary payment to another, something of economic value is provided to the other. Para 90 GSTR sets out illustrations, of circumstances where the recipient of a supply may provide or make a thing available to the supplier for use in making the supply and states that the thing (made available for use) does not necessarily forms the consideration. Thus, where ‘A’ agrees to supply services to ‘B’ at a specified rate per hour at ‘B’s’ premises and ‘B’ agrees to allow ‘A’ use of its computer facilities, stationery and safety equipment to perform the services and also agrees to transport ‘A’ to ‘B’s’ location and to provide accommodation and boarding during the period of TVs’ performance of the service, the provision of the use of such facilities or meals is not part of the price paid by ‘B’ to ‘A’, as it is not payment to or of any value to ‘A’ in return for his supply. Rather these are conditions of the contract that define the supply made by ‘A’ and are used in providing the services rather than constituting supplies to ‘A’ in return for the services; and accordingly form no part of the taxable value of the services provided, is the exposition. If however the contact required ‘A’ to himself make provision for all these facilities/arrangements and the consideration to ‘A’ was a composite consideration including the value of such facilities/arrangements, then the entire consideration could legitimately form the value liable to tax.
(xii)
We avoid further reference to the several illustrations set out in GSTR nor attempt to integrate the GSTR expositions into the context of Section 67, since on a true and fair construction of the provisions of Section 67 we find no necessity for reliance on guidance derived from overseas fiscal legislation or clarifications on provisions of such legislation.
8A Summary of Revenue Contentions:
A
(i) The scheme for valuation of construction service provides several alternatives to the service provider. Under the Act and the Rules, the service provider can avail cenvat credit, of materials used including goods such as cement and TMT bars needed for providing construction service while remitting service tax on the full value of the service provided. Apart from such set off by way of cenvat credit of excise duty paid on goods and material, other options are provided;
(ii) Under Notification No. 12/2003-ST exemption is provided to the extent of the value of the goods sold during the course of providing the service but subject to the condition of producing documentary proof specifically indicating the value of goods sold;
(iii) Under Notification No. 15/2004-ST, a generic abatement of 67% of the “gross amount charged” is provided in case of a composite contract, where the “gross amount charged” includes the value of material used, for the reason that in cases of works contract, bifurcation of the value of goods sold/used is difficult and subject also to the conditions therein, of non availment of credit of input goods, capital goods and the benefits under Notification No. 12/203-ST, towards cost of goods;
(iv) In case of works contract under a scheme there under the option of discharging the service liability at a very low rate on the gross amoun