Service Tax, as the name suggest, is a tax on service provided and received, where the onus to pay is on the Service provider. The levy and collection of Service Tax requires a service provider, who renders the services and a service receiver, for whose benefit the service is rendered. The levy and collection of Service Tax in India is governed by the provisions of Finance Act, 1994 and the rules made therein under.
In contracts for the purpose of erection, commissioning, installation of plant, machinery or equipment, construction of residential and commercial complex etc, where the value of the contract specified was inclusive of the cost of materials or goods used, consumed and sold during the provision of service, the Notification No. 12/2003-S.T., dated 20.06.2003 provided for exemption to the value of goods and materials sold by the service provider to the recipient of service from the service tax leviable thereon subject to condition that there is documentary proof of the value of the said goods and materials supplied. The benefit of this notification can only be availed when no credit of duty paid on such goods and materials sold, has been taken under the provisions of the Cenvat Credit Rules, 2004 or where such credit has been taken, the service provider pays the amount equal to such credit availed before the sale of such goods and materials. This notification does not permit exclusion of the value of goods or materials supplied to the Service receiver when such goods or materials are not sold by the Service provider. A similar relief is also permitted in Notification No. 1/2006-S.T., dated 01.03.2006, which provides for abatement in the taxable value where the gross amount charged from the customer includes the value of any material/goods sold by the service provider during the course of provision of service. This abatement is subject to the condition that no Cenvat Credit of inputs, input services and capital goods is availed by the Service Provider and the benefits of Notification No. 12/2003 is not claimed. This Notification, however, does not specify the inclusion of value of goods supplied free of charge to the Service receiver, in the gross value since such goods are not sold by the Service provider to the Service receiver at the time of providing of service.
A dispute arose in respect of materials received free of cost by the provider of service from the receiver of service while availing the benefits of these two notifications. The department was of the view that this value needs to be included in the taxable value and since the Notification No. 12/2003-S.T., dated 20.06.2003 only exempted goods/ materials sold by the Service Provider, the value of material/goods received free of cost should be subjected to Service Tax. The department also took the view that since this value is not included in the gross amount charged to the Customers by the Service provider, the benefit of Notification No. 1/2006-S.T., dated 01.03.2006 cannot be availed.
In the case of M/s. VPR Mining Infrastructure Pvt Ltd, the Tribunal vide its interim order on the issue (reported in STO 2011 CESTAT 220) held that receipt of free supply item by a manufacturer is similar to receipt of materials free of cost by a service provider as both the manufacturer and the service provider will have to otherwise incur cost of these items to produce excisable goods or to render taxable service and therefore will include the value of the materials used in rendering the taxable service and charge the same from the client. As per Rule 3 (a) of the Service Tax Rules, the taxable value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to a person in the ordinary course of trading and the gross amount charged is the sole consideration.
The Tribunal held that the Section 67 clearly provides that for calculating value of a service, consideration in monetary as well as non-monetary terms are required to be taken into account and where consideration is not ascertainable, it has to be determined in the prescribed manner. Service tax (Determination of Valuation Rules), 2006 clearly provides that where the value cannot be determined, equivalent money value of consideration which cannot be less than the cost of the provisions of taxable service, is required to be taken into account and value of taxable service is the total amount of consideration consisting of all components of taxable service.
The above view of the Tribunal, although at an interim stage, is bound to disrupt the present practice of billing adopted by service providers, where the cost is inclusive of goods, materials etc sold to the service receiver but does not reflect the notional value of goods/materials received free of charge. The practice of billing by including the value of notional value of goods/materials received free of charge will also lead to confusion and disputes, as the Invoice based on this practice will not reflect the correct value recoverable from the client, since no Service receiver will be ready to pay for such goods or materials which they have supplied free of charge to the Service provider, for the purpose of providing of the service. The Government of India needs to immediately step in to minimize the damage by amending Notification No. 12/2003-S.T., dated 20.06.2003 to provide for exclusion of value of goods supplied free of charge for providing of service.
At the same to avoid any consequential effect of this ruling to Service Providers availing abatement, the Notification No. 1/2006-S.T., dated 01.03.2006 also needs to be amended to provide that the gross value will not include value of goods supplied free of charge to Service for provisioning of the service.