Assessment of Service Tax considering the free supply
The inclusion or exclusion of value of free supply particularly in the case of Industrial and commercial construction has been a bone of contention between the revenue and the assessee regarding assessment of Service Tax. The revenue always insists that the cost of free supply should be included for the purpose of assessment by taking shelter of 67 of the Finance Act, 1994. On the other hand according to assessee same should not be includable in the assessable value.
Initially there were judgments on both sides and finally law was settled in the larger bench decision of Bhayana Builders Pvt. Ltd. Vs Commissioner, 2013 (32) S.T.R. 49 (Tribunal-LB).
The Hon’ble Tribunal examined the ambit and scope of section 67 of the Finance Act 1994 and held categorically that cost of free supply of goods for rendering the services is not includable in the assessable value for the discharged the service tax liability, the relevant paras are as follows:
“(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 and Technocrats Pvt. Ltd. v. Union of India – 2013 (29) S.T.R. 9 (Del.), 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 and Technocrats Pvt. 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”.
It is really unfortunate that despite a decision of larger bench the adjudication in the department many a times take a contrary view in blatant violation of judicial discipline. The Hon’ble tribunal recently noticed this trend of indiscipline in the matter M/s Ahclon Builders & Developments P. Ltd., 2016 (42) S.T.R. 845 (Tri.-Ahmd.) and passed a stricture against adjudicating authority in following words:
“10. It can be noted that the adjudicating Authority has recorded incorrect finding as to the non-applicability of the ratio of the Larger Bench decision. Judicial discipline demands that the Adjudicating Authority should follows the pronouncements made by the higher judicial forums without any reservation. Suffice to say that the Adjudicating Authority has let go the judicial discipline, in our view, the impugned order to the extent it confirms the demand of Service Tax liability under the category of “Commercial or Industrial Construction Service “ by including the value of free supply materials is liable to be set aside and we do so.