2022 (6) TMI 1262 - AT - Service Tax

Valuation - inclusion of free supply of materials namely, cement and steel by the appellant to the contractor, in the value of service provided by the contractor engaged for construction work in the appellant factory - HELD THAT - In COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. 2018 (2) TMI 1325 - SUPREME COURT , the Supreme Court observed that the value of taxable services cannot be dependent on the value of goods supplied free of cost by the service recipient and such a value has no bearing on the value of services provided by the service recipient. The Supreme Court had examined this precise issue as to whether the cost of material supplied free of cost can be included in the taxable value of service, and is thus applicable to the present case. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
Whether the free supply of materials by the appellant to the contractor would be included in the value of service provided by the contractor engaged for construction work in the appellant factory.

Analysis:
The central issue in this appeal before the Appellate Tribunal CESTAT New Delhi was whether the free supply of materials, specifically cement and steel, by the appellant to the contractor should be considered in the taxable value of services provided by the contractor for construction work at the appellant's factory. Both the Adjudicating Authority and the Appellate Authority had upheld the demand, stating that the free supply of cement should indeed be included in the taxable value.

The appellant's counsel referred to a crucial judgment by the Supreme Court in Commissioner of Service Tax vs. Bhayana Builders (P) Ltd [2018 (10) GSTL 118 (SC)], arguing that the cost of materials provided free of charge should not be part of the taxable value. The Supreme Court in the Bhayana Builders case had emphasized that the value of taxable services should not depend on the value of goods supplied without charge by the service recipient, as it does not impact the value of services provided. The Court's detailed analysis highlighted that the definition of "gross amount charged" under Explanation (c) to Section 67 does not allow the Department to disregard the contract value or add the value of free goods to determine the taxable service value.

Despite the appellant's reliance on the Bhayana Builders judgment, the Commissioner (Appeals) had distinguished it, leading to the appeal before the CESTAT. The Tribunal noted that the Supreme Court had already examined the specific issue of including the cost of free materials in the taxable value of services, rendering the Commissioner's distinction baseless. Consequently, the Tribunal set aside the Commissioner's order dated January 13, 2021, and allowed the appeal in favor of the appellant, emphasizing that the cost of materials supplied free of cost should not be considered in the taxable value of services provided by the contractor.