By TIOL News Service

NEW DELHI, SEPT 09, 2013: BY the order dated 05.04.2013 in ST/629/2008, a Division Bench of the Tribunal, noticing a conflict between decisions of two Division Benches;

(a) in Cemex Engineers vs. CST, Cochin - (2009-TIOL-2208-CESTAT-BANG) and

(b) in Jaihind Projects Ltd. vs. CST, Ahmedabad - (2010-TIOL-124-CESTAT-AHM)

referred, for the consideration of a Larger Bench the issue:

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).

At the hearing of these appeals, the Larger Bench noticed 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 "Explanation" to Notification No. 15/2004-ST.

Conflict of opinion, leading to the present reference :

(i) In Cemex Engineers - (2009-TIOL-2208-CESTAT-BANG) 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., Chennai vs. Union of India - (2007-TIOL-176-HC-MAD-ST), the Tribunal 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. - (2010-TIOL-124-CESTAT-AHM), 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 te 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 the 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.

The Tribunal made a detailed analysis with several decisions and held:

The conclusion in Jaihind Projects Ltd. - (2010-TIOL-124-CESTAT-AHM) 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 incorrect. Similarly, the analysis in para 24 of Jaihind Projects Ltd.,- (2010-TIOL-124-CESTAT-AHM) 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.

From the several aids to interpretation, the Tribunal was compelled to conclude that goods and materials, supplied/ provided/ used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/ provision / use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/ goods incorporated or otherwise, would alone constitute the gross amount charged., This is not to say that an exemption Notification cannot enjoin a condition that the value of free supplies must also go into the gross amount charged for valuation of the taxable service. If such intention is to be effectuated the phraseology must be specific and denuded of ambiguity.

The Tribunal observed,

+ 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.

+ 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.

+ 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.

+ 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 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.

+ 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.

+ Any value to constitute a consideration, whether monetary or otherwise should have flown or should flow from a service recipient to a service provider and should accrue to the benefit of the later; and that this is a precondition of taxability under Section 67.

In conclusion, the Tribunal answered the reference as follows:

(a) 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 non-monetary 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, within the meaning of the later expression in Section 67 of the Finance Act, 1994; and

(b) Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST.

(See 2013-TIOL-1331-CESTAT-DEL-LB)