S K Makwana VERSUS C.C.E. & S.T.-Surat-i

Service Tax Appeal No. 11951 of 2013-DB

(Arising out of OIA-CCEA-SRT-I/SSP-413/2012-13/U/S-35A Dated- 20/03/2013 passed Commissioner of Central Excise, Customs and Service Tax-SURAT-I)

 

S K Makwana
C.C.E. & S.T.-Surat-i	VERSUS

 

 

 

 

APPEARANCE:

Shri. Shri. S. Suriyanarayanan., Advocate for the Appellant

Shri. Prakash Kumar Singh, Superintendent (AR) for the Respondent

 

CORAM: HON’BLE MR. RAJU, MEMBER (TECHNICAL)

HON’BLE MR. SOMESH ARORA MEMBER (JUDICIAL)

 

Final Order No. A/ 10484 /2023

 

 

 

 

Raju

DATE OF HEARING: 06.03.2023 DATE OF DECISION:06.03.2023

 

 

This appeal has been filed by S K Makwana against inclusion of the value of free supplies received from service recipient by the appellant during the provider of Commercial or Industrial Construction Service. The issue regarding includability of the value of free supplies in the gross amount received has been examined by the Hon’ble High Court of Delhi in the case of  BHAYANA BUILDERS (P) LTD-2013 (32) STR 49 (Tri.-LB).  In the said

decision following has been observed:-

 

“12. The word use therefore has multiple connotation and bears different meanings depending upon the context. The word used is therefore per se ambiguous or obscure. Since in its preambular context, the expression gross amount charged (as our analysis has concluded) means an amount charged on the service recipient, received by the provider and accruing to the benefit of the later in relation to the taxable service provided and the Explanation seeks to define gross amount charged, an expression occruing in the preamble, by employing three words to contextualise the definition – supplied, provided, used, we are satisfied that application of the noscitur principle could be gainfully employed to identify the legal meaning of the word used from several grammatical/literal meanings of the said word, by employing the associational context. It is true, as contended by Revenue, that

 

even if one of the literal meanings of the expression used, namely free supplies used is considered as the legal meaning as well, construction service providers may not be handicapped as they may seek benefits under Notification No. 12/2003-S.T. In our view however the fact that the assessee have an alternative recourse to avoiding the rigour cannot be the criterion for interpreting the Explanation. This contention by Revenue proceeds on a fallacious comprehension of Notification No. 12/2003-S.T. The benefits under this Notification are only in respect of the value of goods and materials sold by a service provider to the recipient of a taxable service. In the case of free supplies by the recipient there is no sale or transfer of title in the goods and materials in favour of the service provider, at any point of time. Therefore when free supplied goods and materials are incorporated into the construction would be no sale by the provider to the recipient either. Notification No. 12/2003-S.T. would therefore be inapplicable.

 

13. In any event, provisions of the Explanation must be interpreted and the true meaning of the problematic expressions therein ascertained, independent of a cost-benefit analysis.

 

14. Board Circular dated 16-2-2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-S.T.)and in the context of an identical Explanation introduced in Notification No. 18/2005-S.T., clarified that gross amount charged shall include the value  of  goods  and  materials    This  circular constitutes contemporanea expositio of the meaning of the Explanation in Notification No. 18/2005-S.T.

 

15. From the several aids to interpretation, referred to (supra) we are 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.

 

16. Inconclusion we answer the reference as follows :

 

• The value of goods and materials supplied free of costby 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

 

• Value of free supplies by service recipient do not comprise thegross amount charged under Notification No. 15/2004-S.T., including the Explanation thereto as introduced by Notification No. 4/2005-S.T.”

 

2. Thematteralso been examined by the Hon’ble Apex Court has been observed as follows:-

 

 

 

“17.Faced with the aforesaid situation, the argument of the Learned Counsel for the Revenue was that in case the assessees did not want to include the value of goods/materials supplied free of cost by the service recipient, they were not entitled to the benefit of notification dated September 10, 2004 read with notification dated March 1, 2005. It was argued that since building construction contract is a composite contract of providing services as well as supply of goods, the said notifications were issued for the convenience of the assessees. According to the Revenue, the purpose was to bifurcate the component of goods and services into 67% : 33% and to provide a ready formula for payment of service tax on 33% of the gross amount. It was submitted that this percentage of 33% attributing to service element was prescribed keeping in view that in the entire construction project, roughly 67% comprises the cost of material and 33% is the value of services. However, this figure of 67% was arrived at keeping in mind the totality of goods and materials that are used in a construction project. Therefore, it was incumbent upon the assessees to include the value of goods/material supplied free of cost by the service recipient as well otherwise it would create imbalance and disturb the analogy that is kept in mind while issuing the said notifications and in such a situation, the AO can deny the benefit of aforesaid notifications. This argument may look to be attractive in the first blush but on the reading of the notifications as a whole, to our mind, it is not a valid argument.

 

18.In the first instance, no material is produced before us to justify that aforesaid basis of the formula was adopted while issuing the notification. In the absence of any such material, it would be anybody’s guess as to what went in the mind of the Central Government in issuing these notifications and prescribing the service tax to be calculated on a value which is equivalent to 33% of the gross amount. Secondly, the language itself demolishes the argument of the Learned Counsel for the Revenue as it says ‘33% of the gross amount ‘charged’ from any person by such commercial concern for providing the said taxable service’. According to these notifications, service tax is to be calculated on a value which is 33% of the gross amount that is charged from the service recipient. Obviously, no amount is charged (and it could not be) by the service provider in respect of goods or materials which are supplied by the service recipient. It also makes it clear that valuation of gross amount has a causal connection with the amount that is charged by the service provider as that becomes the element of ‘taxable service’. Thirdly, even when the explanation was added vide notification dated March 1, 2005, it only explained that the gross amount charged shall include the value of goods and materials supplied or provided or used by the provider of construction service. Thus, though it took care of the value of goods and materials supplied by the service provider/assessee by including value of such goods and materials for the purpose of arriving at gross amount charged, it did not deal with any eventuality whereby value of goods and material supplied or provided by the service recipient were also to be included in arriving at gross amount ‘gross amount charged’.”

 

3. In view of above, it is a settled position of law that the value of free supplies cannot be added to the gross amount charged for the purpose of payment of service tax.
4. Inview of the above the impugned order is set aside, appeal is allowed.

 

 

(Dictated and Pronounced in the open court)

(RAJU) MEMBER (TECHNICAL)

 

PRACHI

(SOMESH ARORA) MEMBER (JUDICIAL)