CESTAT Quashes Services Tax Demand on Value of Goods provided Free of Cost under Mining Contracts

The Customs, Excises, and Service Taxes Appellate Tribunal (CESTAT), New Delhi Bench has quashed service tax demand by the department where addition was made on the value of goods provided free of cost by the Company under a contract for mining services.

The appellant, M/s TCL – MMPL Consortium is engaged in providing mining services to M/s Hindustan Copper Limited3 under two agreements dated April 24, 2009 and April 19, 2010. The agreements provided for the price payable to the appellant for such mining services.

The appellant has discharged service tax liability on this amount. The agreements also provided that HCL shall provide certain items on free of cost basis to the appellant.

The involved in this appeal is about the inclusion of the value of items supplied on a free of cost basis by the service recipients to the appellant in the value of mining services provided by the appellant. The appellant believed that providing such items on a free-of-cost basis was a mere condition of the contract and not a consideration for the provision of mining services by the appellant. It, therefore, did not include the value of such items in the taxable value of its mining services.

The question was whether the value of items supplied free of cost by service recipients to the appellant have to be included in the value of mining services provided by the appellant.

The coram headed by President Justice Dilip Gupta noted that the Revenue’s plea is based on the rulings were the Courts held that in a working contract, the value of all goods should be included, whether the goods have been used by the service provider or otherwise supplied by the service recipient free of cost.

Accepting the contentions of the Company, the Tribunal observed that “the aforesaid decision of the Tribunal in ABL Infrastructure is based on the provisions of the works contract composition scheme. The learned Authorized Representative of the Department has not placed any rule or notification which may provide that the cost of material supplied free of cost shall be included in the value of mining services in a contract similar to that in the case of the appellant. Such being the position, in view of the aforesaid decision of the larger bench of the Tribunal in Bhayana Builders and of the Supreme Court in Bhayana Builders, it is not possible to sustain the demand of service tax that has been confirmed by the Commissioner.”

The Tribunal ruled that the Department has not placed any rule or notification which may provide that the cost of material supplied free of cost shall be included in the value of mining services in a contract similar to that in the case of the appellant.

The CESTAT in the light of the orders of the Supreme Court in the case of Bhayana Builders, held that it is not possible to sustain the demand of service tax that has been confirmed by the Commissioner