CESTAT Rules, Free-Supply Materials Can’t Be Included in Taxable Value Of Construction Services
Pranav B Prem
The Bengaluru Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that free-supply materials provided by customers cannot be included in the taxable value of construction services and therefore cannot be subjected to service tax. The ruling came in an appeal filed by M/s Technocon Builders, a Bengaluru-based construction service provider, challenging the denial of abatement under Notification No. 1/2006 and the confirmation of service tax demands and penalties.
The Tribunal comprising P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) examined whether the value of materials supplied free of cost by customers could be added to the “gross amount charged” for determining the taxable value of services. The assessee had been issued a show cause notice on the basis of audit objections alleging exclusion of free-supply materials while claiming abatement, non-payment of service tax on mobilization advances during 2006–2007 and liability under the Reverse Charge Mechanism for Goods Transport Agency (GTA) services.
The adjudicating authority had denied the benefit of the notification, held that free-supply materials were includible in assessable value, confirmed the demand of service tax on mobilization advances and GTA services and imposed penalties. Aggrieved, Technocon Builders appealed before CESTAT.
While analysing the taxability of free-supply materials, the Tribunal relied on the Supreme Court judgment in Commissioner of Service Tax v. Bhayana Builders Pvt. Ltd., which held that goods supplied free of cost by the recipient of service cannot form part of the “gross amount charged” for levy of service tax. The Tribunal observed that the value of materials supplied by the customer has no bearing on the value of services rendered, and therefore could not be added to the taxable value.
The Tribunal further held that the demand raised for the period prior to 1 June 2007 was unsustainable because works contract service became taxable only from that date. Referring to the Supreme Court judgment in Larsen & Toubro, the Bench concluded that construction services falling under the nature of works contracts could not be taxed under earlier service categories prior to 1 June 2007. As a result, all service tax demands raised for the pre-June 2007 period were set aside.
With respect to mobilization advances, the Tribunal held that such advances could be subjected to tax only for the period after 1 June 2007. Since the underlying service itself was not taxable before that date, mobilization advances received before 1 June 2007 could not attract service tax. Liability on advances was upheld only for the period after 1 June 2007.
Regarding GTA services, the Tribunal noted that Technocon Builders had already discharged the tax liability along with interest prior to the issuance of the show cause notice. Therefore, while the tax demand was affirmed, the penalties were removed on the ground that penalties were unwarranted when the assessee had paid tax voluntarily.
Accordingly, the Tribunal partly allowed the appeal, setting aside the major demand linked to the inclusion of free-supply materials and the entire demand for the period prior to 1 June 2007, while sustaining only the tax liability on mobilization advances post-1 June 2007 and tax already paid on GTA services, and removing all penalties.
Appearance
Counsel For Petitioner: Akbar Basha, Chartered Accountant (CA)
Counsel For Respondent: M. A. Jithendra, Asst. Commissioner (AR)
Cause Title: M/s. Technocon Builders Versus Commissioner of Service Tax
Case No: Service Tax Appeal No. 612 of 2012
Coram: P.A. Augustian (Judicial Member), R. Bhagya Devi (Technical Member)
