Free-of-cost materials supplied by customers cannot be included in the taxable value for service tax.

The appellant, registered to provide construction services, did not file ST-3 returns or pay service tax for 2012–13.

Following an investigation, the department proposed a best-judgment assessment under Section 72 of the Finance Act, 1994 and a demand under Section 73.

The Commissioner confirmed service tax of ₹2,18,69,271, imposed penalties under Sections 76 and 77(2), and dropped the balance of the proposed demand.

After the appeal was restored following an earlier dismissal for non-prosecution, the appellant again sought an adjournment through a proxy counsel.

The Tribunal declined the request and decided the appeal on the merits.

The appellant challenged, among other things, the treatment of the contracts, the valuation of works contract services, inclusion of free-of-cost materials, and the penalty.

1. Whether the service tax demand for April–June 2012 was unsustainable because the pre-negative-list provisions applied and the hospital construction was not commercial or industrial construction.

2. Whether the valuation of works contract services for July 2012–March 2013 properly allowed for the value of goods or the prescribed abatement and accounted for the service recipient’s 50% liability.

3. Whether the value of free-of-cost materials supplied by customers could be included in the taxable value.

4. Whether the services listed in Table A were wrongly classified as service contracts rather than works contracts, and whether the penalties and claimed tax deposits warranted interference.

Section 72 of the Finance Act, 1994 permits best-judgment assessment in the circumstances specified by that provision, while Section 73 provides for recovery of service tax not paid or short-paid; Sections 76 and 77(2) provide for penalties for the relevant defaults.

Rule 2A of the Service Tax (Determination of Value) Rules, 2006 provides for determining the service portion of a works contract by deducting the value of goods transferred or, where that value is not determined under the prescribed method, by applying the applicable percentage to the total amount charged.

Notification No. 30/2012-ST provides for a 50% allocation of service-tax liability to the service recipient in the specified cases, while Notification No. 1/2006-ST was relied on for the claimed abatement.

The Tribunal applied the Larger Bench decision in Bhayana Builders Pvt. Ltd. v. Commissioner of Service Tax, Delhi, 2013 (32) S.T.R. 49 (Tri. LB), for the principle that the value of free-of-cost materials supplied by the service recipient is not includible in the taxable value.

For April–June 2012, the Tribunal held that the construction services were taxable under the applicable regime and rejected the claimed exclusion for the hospital project because the appellant had not established that the hospital was charitable rather than commercial.

It also found that the Commissioner had allowed the relevant abatement and reduced the appellant’s liability where the recipient was liable for service tax.

For July 2012–March 2013, the appellant produced no material showing that the actual value of goods used exceeded the abatement allowed; the Tribunal therefore found no basis to disturb the works-contract valuation.

It accepted the challenge to the inclusion of free-of-cost materials, applying Bhayana Builders, and set aside the corresponding ₹28,38,912 demand.

The appellant did not substantiate its claim that the Table A contracts were works contracts.

The claimed tax deposits were left to verification and appropriation if established, while the Tribunal upheld the Section 76 penalty in light of the non-payment, non-filing, and non-disclosure that led to the investigation.

The demand of ₹28,38,912 attributable to free-of-cost materials was set aside; the remainder of the impugned order, including the remaining demand and penalty, was upheld.

Any service-tax deposits established through the claimed challans were to be verified and appropriated against the confirmed demand.