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Timestamp: 2019-04-22 00:22:56+00:00

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REPRESENTED BY : S/Shri V. Lakshmikumaran, Ms. Swati Gupta, P.K. Sahu, Prashant Shukla, J.K. Mittal, Jeetu Gupta, Prakash Shah, Dr. G.K. Sarkar, Prashant Srivastava, S.K. Gupta, S.K. Sarwal, Mukul Chandra, Ayush Mehrotra, Mayank Garg, Harpreet Singh & Sanjay Grover, Advocates, Nitesh Garg and A.K. Batra, CAs and A.K. Mishra, Consultant, for the Assessee.
S/Shri S.K. Sinha, CDR with Govind Dixit and Amresh Jain, DRs, for the Respondent.
(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-S.T., dated 10-9-2004 as amended by Notification No. 4/2005-S.T., dated 1-3-2005. The later Notification added an “Explanation” to Notification No. 15/2004-S.T.
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.
(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.
“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 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.
A. Notification No. 12/2003-S.T., dated 26-6-2003, 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. 1-7-2013.
At this stage it may be noticed that the expression “gross amount charged” occurs in the preamble to Notification No. 15/2004-S.T. and the percentage of abatement specified in the Notification is clearly in relation to the taxable value computable under Section 67.
(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.”.
(b) the service provider had availed benefits of Notification No. 12/2003-S.T., dated 20-6-2003.
F. By Notification No. 18/2005-S.T., dated 7-6-2005, 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-S.T., 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.
Paragraph 13.5 of this circular explains the reasons for issue of exemption Notification No. 15/2004-S.T., dated 10-9-2004.
(ii) Our attention is also invited to a Board Circular dated 16-2-2006. 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-S.T., dated 7-6-2005 entitles a builder/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-S.T. also contains an ‘Explanation’, identical to the ‘Explanation’ to Notification No. 15/2004-S.T. (as amended by Notification No. 4/2005-S.T.), 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.
(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-S.T.; 18/2005-S.T. and 1/2006-S.T., for the period 1-10-2005 to 31-3-2006. 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., Chennai v. Union of India - 2007 (7) S.T.R. 123 (Mad.), 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 Jaihand 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-S.T. 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-S.T. (introduced by Notification No. 4/2005-S.T.) 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-S.T. 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-S.T., 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-S.T., dated 17-9-2004, by holding that the ‘Explanation’ (to Notification No. 15/2004-S.T.) was not in existence when this Board circular was issued; and was inserted later, on 1-3-2005.
7. Before we deal with the issue referred to us namely, whether the ‘Explanation’ to Notification No. 15/2004-S.T. 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-S.T., the scope of section 67 requires to be considered.
(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 18-4-2006, 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. and Others - 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 and Technocrats Pvt. Ltd. v. Union of India - 2013 (29) S.T.R. 9 (Del.), 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 and Technocrats Pvt. 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 M/s. Gannon Dunkerley and Co. and Others v. State of Rajasthan and Others - (1993) 1 SCC 364; and State of Andhra Pradesh and Others v. Larsen & Toubro Limited and Others - (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.
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 ‘A’s’ 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.
(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-S.T.
B. Revenue relies on the decision in M/s. N.M. Goel and Co. v. Sales Tax Officer, Rajnandgaon and Another - (1989) 1 SCC 335 = 1988 (38) E.L.T. 733 (S.C.). 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 was a 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 Limited v. Union of India - 2006 (2) S.T.R. 161 (S.C.) and the decision of this Tribunal in Naresh Kumar & Co. Pvt. Ltd. v. Commr. of Service Tax, Kolkata - 2008 (11) S.T.R. 578 (Tri.-Kolkata) 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-S.T., 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-S.T., as part of our analyses, to follow.
(i) The core issue that remains to be considered, is whether Notification No. 15/2004-S.T. as amended by Notification No. 4/2004-S.T. and in particular, the ‘Explanation’ thereby appended to Notification No. 15/2004-S.T. 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-S.T. While Notification No. 12/2003-S.T. 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-S.T. 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-S.T. are availed. This was the position up to 1-3-2005. On this date, Notification No. 4/2005-S.T. was issued engrafting the ‘Explanation’ to Notification No. 15/2004-S.T. 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-S.T., 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-S.T. 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-S.T., dated 17-9-2004, in Para 13.5 explained the reason for issuance of Notification No. 15/2004-S.T. This circular clarified that the earlier Notification No. 12/2003-S.T. 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-S.T. 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-S.T. This clarification accords with the true and fair construction of the unamended Notification No. 15/2004-S.T.
(v) The question therefore is whether Notification No. 4/2005-S.T. expands the scope of the expression “gross amount charged”, since this expression in the preamble to Notification No. 15/2004-S.T. does not and cannot comprehend value of “free supplies” by a construction service recipient.
(vi) Some of the ld. Counsel for assessees 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. 4/2004-S.T. 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-S.T.; 15/2004-S.T., 4/2005-S.T., 18/2005-S.T., 19/2005-S.T. and 1/2006-S.T., 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-S.T.; 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-S.T. 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-S.T. 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-S.T. 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 - Liteteng 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.
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 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 State of Bombay v. Hospital Mazdoor Sabha (supra) [AIR 1960 SC 610]; Bank of India v. Vijay Transport - AIR 1988 SC 151; Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise - AIR 1991 SC 754 = 1990 (47) E.L.T. 491 (S.C.); Kerala State Housing Board v. Rampriya Hotels (P) Ltd., JT - 1994 (5) SC 113; Samatha v. State of Andhra Pradesh - AIR 1997 SC 3297; K. Bhigirathi G. Shenoy v. K.B. Ballakuraya, JT - 1999 (2) SC 563; Godfrey Phillips v. State of U.P.- 2005 (2) SCC 515; Commrs. v. Savoy Hotel - (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 Muhammad - AIR 1967 SC 903; Acqueous Victuals Pvt. Ltd. v. State of U.P. - 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, Ludhiana v. State of Punjab - AIR 1998 SC 171, p. 173 = 1997 (96) E.L.T. 219 (S.C.); G. Radhakrishna Murthy & Co. v. Commercial Tax Officer, JT - 1998 (4) SC 426; Stonecraft Enterprises v.Commissioner of Income-Tax, JT - 1999 (2) SC 332, p.34 ; Leelabai Gajanan Pansare v. Oriental Insurance Company Ltd - (2008) 9 SCC 720.
“................ 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.
“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 far-fetched, is a plausible and likely one that the Government could have had in mind and that it should be accepted.
“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.
(xii) Earlier, in Hariprasad Shivshankar Shukla and Another v. A.D. Divelkar and Others, 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 bona fide 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-S.T. (to explain the meaning of “gross amount charged”, an expression in the preamble to the Notification), cannot be construed, insofar 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.
“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 :  1 SCR 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.
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-S.T. 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-S.T. (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 and Others - (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-S.T. 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-S.T. On the same premise, the decision inPeekay Re-Rolling Mills (P) Ltd., v. Assistant Commissioner - 2007 (219) E.L.T. 3 (S.C.) = 2009 (13) S.T.R. 305 (S.C.) 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-S.T. The word use variously meanscause 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 occruing in the preamble, by employing three words to contextualise the definition - supplied, provided, used, we are satisfied that application of the nosciturprinciple 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-S.T. 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-S.T. 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-S.T. 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 16-2-2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-S.T.) and in the context of an identical Explanation introduced in Notification No. 18/2005-S.T., 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-S.T.
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.
(b) Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-S.T., including the Explanation thereto as introduced by Notification No. 4/2005-S.T.
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.

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