Inclusion of value of free goods supplied in "gross amount" for Construction Service

PJ/Case Laws/2011-12/1510

Case: Agrim Association Pvt. Ltd. Vs. Commissioner of Service Tax, New Delhi

Citation: 2012 (25) S.T.R. (Tri. –Del.)

Issue:- Whether value of goods free supplied by service recipient to be included within meaning of “gross amount charged” or “consideration” as used in Section 67 of Finance Act, 1994?

Brief Facts:- The Appellant was providing service classifiable as "construction service" during 10-9-2004 to 15-6-2005 and as "Commercial or Industrial Construction service" during the period 16-6-2005 to Sept. 07 as defined in Finance Act, 1994. They availed benefit of Notification No. 15/2004-S.T. during 10-9-2004 to 28-3- 2006 and Notification 1/2006-S.T. for subsequent period and discharged service tax liability only on 33% of the contract value after availing abatement of 67%.

One of the representative contracts was the contract dated 10-7-2006 with Asian Hotels Ltd. As per this contract they were required to do dismantling work, civil work like construction of walls, POP work, flooring work, wood work, painting and finishing works and supply of manpower. The Revenue contests that they were engaged in providing only finishing services and hence they were not eligible for the benefit of the said notifications. It is also alleged that in some of the contracts, the applicants had received Free of Cost (FOC) materials from the service receivers and the value of such FOC materials was not included in the gross amount charged before availing the rebate of 67% provided under the notifications.

Appellants Contention:- The applicants submit that the contracts undertaken by them were in the nature of composite works contract which were made chargeable to service tax only, with effect from 1-6-2007 under works contract service and hence the applicants were not liable to pay service tax during the impugned period. They further submit that even if they were liable to pay service tax under construction service, they were entitled to avail exemption under Notification 12/2003-S.T. In respect of value of goods and materials sold in the course of executing the contracts in question on which due Sales Tax/VAT was paid by the applicant. They claim that the value of such goods and materials is much higher than the abatement (67%) claimed by the applicant under Notification No. 15/2004-ST. and 1/2006-S.T. hence no question of short payment of service tax can arise.

Respondents Contention:- Respondent submits that the fact that the type of contract undertaken by them would be covered under "Works Contract Service" from 1-6-2007 is not a reason to conclude that it was not covered by other entries in existence prior to that date, especially because the definitions of the concerned services squarely covered the service provided by them during the said period. Respondent also points out that it is an express condition in the Notification 1/2006-S.T. that the exemption will not be available to completion and finishing services. He contests that the applicant was providing only completion and finishing service. He also argues that this exemption was available only if the value of all the materials supplied free of cost by the receiver of the service was included in the gross receipts before applying the 67% abatement from the gross value.
He further contests that for claiming exemption under Notification 12/2003-S.T. they should have indicated the value of the material sold in the concerned invoices. Since this was not done they are not eligible for the exemption and the demand has been rightly confirmed.

Reasoning of Judgment:- According to Notification 01/2006-ST, 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.

"Commercial or industrial construction service" means —
(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 metal 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, rail-ways, transport terminals, bridges, tunnels and dams,"

There can be a dispute whether activity undertaken by the applicants is the one at clause (c) or that at clause (d) above. Further Notification 1 /2006-S.T. does not talk about inclusion of value of materials supplied free of cost by the receiver of the service. It only says that the value of materials sold by the provider of service should be included in the gross value before claiming abatement. The question whether the value of materials supplied by service receiver can be brought within the meanings of "gross amount charged" or "consideration" used in Section 67 of the Finance Act, 1994.

Notification 12/2003-ST. reads as under : "In exercise of the powers conferred by 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 so much of the value of all the taxable services, as is equal to the value of goods and materials sold by the recipient of service from the service leviable thereon under section (66) of said Act, subject to the condition that there is documentary proof specifically indicating the value of the said goods and materials.

In the Notification it is specified that the an assessee should indicate the value of material sold in each invoice. They should have documentary proof specifically indicating the value of the said goods and material sold. When the applicants are making a claim that they have paid VAT on more than 67% of the gross receipts received by them and they have documentary proof by way of VAT returns, the claim cannot be brushed aside.

Decision:- Stay granted.

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PJ/Case Laws/2011-12/1510

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