2014 (1) TMI 1606 - AT - Service Tax

Valuation - construction service - inclusion of value of free supply - Penalty u/s 77 & 78 - Held that - The value of goods and materials supplied free of cost of 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 - Value of free supplies by service recipient do not comprise the gross amount charged under Notification No.15/2004-S.T., including the Explanation thereto as introduced by Notification No. 4/2005-S.T - imposition of penalties under Section 77 & 78 of the Finance Act, are not sustainable - Decided in favour of assessee.

Summary

Issues:
Challenge to penalties imposed under Section 77 & 78 of the Finance Act based on the value of goods and material supplied free of cost by the service recipient.

Analysis:
The appeal was filed against an order where the appellants contested the demand, interest, and penalties imposed under Section 77 & 78 of the Finance Act. The main contention was that the demand was calculated considering the cost of free supplies by the service recipient. However, referencing the decision of the Larger Bench in the case of Bhayana Builders (P) Ltd. Vs. Commissioner of Service tax, Delhi, it was established that the value of goods and materials supplied free of cost by the service recipient should not be included in the assessable value for service tax purposes. This legal precedent formed the basis of the appellant's argument against the penalties.

The Revenue, on the other hand, argued that the appellant had concealed the value of the free supplies, justifying the imposition of penalties. The Tribunal referred to the decision in the Bhayana Builders case, which clarified that the value of free supplies should not be considered in the taxable value under the Finance Act. As a result, the penalties under Section 77 & 78 of the Finance Act were deemed unsustainable based on this legal interpretation.

Consequently, the Tribunal set aside the penalties imposed on the appellants, as they were not challenging the demand for service tax and interest. The judgment highlighted that the value of goods and materials provided free of cost by the service recipient should not be factored into the taxable value, aligning with the interpretation established in the Bhayana Builders case. Therefore, the appeal was disposed of in favor of the appellant, emphasizing the legal principle that penalties based on the inclusion of free supplies in the assessable value were not justified under the Finance Act.