Whether the value of the material supplied by the recipient of the taxable service free of cost (viz. “free supplies”) should be included, for availing the benefit of abatement under Notification No. 15/2004-ST, dated 10.09.2004 as amended/substituted ?
Held
Value of goods and materials supplied free of cost by a service recipient to provider of taxable construction service is not a consideration paid by or flowing from service recipient, accruing to benefit of service provider and not includible in value of services determined under section 67
In view of ambiguous explanation in Notification No. 15/2004-ST, only value of goods or materials belonging to service provider and used/supplied/provided by him against consideration can only form part of ‘gross amount charged’ for computation of abatement; free supplies by buyer cannot be so included
CESTAT, NEW DELHI BENCH (LARGER BENCH)
Bhayana Builders (P.) Ltd.
v.
Commissioner of Service Tax, Delhi
G. RAGHURAM, PRESIDENT
SAHAB SINGH AND MANMOHAN SINGH, TECHNICAL MEMBER
SAHAB SINGH AND MANMOHAN SINGH, TECHNICAL MEMBER
APPEAL NOS. ST/247 OF 2008 & OTHERS
APPLICATION NOS. ST/STAY/1846 – 1847 OF 2010
SEPTEMBER 6, 2013
V. Laxmikumaran, Ms. Swati Gupta, P.K. Sahu, Prashant Shukla, J.K. Mittal, Jeetu Gupta, Nitesh Garg, Prakash Shah,Dr. G.K. Sarkar, Prashant Srivastava, A.K. Batra, S.K. Gupta, S.K. Sarwal, Mukul Chandra, Ayush Mehrotra, A.K. Mishra, Mayank Garg, Harpreet Singh and Sanjay Grover for the Appellant. S.K. Sinha, Govind Dixit and Amresh Jain for the Respondent.
ORDER
G Raghuram, President – By the order dated 05.04.2013 in ST/629/2008, a Division Bench of this Tribunal, noticing a conflict between decisions of two Division Benches; (a) in Cemex Engineers v. CST [2009] 23 STT 389 (Bang.-Cestat), and (b) in Jaihind Projects Ltd. v. CST [2010] 25 STT 196 (Ahd. – Cestat) referred, for the consideration of a Larger Bench the issue:
| “(i) | Whether the value of goods/material supplied or provided free by a service recipient and used for providing the taxable service of construction of commercial or industrial complex, must be included in computation of the gross amount (charged by the service provider), for valuation of the taxable service, under Section 67 of the Finance Act, 1994 (the Act). We notice at the hearing of these appeals however, that the issue specifically is: whether the value of the material supplied by the recipient of the taxable service free of cost (hereinafter, for convenience referred to as “free supplies”) should also be included, for availing the benefits under Notification No. 15/2004-ST, dated 10.09.2004 as amended by Notification No. 4/2005-ST dated 01.03.2005. The later Notification added an “Ëxplanation” to Notification No. 15/2004-ST.” |
2. For the purposes of the issues referred to the Larger Bench, the several assessees/appellants; had provided commercial or industrial construction service, a taxable service enumerated in Section 65(105)(zzq). Commercial or Industrial Construction service means any service provided or to be provided to any person, by any other person, in relation to commercial or industrial construction service.
3. Relevant Provisions
| (a) | Section 65(25b) defines construction or industrial construction service to mean: |
| “(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 meal 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, railways, transport terminals, bridges, tunnels and dams; “ | ||
| (b) | Valuation of taxable services : |
Since the amendment w.e.f. 18.04.2006, Section 67 reads:
| ’67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, — |
| (i) | in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; | |
| (ii) | in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; | |
| (iii) | in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. |
| (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. | ||
| (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. | ||
| (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. | ||
| Explanation. — For the purposes of this section, — | ||
| (a) | “consideration” includes any amount that is payable for the taxable services provided or to be provided; | |
| (b)** | ** | ** |
| (c) | “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’ | |
| (c) | Prior to substitution w.e.f. 18.04.2006 by the Finance Act, 2006, Section 67 read as follows: | |
| ’67. Valuation of taxable services for charging service tax.— For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service provided or to be provided by him. | ||
| Explanation 1.— For the removal of doubts, it is hereby declared that the value of a taxable service, as the case may be, includes,— |
| (a) | the aggregate of commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker; | |
| (b) | the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuits; | |
| (c) | the amount of premium charged by the insurer from the policy holder; | |
| (d) | the commission received by the air travel agent from the airline; | |
| (e) | the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer; | |
| (f) | the reimbursement received by the authorised service station from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; and | |
| (g) | the commission or any amount received by the rail travel agent from the Railways or the customer, |
but does not include—
| (i) | initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit; | |
| (ii) | the cost of unexposed photography film, unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service; | |
| (iii) | the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles; | |
| (iv) | the airfare collected by air travel agent in respect of service provided by him; | |
| (v) | the rail fare collected by rail travel agent in respect of service provided by him; | |
| (vi) | the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service; | |
| (vii) | the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation service; and | |
| (viii) | interest on loans. |
| Explanation 2.— Where the gross amount charged by a service provider is inclusive of service tax payable, the value of taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged. | ||
| Explanation 3.— For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. |
| (i) | in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; | |
| (ii) | in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; | |
| (iii) | in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. |
| (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. | ||
| (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. | ||
| (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. | ||
| Explanation.— For the purposes of this section.— |
| (a) | “consideration” includes any amount that is payable for the taxable services provided or to be provided; | |
| (b) | “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value; | |
| (c) | “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’ |
4. Exemption Notifications :
A. Notification No. 12/2003-ST dated 26.06.2003 (sic), issued by the Central Government, exercising powers under Section 93(1) of the Act exempted the value of goods and materials sold by a service provider to a recipient of service from the tax leviable thereon, subject to documentary proof specifically indicating the value of such goods and material. This notification was specified to come into force w.e.f. 01.07.2013 (sic)
B. By Notification No. 15/2004-ST dated 10.09.2004, a further exemption was granted in respect of taxable service provided by a commercial concern to any person in relation to construction service. This Notification reads:
“In exercise of the powers conferred by sub-section (1) of 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 the taxable service provided by a commercial concern to any person, in relation to construction service, from so much of the service tax leviable thereon under section 66 of the said Act, as is in excess of the service tax calculated on a value which is equivalent to thirty-three per cent. of the gross amount charged from any person by such commercial concern for providing the said taxable service :
Provided that this exemption shall not apply in such cases where —
| (i) | the credit of duty paid on inputs or capital goods has been taken under the provisions of the Cenvat Credit Rules, 2004; or | |
| (ii) | the commercial concern has availed the benefit under the notification of the Government of India, in the Ministry of Finance, (Department of Revenue) No. 12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503(E), dated the 20th June, 2003].” |
C. Notification No. 4/2005-ST was issued on 01.03.2005, introducing an Explanation at the end of Notification No. 15/2004-ST. This Explanation reads:
‘Explanation. — For the purposes of this notification, 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.’
At this stage it may be noticed that the expression “gross amount charged” occurs in the preamble to Notification No. 15/2004-ST and the percentage of abatement specified in the Notification is clearly in relation to the taxable value computable under Section 67.
D. Notification No. 19/2005-ST dated 07.06.2005 introduced amendments, inter alia to Notification No. 15/2004-ST. According to this amendment, in Notification No. 15/2004-ST:
| ‘(i) | for the words “construction service”, occurring at two places, the words “commercial or industrial construction service” shall be substituted; | |
| in the proviso, for clause (ii), the following shall be substituted, namely :— | ||
| (ii) | “(ii) the commercial concern has availed the benefit under the notification of the Government of India, in the Ministry of Finance, (Department of Revenue) No. 12/2003-Service Tax, dated the 20th June, 2003 [G.S.R. 503 (E), dated the 20th June, 2003]; or | |
| (iii) | the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance Act, 1994″.’ |
E. Further amendments were made by Notification No. 1/2006-ST dated 01.03.2006, including in respect of commercial or industrial construction service. Accordingly, in respect of commercial or industrial construction service, abatement of 67% of the tax was reiterated subject to the conditions specified in column (4) of the table to this Notification. The stipulated conditions provided that the exemption (abatement) would not apply where the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in Section 65(25b)(c) of the Act. The explanation to this condition stated that 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. The Notification also incorporated a proviso (applicable to all taxable services covered by the Notification) which specified that the exemption notification would not apply where:
| “(a) | cenvat credit of duty on inputs and capital goods or cenvat credit of service tax on input services, used for providing such taxable service, has been taken under the provisions of the Cenvat Credit Rules, 2004; or | |
| (b) | the service provider had availed benefits of Notification No. 12/2003-ST dated 20.06.2003.” |
F. By Notification No. 18/2005-ST dated 07.06.2005, exemption of 67% of the service tax leviable in respect of construction of complex service was granted subject to the conditions specified. Under the proviso to this Notification apart from excluding benefits of exemption where cenvat credit is availed or where the service provider has availed benefits under Notification No. 12/2003-ST, benefit of the exemption was also excluded where the taxable services provided is only completion and finishing services in relation to residential complex, specified in Section 65(30a) (b) of the Act. An explanation to the Notification clarified that the gross amount charged shall include the value of goods and material supplied or provided or used for providing the taxable service by the service provider.
5. Board Circulars:
| (i) | Consequent on introduction of new taxable services by the Finance Act 2004, including construction services, the Board issued a circular dated 17.09.2004 clarifying the scope of these services. Paragraph 13 of this circular deals with construction services. Paragraph 13.1 clarifies: | |
| “13.1 Services provided by a commercial concern in relation to `construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done, by a building or civil contractor. Estate builders who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a labourer engaged directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax”. |
Paragraph 13.5 of this circular explains the reasons for issue of exemption Notification No. 15/2004-ST dated 10.09.2004.
| “13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (refer Notification No. 15/2004-S.T., dated 10-9-2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-S.T.) of exemption towards cost of goods are availed “. | ||
| (ii) | Our attention is also invited to a Board circular dated 16-02-2006. This circular purports to clarify the scope of construction of complexes – a taxable service specified in Section 65(30a) read with Section 65 (105) (zzzh) of the Act. To the extent relevant and material for the purposes of this reference, para 8 of this circular clarifies that in the construction business, different practices and financial arrangements concerning promoters, developers and builders, land owners, contractors and buyers exist; these practices influence the “taxable value” under the construction of complex services; and therefore in all such situations, the taxable value under section 67 shall be the gross amount charged by the service provider (builder in this case) for such services provided or to be provided by him. The circular further states that this circumstance read with Notification No.18/2005-ST dated 07-06-2005 entitles abuilder/contractor, abatement of 67% on the gross amount charged, which shall include the value of goods and materials supplied; and further that no deductions/exemptions are provided for computation of such taxable value in the composite contract. | |
| (iii) | It requires to be noticed that Notification No.18/2005-ST also contains an ‘Explanation’, identical to the ‘Explanation’ to Notification No.15/2004-ST (as amended by notification No.04/2005-ST), namely that for the purposes of the Notification, the “gross amount charged” shall include the value of goods and materials supplied or provided or used for providing the said taxable service provided by the said service provider. |
6. Conflict of opinion, leading to the present reference:
| (i) | In Cemex Engineers (supra) the appellant was engaged in providing both commercial and industrial construction and construction of complex – taxable services and paid service tax availing abatement of 67%, in terms of Notification Nos. 15/2004-ST; 18/2005-ST and 1/2006-ST, for the period 01.10.2005 to 31.03.2006. Proceedings were initiated contending that the value of materials supplied free of cost by the recipient for incorporation in the taxable services was not offered to tax and could not be excluded if benefit was claimed under the Notifications. Challenging the adjudication order, confirming demand of service tax, interest and penalties, the appellant approach the Tribunal. Allowing the appeal and relying on an observation of the High Court of Madras in an interim order in Larsen & Toubro Ltd. v. Union of India [2007] 11 STT 27, we held that the value of goods supplied and provided by the client cannot be included for calculating service tax; that insisting on including cost of materials supplied by the service receiver would be contrary to Section 67 of the Act, (which specifies that the value of taxable service shall be gross amount charged by the service provider for such service); and therefore cost of materials supplied by the service receiver would not therefore be covered, in terms of Section 67. | |
| (ii) | In a subsequent judgment, in Jaihind Projects Ltd. (supra), a contrary view is expressed. The appellants were engaged for laying pipelines and providing (commercial or industrial construction) service to State instrumentalities like ONGC, GAIL, IOCL etc. apart from providing services of sand blasting, coating and painting of pipelines to another recipient Essar Projects Limited. Under the agreements with recipients, the appellant was required to supply various materials such as cement, steel, cables valves, etc. The pipes were however, provided by the service recipient. The appellant availed the benefit of Notification No. 15/2004-ST and remitted service tax on 33% of the gross amount charged from the service recipient. Revenue, on the basis of the explanation to Notification No. 15/2004-ST (introduced by Notification No. 4/2005-ST) alleged that the appellant must have included the value of the free supply of material (pipes) provided by the service recipient, to avail the benefits of Notification No. 15/2004-ST. Having suffered an adverse adjudication order the appeal was preferred to this Tribunal. The Tribunal held that even under Section 67 of the Act read with Rule 3 of the Service Tax (Determination of Value) Rules, 2006, the pipes being an essential component and essentially required for providing the pipeline service (though supplied free of cost by the service recipient), must be treated as consideration other than in the form of money; and the value of such pipes must be included in the gross value to be offered for taxation. Dealing with the “Explanation” to Notification No. 15/2004-ST, the Tribunal held that the ‘Explanation’ has explained that the meaning of “gross amount charged” and once an assessee opts for the benefits of abatement under the said Notification he must include the value of the goods for the purpose of the contract used for the service provided; without availing cenvat credit on inputs of capital goods; without availing the benefit of exclusion if the goods were sold; and even though some goods are supplied or provided by the service provider (free of cost), including the value of such free supplies as well. Another reason recorded by the Tribunal for holding in favour of Revenue and against the appellant is that discriminatory results would ensue between two pipeline service providers; where one such provider uses pipes provided by himself and the other uses pipes provided by the service recipient. According to the Tribunal, where goods or material are supplied free of cost by a third party or the recipient, the expression “used” comes into play and the objective of the explanation and the proviso is to ensure that in different situations the liability to service tax would remain the same. This decision negatived the contention by the appellant based on Board Circular No. 80/10/2004-ST dated 17.09.2004, by holding that the ‘Explanation’ (to Notification No. 15/2004-ST) was not in existence when this Board circular was issued; and was inserted later, on 01.03.2005. |
7. Before we deal with the issue referred to us namely, whether the ‘Explanation’ to Notification No.15/2004-ST enjoins inclusion of the value of “free supplies” used by the service provider, in the ‘gross amount charged’ for the service provided and such inclusion is mandatory for availment of benefits under Notification No.15/2004-ST, the scope of section 67 requires to be considered.
8. Scope of Section 67 of the Act:
| (i) | We have earlier extracted the pre and post amended provisions of Section 67. This provision, both prior and subsequent to the amendment enacts that the value of any taxable service shall be the gross amount charged by the service provider for such service. Explanation 1. of the pre-amended provision specified various components that are included in the value of a taxable service; such as the aggregate commission or brokerage charged by a broker on the sale/purchase of securities; the commission received by the travel agent from the airline; the reimbursement received by the authorized service station from the manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; etc. Explanation 1. also enumerated components which are to be excluded from the value of taxable service, such as an initial deposit made by the subscriber while applying for telephone a connection; or pager or facsimile; the cost of unexposed photography film or unrecorded magnetic tape; the cost of parts or accessories or consumables such as lubricants and coolants, if any sold to the customer during the course of service or repair of motor cars; air fare or rail fare collected by an air/rail the travel agent in respect of service provided; the cost of parts or other materials, if any sold to the customer during the course of providing maintenance or repair services, etc. | |
| (ii) | After the amendment, which substitutes Section 67 with effect from 18-04-2006, where service tax is chargeable on any taxable service with reference to its value then such value shall, in a case when the provision of service is for consideration in money, be the gross amount charged by the service provider for such service [sub-clause (i)]. Where provision of service is for a consideration not wholly or partly consisting of money, the value shall be such amount in money as, with the addition of service tax charged, is equivalent to the consideration [sub-clause(ii)]; and where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. The Explanation to the amended Section 67 purports to define the expressions “consideration”, “money” and “gross amount charged”. | |
| (iii) | Though Revenue has contended that the value of “free supplies” to a construction service provider ought to be included in the value of taxable services for determination of the liability to tax under Section 67 of the Act in view of sub-clause (ii) of section 67(1), we are not persuaded that this is the appropriate construction of the provision. Sub-clause (ii) applies where a taxable service is provided for a consideration which is not either wholly or partly, for money. Therefore the non-monetary consideration must still be a consideration accruing to the benefit of the service provider, from the service recipient and for the service provided. | |
| (iv) | The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not defined in the U.P. Act, its meaning as derived from the definition of the expression in Section 2(d) of the Contract Act, 1872 could be considered. After considering the definition of the expression in the Contract Act and referring to Black’s Law Dictionary; other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court held that: the in escapable conclusion that follows is that consideration means a reasonable equivalent for other valuable benefit passed on by the promisor to the promisee or by the transfer of to the transferee. | |
| (v) | Clearly, Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient. | |
| (vi) | In Intercontinental Consultants & Technocrats (P.) Ltd. v. Union of India [2012] 38 STT 75/28 taxmann.com 213, the Delhi High Court was essentially considering a challenge of the validity of Rule 5 of the Service Tax (determination of value) Rules, 2006. This provision was challenged to the extent it includes reimbursement of expenses in the value of taxable services for the purpose of levy of service tax. Apart from the challenge to its constitutionality, the provision was challenged on the ground that it is ultra vires the provisions of Sections 66 and 67 of the Act. The High Court held that section 66 of the Act levies tax only on the taxable services; that this is an inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of Section 67; that on construing the provisions of Sections 66 and 67 (1)(i) together and harmoniously, it is clear that the value of taxable service shall be the gross amount charged by the service provider; and nothing more and nothing less than the consideration paid as a quid pro quo for the service can be brought to charge. The High Court further held that the common thread that runs through Sections 66 and 67 and 94 (the Rule making power), manifests that only the service actually provided by the service provider can be valued and assessed to tax. The High Court concluded that the provisions of Rule 5(i) of the valuation Rules are repugnant to Sections 66 and 67 of the Act since the provision purport to tax not, what is due from the service provider under the charging section, but seeks to extract something more from him by including in the valuation of the taxable service other expenditure and costs which are incurred by the service provider in the course of providing taxable service. | |
| (vii) | In the light of the clear Legislative text, the unambiguous provisions of sections 66 and 67 of the Act and in the light of the judgment in Intercontinental Consultants & Technorats (P) Ltd. (supra), the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. Whether the legislature may enact that the value of “free supplies” should be included in the value of the service provided for levy of tax; and within its legislative competence, is an aspect that is speculative for the nonce and outside the purview of either the substantive appeals or the issue referred to us. In this view of the matter it is not necessary to consider the contention on behalf of the assessees that an interpretation that Section 67 of the Act enables or mandates inclusion of the value of goods and materials incorporated into construction services (whether provided by the service provider or as a free supplies by the service recipient) would render the legislative provision unconstitutional, since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Ld. Counsel placed reliance on the judgment in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 66 Taxman 229 (SC) and State of Andhra Pradesh v.Larsen & Toubro Ltd. [2008] 9 SCC 191, to buttress this contention. | |
| (viii) | Since Section 67 of the Act, as currently structured does not, in our view require inclusion of free supplies in the gross value charged, for computation of the value of taxable services; and as this is the only issue presented (on Section 67 of the Act); we find no justification for a wider analysis of a speculative theatre, of potential conflict. | |
| (ix) | On the above analysis, we hold that the conclusion in Jaihind Projects Ltd. that section 67 itself mandates inclusion of the value of “free supplies” by service recipients for incorporation into the service, for valuation of the taxable service, is with respect, incorrect. Similarly, the analysis in para 24 of Jaihind Projects Ltd., that since goods supplied by service recipients are essential components for providing the agreed service, these must be treated as non-monetary consideration and included in the value of the taxable service, proceeds on a flawed interpretation of the provisions of Section 67. In para 27 another reason offered is that the explanation is intended to bring parity among all service providers providing such services. In the words of the judgment: | |
| “Basically, the objective of the explanation is to bring parity among all the service providers providing such services. Let us take a case of two pipe laying service providers. In one case, the pipes are provided by the service receiver free of cost and in such case, the service receiver leaves it to the provider to supply the pipes or sell the pipes to him. In latter case, the value of the services would include the value of the pipes. In the former case, the value of the pipes gets excluded just because of the service receiver has provided the same free” …………….. The objective of the explanation and the proviso is to ensure that in different situations, the liability of Service tax would remain the same and it is very difficult to find fault with this objective”. |
It would appear that this part of the Jaihind Projects Ltd. analyses was endeavouring to identify equities in a fiscal legislation (the Act) or in an exemption Notification issued thereunder. In Union of India v. Bombay Tyre International Ltd. 1983 (14) ELT 1986 (SC) the Court negated the assessee’s, contention that uniformity of incidence is a basic character of excise (tax/duty). The contention was that the principle of uniformity of taxation requires exclusion of post – manufacturing expanses and profits, a factor which would vary from one manufacturer to another. Rejecting this contention the Court held that levy in this country has the status of a constitutional concept and the point of collection is located where the statute declares it will be and the legislature is free to adopt any standard for determining the value. Further, in Union of India v. Nitdip Textile Processors (P.) Ltd. [2011] 203 Taxman 1/15 taxmann.com 59 (SC) the Court ruled that advantages or disadvantages to individual assessees are accidental, inevitable and inherent in every taxing Statute. The relevant observations are:
| “Advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing Statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line. The point is illustrated by two decisions of this Court. In Khandige Sham Bhat v. Agricultural Income tax Officer, Kasaragod and Anr. (AIR 1963 SC 591). Tranvancore Cochin Agricultural Income Tax Act was extended to Malabar area on November 01, 1956 after formation of the State of Kerala. Prior to that date, there was no agricultural income tax in that area. The challenge under Article 14 was that the income of the petitioner was from areca nut and pepper crops, which were harvested after November in every year while persons who grew certain other crops could harvest before November and thus escape the liability to pay tax. It was held that, that was only accidental and did not amount to violation of Article 14. In Jain Bros. v Union of India (supra), Section 297 (2)(g) of Income Tax Act, 1961 was challenged because under that Section proceedings completed prior to April, 1962 was to be dealt under the old Act and proceedings completed after the said date had to be dealt with under the Income Tax Act, 1961 for the purpose of imposition of penalty. April 01, 1962 was the date of commencement of Income Tax Act, 1961. It was held that the crucial date for imposition of penalty was the date of completion of assessment or the formation of satisfaction of authority that such act had been committed. It was also held that for the application and implementation of the new Act, it was necessary to fix a date and provide for continuation of penalty proceedings. It was also held that the mere possibility that some officer might intentionally delay the disposal of a case could hardly be a ground for striking down the provision as discriminatory”. | ||
| (x) | In Moriroku UT India (P.) Ltd. v. State of U.P. 2008 (224) ELT 365 (SC) the issue for consideration was whether Revenue could impose sales tax on the value of moulds (toolings) supplied by appellant’s customer i.e. Honda Siel Cars India Ltd., free of cost, under Section 3. of the UP Trade Tax Act 1948. In particular, the question considered was whether the amortization cost of toolings was includable in the sale price of auto components as in the case of excise duty under Central Excise Act, 1944; and whether Revenue was right in equating sales tax to excise duty. After considering the provisions of Sections 2(h), 2(i) and 3 of the 1948 Act, the Supreme Court explained the principle and the concepts, under excise duty and sales tax, as follows:— | |
| “19. U.P. Trade Tax Act, 1948 is a self-contained code for levy of tax on sale or purchase of goods in Uttar Pradesh. Clause (bb) of Section 2 defines the expression “trade tax” to mean a tax payable under the Act. Clause (h) of Section 2 defines the expression “sale” to include transfer of the right to use any goods for any purpose for cash or deferred payment or other valuable consideration. In this case we are concerned only with Section 3 and not with Section 3-F of the 1948 Act. Section 3 inter alia provides that every dealer shall for each assessment year pay a tax at the rates provided under Section 3-A, Section 3-D or Section 3-H on his turnover of sales or purchases or both, as the case may be. which shall be determined in such manner as may be prescribed. Section 3-F provides for tax on transfer of right to use any goods or goods involved in execution of works contract. The definition of “sale” in Section 2(h) is in two parts. The first part covers the normal sale and the second part covers deemed sales. In the present case, we are concerned with sale of auto components to the buyer. It is a normal sale. The aggregate amount for which these auto parts/components are sold constitutes the turnover relating to such sales within the meaning of turnover in Section 2(i). Therefore, it is on such turnover that liability of tax under Section 3 of the 1948 Act has to be determined. Therefore, sales-tax or trade-tax under the 1948 Act is leviable on sale, whether actual or deemed, and for every sale there has to be a consideration. On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event-based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of raw material or finished goods (as in the case of job workers). Excise duty, therefore, is independent of ownership (see: Ujagar Prints & Ors. v. Union of India & Ors. also reported in [(1989) 3 SCC 488] = (2002-TIOL-03-SC-CX). Therefore, for sales-tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales-tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty on manufacture. The provisions relating to measure (Section 4 of 1944 Act read with Excise Valuation Rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose Rule 6 makes a deeming provision by providing for notional additions. Such deeming fictions and notional additions in excise law are totally irrelevant for sales-tax purposes”. |
From the above decision, the principle is clear that for the purposes of levy of sales tax it is the consideration for the transfer of the property in goods from the seller to the buyer, that has to be taken into consideration and tax must be levied on the consideration for the transfer of property, unlike in the case of excise duty where the levy is event based and irrespective of whether goods are sold or captively consumed, the liability inheres even where the manufacturer is not the owner of the raw material or finished goods. This principle is equally applicable to the levy of service tax under the provisions of the Act and in particular in the context of the specific language in Section 67 of the Act.
| (xi) | Shri Lakshmi Kumaran for the assessees referred to the concept of “consideration” expounded in Goods and Service Tax Rulings 2001/6, in the context of Australian GST Legislation, as providing generic guidance for identifying consideration which is liable to be taxed. This GSTR also explains the concept, of when non-monetary consideration would be taxable for levy of tax. In the area of non-monetary consideration, GSTR emphasises that the definition of a taxable supply requires, among other things that a supply is made for consideration. Thus, there must be a supply; a payment; and the necessary nexus between the supply and the payment. Thus, where one party makes monetary payment to another, something of economic value is provided to the other. Para 90 GSTR sets out illustrations, of circumstances where the recipient of a supply may provide or make a thing available to the supplier for use in making the supply and states that the thing (made available for use) does not necessarily forms the consideration. Thus, where ‘A’ agrees to supply services to ‘B’ at a specified rate per hour at ‘B’s’ premises and ‘B’ agrees to allow ‘A’ use of its computer facilities, stationery and safety equipment to perform the services and also agrees to transport ‘A’ to ‘B’s’ location and to provide accommodation and boarding during the period of TVs’ performance of the service, the provision of the use of such facilities or meals is not part of the price paid by ‘B’ to ‘A’, as it is not payment to or of any value to ‘A’ in return for his supply. Rather these are conditions of the contract that define the supply made by ‘A’ and are used in providing the services rather than constituting supplies to ‘A’ in return for the services; and accordingly form no part of the taxable value of the services provided, is the exposition. If however the contact required ‘A’ to himself make provision for all these facilities/arrangements and the consideration to ‘A’ was a composite consideration including the value of such facilities/arrangements, then the entire consideration could legitimately form the value liable to tax. | |
| (xii) | We avoid further reference to the several illustrations set out in GSTR nor attempt to integrate the GSTR expositions into the context of Section 67, since on a true and fair construction of the provisions of Section 67 we find no necessity for reliance on guidance derived from overseas fiscal legislation or clarifications on provisions of such legislation. |
8A Summary of Revenue Contentions:
| A | (i) The scheme for valuation of construction service provides several alternatives to the service provider. Under the Act and the Rules, the service provider can avail cenvat credit, of materials used including goods such as cement and TMT bars needed for providing construction service while remitting service tax on the full value of the service provided. Apart from such set off by way of cenvat credit of excise duty paid on goods and material, other options are provided; | |
| (ii) Under Notification No. 12/2003-ST exemption is provided to the extent of the value of the goods sold during the course of providing the service but subject to the condition of producing documentary proof specifically indicating the value of goods sold; | ||
| (iii) Under Notification No. 15/2004-ST, a generic abatement of 67% of the “gross amount charged” is provided in case of a composite contract, where the “gross amount charged” includes the value of material used, for the reason that in cases of works contract, bifurcation of the value of goods sold/used is difficult and subject also to the conditions therein, of non availment of credit of input goods, capital goods and the benefits under Notification No. 12/203-ST, towards cost of goods; | ||
| (iv) In case of works contract under a scheme there under the option of discharging the service liability at a very low rate on the gross amount of the works contract is provided, without deduction of the value of goods or any abatement; | ||
| (v) The Explanation to Notification No. 15/2004-ST (added by Notification No. 4/2005-ST) enjoins that where an assessee opts for benefits of abatement of 67%, he must include the value of all the goods incorporated for the purpose of the contract, without availing cenvat credit of inputs or capital goods or the benefits of exclusion of the goods sold; | ||
| (vi) The word “used” in the Explanation clearly means that irrespective of the source of supplies, if some material or goods were used in the construction service, the value of such goods must also be included, for availing abatement benefits under Notification No. 15/2004-ST; | ||
| (vii) Even under Section 67 of the Act the value of goods whether supplied or provided by the provider or used for providing the taxable service though as free supplies by the recipient, constitute the “gross amount charged” for providing the taxable service; | ||
| (viii) In terms of the contract between the parties (referred to in the written submissions by Revenue), free supplies constitute the consideration by the promisor/the service recipient to the promisee/the service provider for providing the taxable, construction service. In any event, since goods and materials like cement/steel are integral components of construction services these would be the value of the service and this value is accordingly taxable under Section 67 and must be disclosed and offerred for tax, if availing exemption benefits under Notification No. 15/2004-ST. | ||
| B. | Revenue relies on the decision in N.M. Goel & Co. v. Sales Tax Officer [1989] 1 SCC 335. The assessee was the building contractor and a registered dealer under the Madhya Pradesh General Sales Tax Act. In the contract with the PWD and the assessee, the prices of the materials to be used for construction included cost of iron, steel and cement. PWD agreed to supply these materials from its store for the construction work and the agreement further provided for deduction of the prices of materials so supplied and consumed in the construction, from the final bill of the assessee. The Sales Tax Authority assessed liability for payment of entry tax for iron, steel and cement since the entry of these goods were the instance of the assessee and were eventually used for the construction. The assessee contested this assessment on the ground that there was no sale of these materials, as these were used for construction and therefore levy of entry tax was unsustainable. The issue therefore was whether there was sale of the material by the PWD (an unregistered dealer) in the supply of these materials for the construction work undertaken by the assessee; and whether there was sale of goods in view of the contract between the parties’, whereunder the custody and control of the goods remain with PWD and these were only used in the construction under the contract. Rejecting the assessee’s appeal, the Court held that in the instant case, by the use or consumption of materials in the work of construction, there a was passing of the property in the goods to the assessee from the PWD and by appropriation; and under the agreement between the parties, there was a sale as envisaged in the relevant provision of the applicable act, which was liable to tax. It must be noticed that in N. M. Goel & Co. (supra) the facts were that though iron, steel and cement were supplied by PWD to the assessee these supplies were not free of cost but were to be deducted from the bills payable by PWD to the assessee. There was thus a sale of these materials by PWD to the assessee and the ownership of these materials passed to the assessee, though these materials were later incorporated in the construction for the benefit of PWD. In case of free supplies, which is the issue before us, the agreements between the parties do not provide for recovering the cost of the free supplies by the service recipient from the service providers i.e. recoveries from the consideration agreed between the parties, to be paid to the service provider. | |
| C. | Revenue places reliance on the judgment of the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245/152 Taxman 135 and the decision of this Tribunal in Naresh Kumar & Co. (P.) Ltd. v. CST [2008] 15 STT 161 (Kol-Cestat) to contend that where there is a nexus between the expenses incurred and the service provided, the value of such expenditure should also be included in the value of the service. These judgments, in our considered view do not assist resolution of the issue referred. There could be no dispute that free supplies by the recipient for use in construction services have a nexus; and an integral nexus for that matter with the construction activity. The essential question is however whether such free supplies by the recipient would constitute consideration accruing to the economic benefit of the service provider so as to be includible in the “gross amount charged” for the service provided, for the purpose of computation of the taxable value under Section 67; or as a case may be ought to be included in the “gross amount charged” for availing the benefits under Notification No. 15/2004-ST, as comprehended within the meaning of the expression “used” in the Explanation thereto. |
9. We integrate the contentions presented on behalf of the assessee’s, with respect to and interpretation of the ‘Explanation’ to Notification No.15/2004-ST, as part of our analyses, to follow.
10. Core analysis of the Explanation to Notification No.15/2004-ST:
| (i) | The core issue that remains to be considered, is whether Notification No.15/2004-ST as amended by notification No.4/2004-ST and in particular, the ‘Explanation’ thereby appended to Notification No.15/2004-ST requires the value of “free supplies” by the service recipient to be added to the gross value of the service (as the gross amount charged), for availment of abatement benefits under Notification No.15/2004-ST. While Notification No.12/2003-ST grants exemption of the value of goods and materials sold by the service provider to the service recipient from the service tax leviable thereon (subject to furnishing documentary proof specifically indicating the value of goods and materials sold), Notification No.15/2004-ST provides a generic abatement to the extent of 67% of the service tax leviable, but subject to the exceptions specified. These exceptions disentitle availment of the abatement benefit, where CENVAT credit is availed or benefits under Notification No.12/2003-ST are availed. This was the position upto 01-03-2005. On this date, Notification No.04/2005-ST was issued engrafting the ‘Explanation’ to Notification No.15/2004-ST. This Explanation purports to explain the meaning of expression “gross amount charged”, to include the value of goods and materials supplied or provided or used by the provider of construction service for providing such service. The expression “gross amount charged” (defined in the Explanation) occurs in the preamble to Notification No.15/2004-ST, whereby exemption is provided (in respect of the taxable service provided by a commercial concern to any person in relation to construction service), to the extent of 67% of the service tax leviable under section 66 of the Act, as is in excess of the service tax calculated on the gross amount charged by the service provider from the service recipient for providing the taxable service. | |
| (ii) | On a literal construction of the expression used in the ‘Explanation’, considered in isolation, it is perhaps legitimate to infer that “gross amount charged” include the value of goods and materials supplied or the value of goods and materials provided or the value of goods and materials used by the provider of construction service, for providing the said service. On the literal construction of the expression “used”, in the case goods and materials used (in the construction) for providing the service, the “gross amount charged” would include value of goods and materials used, irrespective of whether goods and materials belong to or are procured by the service provider at his own cost or are issued by the service recipient free of cost. | |
| (iii) | The ‘Explanation’ purports (as earlier noticed), to define the expression “gross amount charged” occurring in the preamble to Notification No.15/2004-ST. In the context of the preamble, it is clear that abatement of 67% of tax (subject to exceptions enumerated therein) is in respect of the “gross amount charged” by the service provider and remitted to such provider by the recipient, an intention that resonates the identical expression employed in section 67(1)(i) of the Act. | |
| (iv) | As earlier noticed, circular No.80/10/2004-ST dated 17-09-2004, in para 13.5 explained the reason for issuance of Notification No.15/2004-ST. This circular clarified that the earlier Notification No.12/2003-ST was issued to provide benefit to a service provider to take credit of the excise duty paid on inputs by building contractors which include material costs as are that incurred for cement, steel, fittings and fixtures, tiles, etc., which are normally procured from the market. However, it was observed that these materials, normally procured from the market and are not covered by any duty paid documents; and since Notification No.12/2003-ST requires furnishing of documentary proof specifically indicating the value of goods sold, such proof is difficult to obtain in the context of market realities and since in a composite contract, bifurcation of goods sold is difficult, the generic abatement of 67% is provided in the case of composite contracts, where the gross amount charged includes the value of material costs, vide Notification No.15/2004-ST. This clarification accords with the true and fair construction of the unamended Notification No.15/2004-ST. | |
| (v) | The question therefore is whether Notification No.04/2005-ST expands the scope of the expression “gross amount charged”, since this expression in the preamble to Notification No.15/2004-ST does not and cannot comprehend value of “free supplies” by a construction service recipient. | |
| (vi) | Some of the Ld. Counsel for assesses contended that if the value of “free supplies” by service recipients are enjoined to be included in the gross value charged for the taxable service and the ‘Explanation’ were to be so construed, Notification No.04/2004-ST would run foul of Section 67 of the Act. In our considered view, this contention does not commend acceptance. The several exemption Notifications including 12/2003-ST; 15/2004-ST, 04/2005-ST, 18/2005-ST, 19/2005-ST and 01/2006-ST, are exemptions provided in exercise of powers under section 93 (1) of the Act, a provision which authorizes grant of exemption, generally or subject to conditions as may be specified, from the whole or any part of service tax leviable on a taxable service. In incorporating conditions for grant of exemption, the Government is therefore at liberty to define, for example, what components should comprise the gross value charged for providing a taxable service. Mere enlargement of the contours of “gross amount charged” in a condition incorporated in an exemption Notification would not amount to bringing to the tax net a value which is not taxable under Section 67 of the Act. Such a condition would normally indicate that the specified exemption is granted subject to a condition which requires a wider incorporation into the value of the taxable service, for the limited purpose of computing the extent of exemption. A condition expanding the scope of “gross taxable value” for the limited purpose of granting exemption would therefore only mean that the exemption provided is not so generous as facially appears. Any such condition in an exemption Notification would not therefore and per – se violate the provisions of Section 67 of the Act and for that singular reason. The interpretive problematic however is that the ‘Explanation’ has not by itself introduced the expression “gross amount charged” into the Notification and proceeded to define it. The Explanation, on the other hand seeks to define “gross amount charged”, an expression already employed in the preamble to Notification No. 15/2004-ST; and in the preamble the expression is used in the context of Section 67, a provision dealing with valuation of taxable services. | |
| (vii) | The alternative and the substantive contention on behalf of assessees is however that the expression “goods and materials used by the provider of the construction service for providing such service”, in the Explanation to Notification No. 15/2004-ST must be considered as use of materials belonging to the service provider and used in the provision of service; but excluding goods and materials belonging to /owned by the service recipient and provided to the service provider free of cost, for incorporation in construction service. A nuance of this contention is that the goods and materials used must connote those goods and materials as are charged on the service recipient. It is argued that only a benefit, monetary or non-monetary accruing to the service provider from the taxable service provided constitutes the value of the taxable service and that value alone is legitimately susceptible to the levy of service tax. Revenue contends that the literal meaning of expression “used” in the explanation must be given its full and plenitudinous effect and ought not to be restricted by reference to the other two expressions “supply” and “provided nor by reference to the meaning of the expression “gross amount charged”, in the preamble to Notification No.15/2004-ST. Assessees would argue that the interpretive principle of ” Noscitur A Sociis ” or the analogy of the ” Ejusdem generis ” principle should be employed, to hold that goods and materials “used” would mean goods and materials supplied or provided by the provider and ‘used’ for providing the construction service, i.e. goods and materials, the value whereof is charged to the service recipient. | |
| (viii) | The expression “used” in the ‘Explanation’ to Notification No.15/2004-ST is the problematic. It is preceded by two other expressions “supply” and “provided”, the three expressions interspersed by the disjunctive “or”. The expression “used” would bear a particular meaning on its literal construction but becomes plurilisignative in the society of the two other expressions. This potential for multiple meanings of the expression ‘used’, has triggered the forensic effort of assessees’ counsel, inviting us to apply the noscitur principle. This principle is part of linguistic cannons of construction which govern elaboration of the meaning of individual words and phrases by drawing certain inferences. Noscitur is the genius of a family of principles embedded in well-known latin maxims. The general principle of construction is that an Act or other legislative instrument is to be read as a whole, so that the enactment within it is not treated as standing alone but is interpreted in its context, as part of the instrument. The noscitur principle posits that a statutory term is recognised by its associated words i.e. in an associational context, whereby the word or phrase is not construed as if stood alone but in the light of its surroundings. An associated principle states: Noscitur ex socio, qui non cognoscitur ex se (what cannot be known in itself may be known from its associate). Lord Diplock cautioned that the maxim noscitur sociis is always a treacherous one unless you know the societas to which the socii belong Letang v. Cooper [1965] 1 QB 232. The latin word societas means ‘society’ and the nature of the intended society (if any) can only be gathered from the words used. There may not be any precise intention, but the colour of the members of the society (socii) is nevertheless an approximate indication of meaning.” (Bennion on Statutory Interpretation Fifth Edition) | |
| As Bennion (supra) points out, Maxwell explained that the principle means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take, as it were their colour from each other, that is, the more general is restricted to a sense analogous on to a less general. This exposition of the principle was quoted with approval by Gajendragadkar J in State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610. | ||
| (ix) | The Noscitur principle was applied in a number of cases in the Indian context though always accompanied with the caveat that it is a principle with some treacherous implications – vide Hospital Mazdoor Sabha (supra); Bank of India v.Vijay Transport AIR 1988 SC 151 ; Rohit Pulp & Paper Mills Ltd. v. Collector of Central Excise AIR 1991 SC 754;Kerala State Housing Board v. Rampriya Hotels (P.) Ltd. [1994] 5 SCC 672 ; Samatha v. State of Andhra Pradesh AIR 1997 SC 3297 ; K. Bhagirathi G. Shenoy v. K.P. Ballakurya AIR 1999 SC 2143 ; Godfrey Phillips India Ltd. v. State of U.P. [2005] 2 SCC 515 ; Customs of Excise Commissioners v. Sovoy Motels Ltd. [1966] 2 ALL ER 299 ; Bageshwari Charan Singh v. Jagannath AIR 1932 PC 55 ; M.K. Ranganathan v. Government of Madras AIR 1955 SC 604 ; State of Assam v. Ranga Mohammad AIR 1967 SC 903 ; Acqueous Victuals (P.) Ltd. v. State of UP AIR 1998 SC 2278 ; State of Karnataka v. Union of India AIR 1978 SC 68 ; Rainbow Steels Ltd. v. Commissioner of Sales Tax AIR 1981 SC 2101 ;Pardeep Aggarbatti v. State of Punjab AIR 1998 SC 171 ; G. Radhakrishna Murthy & Co. v. Commercial Tax Officer[1997] 8 SCC 37 ; Stonecraft Enterprises v. CIT [1999] 237 ITR 131/103 Taxman 490 (SC); Leelabai Gajanan Pansarev. Oriental Insurance Co. Ltd. [2008] 9 SCC 720. | |
| (x) | In Rohit Pulp and Paper Mills Ltd. (supra) the issue before the Court was whether “coated” paper even where employed as printing and writing paper and not used for industrial purposes would be entitled to concessional rate of excise duty under Notification No.25/84-CE. A proviso to the said Notification excluded the benefit of concessional rate of duty under the said Notification to enumerated categories of paper. These were: cigarette tissue, glassine paper, grease proof paper, coated paper (including waxed paper). The assessee was manufacturing art paper and chromo paper. These two types of papers admittedly fall under the category of “printing and writing paper” as also under the description of “coated paper”. Since these two types were “coated papers”, Revenue concluded that they were not entitled to the concessional rate of duty under the Notification. Allowing the appeal of the assessee, the Supreme Court applied the noscitur principle to conclude that the expression “coated paper” must be considered as analogous to other types of papers which are excluded the benefit of concessional rate of duty and so construed, the exclusion would be applicable only to coated paper used for industrial purposes and not to coated varieties of printing and writing paper. Analyses and application by the Supreme Court of the noscitur principle provides guidance on the application of the principle. We quote : | |
| ‘………………… In other words, it is submitted that the word ‘coated paper’ should be interpreted by applying the principle of “Noscitur A Sociis” or on the analogy of the “Ejusdem generis” principle. This contention, it is submitted, is re-inforced by two considerations. The first is that the Government must have had some idea or principle in putting together the exceptions and there is no conceivable principle other than the one enunciated. The second consideration is the addition of the words used in parenthesis along with ‘coated paper’ viz. “(including waxed paper)”. It is pointed out that waxed paper obviously means coated paper because waxed paper is nothing but paper coated with wax and would have anyhow been covered by the exception. Nevertheless, it was considered necessary, it is said, to specifically include it in order to make it clear by this illustration that only industrial paper like waxed paper is taken out from the concession. The words in parenthesis are, in other words, the words illustrative of the limitation to be read into the expression ‘coated paper’. It is finally argued that, even if the words of the proviso are capable of being construed in a wider manner so as to deny exemption to all kinds of coated paper, the Court should apply the well established principle of construction of taxing statutes that an ambiguous provision should be interpreted in favour of the subject. | ||
| We have considered the contentions urged on both sides and we have come to the conclusion that there is force in the appellant’s contentions. All the three notifications we have extracted above draw a distinction between printing and writing paper on the one hand and other types of paper on the other. They also show that the duty on printing and writing paper is generally less than that on the other varieties of paper. Though paper can be classified into various varieties, it does appear that one such classification is between industrial paper and cultural paper ……………………. | ||
| “It is true that no meticulous reasons can always be made available or discovered for variations in rates of duty as between various types of goods and the absence of some common thread in relation to a set of goods treated alike may not necessarily render the classification irrational or arbitrary. But, at the same time, one can legitimately postulate that the denial of a concession to a group proceeds on the basis of some aspect or feature common to all items in the group. If such a principle can be conceived of which would rationalise the inclusion of all the items, it would be quite reasonable and proper to give effect to a construction of the notification as will accord with that principle. It is this which the appellant has attempted to do and we are inclined to think that the ratiocination of the exceptions suggested, far from being artificial or farfetched, is a plausible and likely one that the Government could have had in mind and that it should be accepted. | ||
| The maxim of noscitur a sociis has been described by Diplock, J. as a “treacherous one unless one knows the societas to which the socii belong” (vide : Letang v. Coopex, 1965-1 Q.B. 232). The learned Solicitor General also warns that one should not be carried away by labels and Latin maxims when the word to be interpreted is clear and has a wide meaning. We entirely agree that these maxims and precedents are not to be mechanically applied; they are of assistance only in so far as they furnish guidance by compendiously summing up principles based on rules of common sense and logic . As explained in Collector of Central Excise v. Parle Exports (P) Ltd. – 1989 (38) E.L.T. 741 (S.C.) = (2002-TIOL- 401-SC- CX ) and Tata Oil Mills Co. Ltd. v. C.C.E. – 1989 (43) E.L.T. 183 (S.C.) = (2002-TIOL-255-SC- CX ) in interpreting the scope of any notification, the Court has first to keep in mind the object and purpose of the notification. All parts of it should be read harmoniously in aid of, and not in derogation, of that purpose. In this case, the aim and object of the notification is to grant a concession to small scale factories which manufacture paper with unconventional raw materials. The question naturally arises : Could there have been any particular object intended to be achieved by introducing the exceptions set out in the proviso. Instead of proceeding on the premise that it is not necessary to look for any reason in a taxing statute, it is necessary to have a closer look at the wording of the proviso. If the proviso had referred only to ‘coated paper’, no special object or purpose would have been discernible and perhaps there would have been no justification to look beyond it and enter into a speculation as to why the notification should have thought of exempting only ‘coated paper’ manufactured by these factories from the purview of the exemption. But the notification excepts not one but a group of items. If the items mentioned in the group were totally dissimilar and it were impossible to see any common thread running through them again, it may be permissible to give the exceptions their widest latitude. But when four of them – undoubtedly, at least three of them – can be brought under an intelligible classification and it is also conceivable that the Government might well have thought that these small scale factories should not be eligible for the concession contemplated by the notification where they manufacture paper catering to industrial purposes, there is a purpose in the limitation prescribed and there is no reason why the rationally logical restriction should not be placed on the proviso based on this classification. In our view, the only reasonable way of interpreting the proviso is by understanding the words ‘coated paper’ in a narrower sense consistent with the other expressions used therein.’ | ||
| (xi) | In Pardeep Aggarbatti, the issue was whether Dhoop and Aggarbatti were covered by the word ‘perfumery’. Entry 16 of Schedule A of the Punjab General Sales Tax Act, 1948 during the relevant period read “cosmetics, perfumery and toilet goods, excluding tooth paste, tooth powder, kumkum and soaps”. The said entry was bifurcated into entries 16 and 16A by a subsequent Notification No. 289/79. The issue was whether “Dhoop and Aggarbatti” were covered under ‘perfumery” in entry No.16 (prior to its bifurcation, since the transaction was entered into before the entry was bifurcated). Allowing the assessee’s appeal, Supreme Court applied the noscitur principle to hold that ‘perfumery’, in the context in which the word is used has no application to “Dhoop and Aggarbatti”. The Supreme Court explained: | |
| 9. Entries in the Schedules of Sales tax and Excise statutes list some articles separately and some articles are grouped together. When they are grouped together, each word in the Entry draws colour from the other words therein. This is the principle of noscitur a sociis. | ||
| 10. We are in no doubt whatever that the word “perfumery” in the said Entry No. 16 draws colour from the words ‘cosmetics’ and ‘toilet goods’ therein and that, so read, the word ‘perfumery’ in the said Entry No. 16 can only refer to such articles of perfumery as are used, as cosmetics and toilet goods are, upon the person. The word “perfumery” in the context in which it is used has, therefore, no application to ‘dhoop’ and ‘aggarbatti’. The distinction between the present case and the case of Indian Herbs Research and Supply Company is evident for the word ‘perfumes’ in the entry under consideration in the latter case was not limited by the words before and after, as in the entry before as; both the words ‘scent’ and ‘perfumes’ related to articles that produced fragrances.’ | ||
| (xii) | Earlier, in Hariprasad Shivshankar Shukla v. A.D. Divikar (Civil Appeal Nos. 103 & 105 of 1956, dated 27-11-1956] the Supreme Court applied the noscitur principle to infer a contextual meaning to the phrase “for any reason whatsoever”, occurring in Section 25F of the Industrial Disputes Act, to hold that termination of a workman occasioned by a bonafide closure of the business is excluded and would not amount to retrenchment within the meaning of the expression in Section 25F. | |
| (xiii) | Elaborating on the noscitur principle it is contended that the expression “used” in the Explanation to Notification No. 15/2004-ST (to explain the meaning of “gross amount charged”, an expression in the preamble to the Notification), cannot be construed, in so far as language permits, as be inconsistent with the meaning of the expression “gross amount charged” in the preamble to the Notification. In substance, the contention is that the Notification exempts service tax to the extent of the tax leviable on 67% of the “gross amount charged”, in relation to construction service; Section 67 (a provision dealing with valuation of taxable services for charging tax) enacts that the value of any taxable service shall be the “gross amount charged”; and “gross amount charged” under Section 67 would not include the value of free supplies. We have also concluded that that is the position; that implicit in this legislative architecture (of Section 67) is the concept that any value to constitute a consideration, whether monetary or otherwise should have flown or should flow from a service recipient to a service provider and should accrue to the benefit of the later; and that this is a precondition of taxability under Section 67. On this syllogism, in defining to explain the meaning of “gross amount charged”, the Explanation could not be construed as expanding the scope of “gross amount charged” in the preamble to the Notification, is the contention. | |
| (xiv) | The appellants placed reliance for the above proposition on Bihta Co-operative Development Cane Marketing Union Ltd.v. Bank of Bihar AIR 1967 SC 389. The core issue in Bihta was whether Explanation (1) to Section 48(1) of the Bihar and Orissa Cooperative Societies Act, 1935 ousts the jurisdiction of the Civil Court in respect of disputes other than those covered by Clauses (a) to (e) of Section 48(1). Allowing the appeal, the Supreme Court observed that the word “non-member” was not found in the Explanation to the Section before the 1948 amendment of the Act; that Clause (e) was added to Section 48 (1) by the 1948 amendment; that by the addition of Clause (e), a dispute between the financing bank authorised under the provisions of Section 16(1) and a person who is not a member of a registered society could also be referred to the Registrar; and that Explanation (1) cannot be considered as enlarging the scope of the main Section 48(1), so as to make all kinds of disputes between a registered society and a non-member cognisable by the Registrar and thus excluding the jurisdiction of the ordinary courts. The following observations of Supreme Court (explaining the scope of the Explanation and notwithstanding its broad cover), are relevant: | |
| “9. We find ourselves unable to accept this contention. Before the amendments introduced in 1948, the Explanation to the section made no mention of non-members and non-members had to be included in the Explanation because of the inclusion of this class of persons in category (e) of sub-s.(1) of s.48. The Explanation must be read so as to harmonise with and clear up any ambiguity in the main section. It should not be so construed as to widen the ambit of the section. The scheme of sub-section (1) of s.48 seems to be that certain disputes touching the business of a registered society should not be taken to civil courts and made the subject matter of prolonged litigation. The legislature took pains to specify the persons whose disputes, were to be subject matter of reference to the Registrar. Non-members did not come into the picture at all. Non-members other than officers, agents or servants of the society do not figure in sub-cls.(a) to (d) except as sureties of members. By sub-cls. (e) only those non-members who had disputes with a financing bank authorised under the provisions of sub-s.(1) of s. 16 were made amendable to the jurisdiction of the Registrar. It was probably thought desirable in the interest of the financing bank which might otherwise be faced with litigation in a civil court in respect of its ordinary day-to-day transactions of advances to agriculturists who were non-members that disputes between the society and this class of person should be quickly and inexpensively adjudicated upon by the Registrar. Before the amendment of 1948, the Explanation only served to clear up the doubt as to whether a dispute was referable to the Registrar when the debt or demand was admitted and the only point at issue was the ability to pay or the manner of enforcement of payment. As already pointed out by this Court, the Explanation had to include non-members after the insertion of category (e) in sub-s.(1) of s.48. The purpose of the Explanation never was to enlarge the scope of sub-s.(1) of s.48 and the addition of category (e) to that sub-section and the inclusion of non-members in the Explanation cannot have the effect“. (Emphasis supplied) | ||
| (xv) | The principle in Bihta Co-operative Development Cane Marketing Union Ltd. (supra) was applied again in Oblum Electrical Industries (P.) Ltd. v. Collector of Customs [1997] 7 SCC 581. In this case the issue was whether customs duty exemption could be claimed on imported crystal beams. Explanation (viii) to Notification No. 116/88-Cus dated 30.03.1988 as defined “materials” as meaning goods which are raw material, components, intermediate products or consumables used in the manufacture of the resultant products and their packings or mandatory spares to be exported in the resultant products. Imported crystal beams were actually used in kilns for manufacture of porcelain insulators. Allowing the assessee’s appeal, the Court observed that in trying to explain the language used in an exemption Notification, one must keep in mind (a) the object and purpose of the exemption; and (b) the nature of the actual process involved in the manufacture of the commodity in relation to which exemption is granted. The principle and its application to interpretation of the relevant part of the Explanation, is set out in paras 12 and 13 of the judgment, which read: | |
| ’12. It is true that in Clause (viii) of the Explanation to the Notification expression ‘materials’ has been defined to mean goods which are raw materials, components, intermediate products or consumables used in the manufacture of resultant products and their packings or mandatory spares to be exported in the resultant products. But the said definition in the Explanation has to be read in consonance with the main part of the notification. It is a well settled principle of statutory construction that the Explanation must be read so as to harmonize with and clear up any ambiguity in the main provision. (See: Bihta Cooperative Development Cane Marketing Union Ltd. v. Bank of Bihar MANU/SC/0260/1966: [1967]1SCR 848. The definition of “materials” in Clause (viii) of the Explanation mast, therefore, be so construed as not to eliminate the distinction between the words materials required for the purpose of manufacture of products and the words materials used in the manufacture of the resultant products in the main part of the definition. | ||
| 13. On a proper Construction the definition of “materials” in Clause (viii) of the Explanation must be confined in its application to the word “materials” in the expression replenishment of materials used in the manufacture of the resultant products in Notification No. 116/88-Cus. Dated March 30, 1988′. | ||
| (xvi) | Reliance is also placed by appellant on several judgments which propound the principle that the charging section of a taxing statute would not be attracted where the corresponding computation provision is inapplicable. In CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) the question was whether capital gains could arise, under Section 45 of the Income Tax Act, 1961, on transfer of its goodwill by the assessee – firm to the newly constituted firm. Dismissing the appeal by Revenue, the Supreme Court observed: | |
| “The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions tougher constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head”. | ||
| The Supreme Court also observed that none of the provisions pertaining to the head “Capital gains” suggest that they include an asset in the acquisition of which no cost at all can be conceived. | ||
| (xvii) | Ld. Counsel also refers to the observations in Govind Saran Ganga Saran v. Commissioner of Sales Tax [1985] Supp. SCC 205. The observation of the Court to which our attention is drawn are set out in paragraph 6 where the Court explain the components which enter into the concept of a tax. The Court pointed out that among the components are firstly, the character of the imposition, known by its nature which prescribes the taxable event attracting the levy; the second is a clear indication of the person on whom the levy is imposed and who are obliged to remit the tax; the third is the rate at which tax is imposed; and the fourth is the measure or value to which the rate would be applied, for computing the tax liability. The Court proceeded to observe that if those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law; and any uncertainty or vagueness in the legislative scheme defining any of those components of the levy, will be fatal to its validity. This principle is analogous to the principle that a liability to tax could not be inferred on a doubtful or an ambiguous provision and the benefit of ambiguity must be resolved in favour of the assessee and against Revenue. | |
| (xviii) | Assessee’s rely on the above judgments to contend that since the expression “used”, in the Explanation to Notification No. 15/2004-ST is inherently ambiguous and more so in the context of the other expressions therein i.e. “supplied” or “provided”, the noscitur principle must be applied to conclude that only such goods and materials which are “supplied” by the service provider or “provided” by the service provider or “used” when supplied or provided by the service provider, i.e., goods and materials whether supplied, provided or used in the construction and charged on the service recipient and the value whereof is received by the provider towards a consideration that accrues to the provider’s benefit, would alone comprise the “gross amount charged” by the provider for providing construction service; and the value of such material alone would form part of the “gross amount charged” within the meaning of Section 67; and for the purpose as well, of availing the benefits under Notification No. 15/2004-ST (apart from the other conditions therein). Alternatively, it is contended that since the value of free supplies is incapable of computation (since no principle of computation of free supplies is indicated and the provisions of Section 67(1) (iii) would not apply as free supplies would not fall within Section 67), the computation provision fails and consequently this restriction on the availability of the benefits of exemption under the said Notification would nugatory. | |
| (xix) | Shri Mittal, for the assessees would rely on the judgment in Associated Cement Companies Ltd. v. State of Bihar (2004) 7 SCC 642 . The issue was whether the assessee was entitled to avail reduction of sales tax liability to the extent of entry tax paid, though it was granted exemption from sales tax on additional/incremental production. The exemption Notification provided for reduction of the liability of an importer of cement to sales tax on sale of such cement, to the extent of entry tax paid by him. The assessee imported cement by paying the tax but was granted exemption from Sales Tax Act on the additional/incremental production of cement, under a scheme. In these circumstances, allowing the assessee’s appeal, the Supreme Court observed that the question of exemption arises only when there is a liability and that exigibility to tax is not the same as the liability to pay tax; that the former depends on the charge created by the Statute, the latter on computation in accordance with the provisions of the Statute and the Rules framed there under if any; and that liability to pay tax and the actual payment of tax are conceptually different. The observation of the Court that exemption presupposes a liability and unless there is liability, the question of exemption does not arise, were made in that context. In the reference before us it is not the case that there is no liability to tax on construction services under the scheme of the Act. Since there is admittedly such liability exemption Notification No. 15/2004-ST was issued (and benefits thereunder are claimed). We are only concerned with the scope of the expression “used” in the Explanation to the said Notification, introduced by Notification No. 4/2004-ST. On the same premise, the decision in Peekay Re-Rolling Mills (P.) Ltd. v. Asstt. Commissioner 2007 (219) ELT 3 (SC) cited by Shri Mittal for the same proposition, does not really assist in interpretation of the expression “used” nor for resolution of the issue referred to this Bench. |
11. Etymologically the words supplied and provided are closely associated words. Provided also means to supply; furnish. Supply bears a similar connotation. The word used is structurally associated (in the Explanation) with the earlier two words and the three words are employed to define the meaning of the expression gross amount charged, an expression that occurs in the preamble to Notification No. 15/2004-ST. The word use variously means cause to act or serve for a purpose; avail oneself of; exploit for one’s own ends; the right of power of using.
12. The word use therefore has multiple connotation and bears different meanings depending upon the context. The word used is therefore per se ambiguous or obscure. Since in its preambular context, the expression gross amount charged (as our analysis has concluded) means an amount charged on the service recipient, received by the provider and accruing to the benefit of the later in relation to the taxable service provided and the Explanation seeks to define gross amount charged, an expression occurring in the preamble, by employing three words to contextualise the definition – supplied, provided, used, we are satisfied that application of the noscitur principle could be gainfully employed to identify the legal meaning of the word used from several grammatical/literal meanings of the said word, by employing the associational context. It is true, as contended by Revenue, that even if one of the literal meanings of the expression used, namely free supplies used is considered as the legal meaning as well, construction service providers may not be handicapped as they may seek benefits under Notification No. 12/2003-ST. In our view however the fact that the assessee have an alternative recourse to avoiding the rigour cannot be the criterion for interpreting the Explanation. This contention by Revenue proceeds on a fallacious comprehension of Notification No. 12/2003-ST. The benefits under this Notification are only in respect of the value of goods and materials sold by a service provider to the recipient of a taxable service. In the case of free supplies by the recipient there is no sale or transfer of title in the goods and materials in favour of the service provider, at any point of time. Therefore when free supplied goods and materials are incorporated into the construction would be no sale by the provider to the recipient either. Notification No. 12/2003-ST would therefore be inapplicable.
13. In any event, provisions of the Explanation must be interpreted and the true meaning of the problematic expressions therein ascertained, independent of a cost – benefit analysis.
14. Board Circular dated 16.02.2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-ST) and in the context of an identical Explanation introduced in Notification No. 18/2005-ST, clarified that gross amount charged shall include the value of goods and materials supplied. This circular constitutes contemporanea expositio of the meaning of the Explanation in Notification No. 18/2005-ST.
15. From the several aids to interpretation, referred to (supra) we are compelled to conclude that goods and materials, supplied/provided/used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/provision/use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/goods incorporated or otherwise, would alone constitute the gross amount charged., This is not to say that an exemption Notification cannot enjoin a condition that the value of free supplies must also go into the gross amount charged for valuation of the taxable service. If such intention is to be effectuated the phraseology must be specific and denuded of ambiguity.
16. In conclusion we answer the reference as follows:
| “(a) | The value of goods and materials supplied free of cost 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; and | |
| (b) | Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST.” |
17. Consequent on our answer to the reference, the appeals shall be listed before the appropriate Bench for disposal on merits and in accordance with this decision, to the extent applicable to each of the appeals.