FEBRUARY 11, 2016

By Sujit Kumar Sinha

ON the question of the service tax liability on free supplies provided by a receiver of works contract service to the assessee, the CESTAT decided this issue in favour of the assessee, which has been reported as Bhayana Builders vs CST - 2013-TIOL-1331-CESTAT-DEL-LB. The Department is in appeal against this order as it assumes that goods supplied free of cost in delivery of works contract, is a form of charge made by the service provider to the service receiver. They argue that the definition of the expression 'gross amount charged' in the relevant exemption notification, refers to all goods used, and thus the price of all goods used whether or not billed by the service provider to the receiver should be incorporated in the gross amount charged in terms of the notification. There is no dispute on the rest of the procedure in which the referral price (the gross amount charged) is reduced to one third and the tax liability calculated by applying the applicable ad valorem rate of duty.

This paper argues that the Tribunal has laid down a good law as the wisdom of a court will certainly see a higher purpose in defending the property rights of the tax assessee which can be taken away from him only by an express intention of the legislature. As there is no discernible legislative intent in the words employed in the exemption notification to the effect that value of free supplies must be included in the referral price, a court will be loath to propose one for any reason whatsoever.

One of the most stiffly contested disputes in CESTAT has been the service tax liability on free supplies provided by a receiver of works contract service. The CESTAT decided this issue which has been reported as Bhayana Builders vs CST - 2013-TIOL-1331-CESTAT-DEL-LB and they held the case in favour of service tax payers. This decision has been followed by all CESTAT benches thereafter, the appeal to the Supreme Court against the order is pending. This paperargues that this rule laid by CESTAT is good law.

1. The Problem

i. Service taxation of construction service has been a great challenge for the government because the contractors rarely provide only service, they invariably deliver a works contract which is a combination of goods with service concretised in the realty. Such contractors do not deliver goods in the same way as a shop keeper would by handing over their physical possession. Goods get transferred through the process of accretion and the transfer is treated as completed when the structure is handed over to the service receiver with municipal certificate of fitness. This delivery of composite package of goods and service has been a challenge to tax the sale of goods under VAT laws or levy service tax for the service part of the works. Laws made for this purpose either for VAT or for service tax have been prone to litigation.

ii. Just as tax payers would like to be assured that a certain tax is payable before depositing the amount in government treasury, the tax officers who assess and collect taxes often raise demands that are based on their perception of what is the obligation of a tax payer to pay on the 'correct' meaning of the text of the statute which may be so thought of on grounds of equity or fairness or reasonableness. There are of course many instances where either of the two parties (tax or tax officials) stand in gross error but those cases are not contentious. However there are many disputes which require fine interpretation, which jurist Ronald Dworkin called 'hard cases' like the present one. It is a general opinion held by most literate people that 'law' is about justice and not legal rules, but those holding this view cannot at the same time fail to understand that the main work of the judiciary is to interpret laws that are made by the legislature and not to devise laws that would be fair, equitable or desirable as a measure of public policy. All practitioners of law spend their career time grappling with this seemingly irreconcilable contradiction but they have many guides to steer them through this strenuous endeavour, of which one is the famous analogy given by the jurist Lon L. Fuller, which is as below:-

"An inventor of useful household devises dies leaving the pencil sketch of an invention on which he was working at the time of his death. On his death bed he requests his son to continue work on the invention, though he dies without having had a chance to tell the son what purpose the invention was to serve or anything about his own plans for completing it. In carrying out his father's wish the son's first step would be to decide what the purpose of the projected invention was, what defect or inefficiency of existing devices it was intended to remedy. He would then try to grasp the underlined principle of the projected invention, the 'true reason of the remedy' in the language of Heydon's case. With these problems solved he would then proceed to work out what was essential to complete the design for the projected devise.

Let us now ask of the son's action questions of the sort commonly asked concerning the interpretation of statutes. Was the son faithful to the father's intention? If we mean, 'did he carry out an intention the father had actually formed concerning the manner of completing the design?' why, of course, the question is quite unanswerable for we do not know whether the father had any such intention, and if so, what it was. If we mean 'did he remain within the framework set by the father, accepting the father's conception of a need for the projected device and his father's general approach to the problem of supplying that need?' then the answer, on the facts supposed, is yes. If the son were able to call on his father's spirit to help, the chances are that this help would take the form of collaborating with the son in the solution of a problem the father had left unsolved. So it is usually with difficult problems of interpretation. If the drafts man of a statute were called in to direct consultation, he would normally have to proceed in the same manner as the judge by asking such questions as the following: Does this case fall within the mischief which the statute sought to remedy? Does it fall within the 'true reason of the remedy' appointed by the statute, that is, is the prescribed remedy apt for dealing with this particular manifestation of the general mischief at which the statute was aimed?"

(Lon L Fuller "The Morality of Law", 6th Indian reprint, 2013, page 84-85)

iii. The Heydon's case sets agenda for a judge who invariably faces the same predicament as the son of the inventor in Fuller's well-known analogy above. The questions that he may ask are:-

a) Does this case fall within the mischief which the statute sought to remedy?

b) Is the remedy apt for dealing with this particular manifestation of the general mischief at which the statute was aimed?

We will use this heuristic devise to analyse the measure of service tax that is payable for provision of works contract service where the provider receives certain materials free of cost from the receiver for providing that service. At the first step, the reader will be taken through the legislative provisions and then they will be analysed to uncover the hidden intent in the text of the legislation.

2. The legal issue involved; Reading the "sketch of the invention".

i. The government being aware that suppliers of different services, often charge their customers through composite bill for both goods and service, issued an exemption notification no. 12/2003-ST dated 20-6-2003 which exempted the value of goods and materials sold from the value of all the taxable services, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials. The intention is evident that the government did not want to levy tax on the goods portion of such supplies as that would amount to transgressing on the legislative powers of the States.

ii. After service tax was introduced on construction activities on 10.9.2004, contractors were not able to produce bills for supplies of all their goods/materials to avail themselves of notification 12/2003-ST and hence the Government thought of pegging the tax liability to a referral amount which is the gross amount charged by them for their supplies, or in other words to a percentage of the amount charged in their composite bill of services which would include prices of all goods supplied by them. They issued notification number 15/2004-ST that exempted tax from the portion that was in excess of 33% of the tax determined on the gross amount charged. Later they amended this notification through notification number 4/2005-ST by providing a definition of the expression "gross amount charged" and said that it shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service. This was supposedly the answer to the problem of missing bills of goods in supply of works contract and the notification was re-issued under a mega notification number 1/2006-ST dated 1.3.2006.

iii. In the practice of supply of works contract certain substances are invariably supplied by the service receiver such as explosives for blasting, being controlled substance, as law does not permit their usage by any other person other than permitted users. Large business houses who avail themselves of construction service often have better price bargaining power with raw material suppliers than construction contractors and they may enter into agreement where they undertake to supply goods (certain construction material) free of cost to the service provider. In such contracts the gross amount charged would get lightened by the cost of free supplies made by the service receiver and as the referral price on which ad valorem rate is to be charged gets reduced so would the tax liability.

iv. The construction service providers who have received free supplies from their customers lean on the words of the notification and plead that there is no justification for adding anything to the gross amount charged by them from their customer. The department felt that the cost of free supplies should be added to gross amount charged before the referral amount is determined. They assume that goods supplied free of cost is a form of charge made by the service provider to the service receiver. The department argues that the definition of the expression gross amount charged refers to all goods used, and thus the price of all goods used whether or not billed by the service provider to the receiver should be incorporated in the gross amount charged for being able to avail of the notification. There is no dispute on the rest of the procedure in which the referral price is reduced to one third and the tax liability calculated by applying the applicable ad valorem rate of duty. The issue then is what must be perceived as the intention of the notifications 15/2004 or 1/2006.

3. The Intention in the 'sketch of invention'

i. The main standpoint of the department is that the interpretation of the notifications taken by Tribunal leave a peculiar result which could not have been intended. The quantum of the tax payable becomes dependent on the quantum of goods that are supplied to the service provider free of cost by the service receiver whereas the quantum of tax levy should be commensurate with the value of service provided. The question that should first be answered before entertaining the issue raised by the department is whether the notifications were meant to value the service content in the works contract or whether they were merely of claiming exemption, entirely at the option of the tax payer, by adopting a particular measure of tax which uses a referral price. It must be first rejected that the exemption notification like all such exemption schemes is not a design simpliciter to give relief to tax payers but to conduct an exercise in valuation. Then only can we discuss the issue of whether the notifications are meant to create a referral price which includes the full cost of all ingredients that have gone in to the works contract and from which one third would be the presumed value of service that is to be taxed.

ii. The language of the notification states that the government 'exempts' the taxable service provided by a construction service provider, 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. Like all exemptions this one too is not compulsory and it is up to the tax payer if he would like to accept the discipline of the tax notification. Implied in the design of this exemption scheme is the notion that any rational tax payer will adopt this scheme only if it beneficial to him. Hence if a service provider who calculates and finds that his tax liability is low compared to his rivals because he has received free supplies from his client service receiver, is well within the design of the notification to benefit from it. If we go back to Fuller's analysis of the analogy of the 'sketch of invention', the first answer is that the sketch does not seem a design to value service component embedded in the works contract but to offer an attractive alternative to normal assessment for paying tax on construction activity.

iii. The department would further argue that the design must also be seen from the definition which was added to the notification at a later stage. It is within the province of the legislature to give any meaning to term they employ through a deeming clause which may go by the name of an 'explanation' or a 'non obstante' clause. The explanation states 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. There is no mention that the definition seeks to include material supplied or provided by the service receiver free of charge as clearly the explanation speaks of the goods and materials supplied and used by the service provider. The reader of this 'sketch of invention' must not put down lines on his own to the 'sketch' to find out the intention of the invention.

iv. This issue was dealt by the CESTAT in the Bhayana Builders case cited above. In analysing this issue the Tribunal borrowed the definition of consideration from section 67 of the Finance Act 1994, which deals with valuation of service and held that 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. They concluded that there is nothing in the notification to indicate that the value of free supplies is includible in the gross amount charged and that such questions are merely speculative and cannot be entertained.

v. The department offered the argument that the definition has expanded the meaning by arguing that the expression "used" in the explanation is a pointer to the intention of the legislature that all goods used by the service provider must be valued and its price added to the gross amount charged. The language of the text employed defeats this argument. The CESTAT found an answer in linguistic principles of interpretation. They said as follows:-

"8(viii)…………..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.

……………………………………………………………

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 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."

vi. This view based on an understanding of the principles of noscitur a soccii is confirmation of the view that there should be something positively written in to the notification to suggest that the word 'used' means that is should be read disassociating with the later part of the same sentence which links them to the expression 'provided by the service provider'. The word "used" must take meaning from words that come with it which are 'supplied' and 'provided' as also the words "gross amount charged" and thus supplies that are not provided by the service provided get excluded from the ambit of the definition in the explanation.

vii. At the first stage we had set upon to answer the question on whether the case falls within the mischief which the statute sought to remedy. The discussion above show that the statutory provision (in this case exemption notification) did not intend to create a system by which tax would be levied in proportion to the quantum of service provided. It was meant to provide an attractive offer to service providers who may opt for it and thereby reduce difficulty in assessment of works contract, which are bundled supplies of goods and services. Hence the notification was in no way trying to construct a legislative devise which would put all service receivers at par so that the quantum of service and quantum of tax remain in proportion.

viii. Exemption notifications are relief from tax incidence and they are not valuation exercises for which recourse may be taken to the definition of value in the same statute or any other. The provision of section 67 of the Finance Act 1994, reads as follows:-

'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, -

a. 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;

b. 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;

c. 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 -

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.'.

[(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.'

The exercise in this article is to interpret notification number 1/2006 dated 1.3.2006 which read as follows before it was rescinded by notification number 34/2012 dated 20.6.2012.:-

'In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of the description specified in column (3) of the Table below and specified in the relevant sub-clauses of clause (105) of section 65 of the Finance Act, specified in the corresponding entry in column (2) of the said Table, from so much of the service tax leviable thereon under section 66 of the said Finance Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column (5) of the said Table, of the, subject to the relevant conditions specified in the corresponding entry in column (4) of the Table aforesaid :

Table

Provided that this notification shall not apply in cases where, -

(i) the CENVAT credit of duty on inputs or capital goods or the 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

(ii) the service provider 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].

Explanation. - For the purposes of this notification, the expression "food" means a substantial and satisfying meal and the expression "catering service" shall be construed accordingly.'

The section of the Finance Act 1994 and the notification 1/2006 talk of charging tax with reference to different base values. The Statute says that the section applies to a situation where the service tax is chargeable on any taxable service with reference to its value. The implication is that the section is focused on value of the service component of the works contract. In contrast the notification exempts service tax in excess of tax calculated on the basis of value which is equivalent to 33% of the ' gross amount charged'. The said expression is further qualified by the clause that it 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 basis for the exercise under section 67 is valuation of service component whereas the exercise in notification 1/2006 is focused on the gross amount charged for what the service providers delivers in the form of works, which is a combined delivery of an indistinguishable mass of goods and service. Since the frames of the section and notification are different, a term given for defining value in section 67 cannot be of any use in understanding value in the notification 1/2006.

ix. The incommensurability of section 67 with notification 1/2006 is further demonstrated by the manner in which the section 67 makes 'consideration' as the basis of valuation which is absent in the notification. The section provides a detailed definition of the expression 'consideration'. In the notification there is no concept of consideration. The measure of tax is linked to gross amount charged for supply of works contract and not for the consideration received in any form for service rendered. The two terms are not synonymous. Charge is a flat term it means a demand for money. Black's Law Dictionary terms it "to demand a fee; to bill < the clerk charged a small filing fee'. In contrast 'consideration' is a far deeper term with wide implications. Black's Law Dictionary defines it as 'something (such as an act, a forbearance, or return of promise) bargained for and received by a promisor from a promise: that which motivates a person to do something, esp to engage in a legal act.' Hence whatever be the correct concept of 'consideration' and whether it should include supplies which are not really given to the account of the service provider but to the works contract which will in due course be transferred to the service receiver, the concept is of no relevance in understanding the intent of the notification.

x. The concept of 'gross amount charged' for the entire works contract with goods and services, was introduced to resolve difficulties faced in valuation of service content in works contract in the manner of a substitute for a section 67 valuation exercise. It would have had questionable constitutional validity if this concept had been used to value of service content in works contract mandatorily. The problem of constitutionality however did not arise in any 'lis' because it is upon the tax assessee to accept this basis or not. The notification is entirely optional and it is assumed that a tax payer would make use of it only if it confers a tax advantage. It is this tax advantage which the department has sought to deny by loading the referral value with value of free supplies, but this loading needs a legal space which is beyond that demarcated for the operation of the said notification.

xi. The assessment of works contract under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 faced the similar difficulty till an Amendment was introduced in 2009 vide Notification No. 23/2009-S.T., dated 7-7-2009 and an explanation was added to the effect as follows:-

'2. In the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, in rule 3, -

(A) in sub-rule(l), for the Explanation, the following Explanation shall be substituted, namely :-

"Explanation. - For the purposes of this sub-rule, gross amount charged for the works contract shall be the sum, -

(a) including -

(i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

(ii) the value of all the services that are required to be provided for the execution of the works contract;

(b) excluding -

(i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

(ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

Provided that nothing contained in this Explanation shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009.";

The amendment of 2009 resolved the difficulty by stating that value of all goods that are supplied either as part of consideration or not will be included in to the gross amount charged. This amendment is in the nature of deeming provision because it is only by an artificial devise that something given free can get included in the gross amount charged.

In a taxing statute there is no escape from the import of words in the legislative instrument that are beyond any real ambiguity. In this case the notification 1/2006 does not admit of ambiguity because it speaks of 'gross amount charged'. The word 'charged' clearly refers to billing and cannot mean value of goods received by a service provider for use in providing a constructed building to that same person who gave it. If the legislature had wanted to refer to something more than what is charged by the service provider, the legislative instrument would have had to insert a 'deeming device' by which it would have declared that the words 'gross amount charged' to include the value of goods supplied free of charge for providing works contract. No deeming clause has been inserted in to the notification though placed in similar circumstances at a much later date, the legislature did provide for one in the Composition Scheme of 2009.

xii. This leads us to the second limb of the enquiry that we had set upon following Prof. Lon L Fuller's exposition on the "sketch of invention' analogy, which is whether the remedy as conjured by the department is apt for dealing with the particular manifestation of the general mischief at which the statute was aimed. Since the answer to first limb of enquiry is in negative perhaps it is not necessary to take this enquiry up at all but still it is relevant to do so in order to demonstrate why the notification could not have been intended to create any such devise.

xiii. F.A. R. Bennion in his popular book 'Statutory Interpretation' tells us that an Act cannot be truly interpreted unless its nature is understood by the interpreter. At present we are in an exercise of understanding a taxing statute. A famous dictum oft repeated in relation to tax Acts was given by Rowlatt J. in these words:-

'…...in a taxing Act on has to look at what is clearly said. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in to nothing is to be implied. One can only look fairly at the language used." (Cape Brandy Syndicate v IRC [1921] 1 KB 64 at pg 71.)

This position is very widely treated as the last word in comprehending tax laws but it may be a little too extreme in its implications. Recently courts have come up with other principles, one of which requires courts to observe the dictum 'ut res magis valeat pereat' in tax matters, meaning that statute must not be interpreted such that it renders it void. Cardozo J warned that in tax matters 'the construction that is liberal to one tax payer may be illiberal to others' (Burnet v Guggenheim 288 US 280) and that tax authorities owe a duty to the general body of tax payers to ensure that tax due is efficiently collected (Reed v Nova Securities Ltd [1985] 1 WLR 193. The overriding principle for understanding tax laws was stated by Evans LJ who said:-

'…..in the context of tax legislation it is necessary to consider the legal analysis with the utmost precision, so that taxpayer shall not become liable to tax unless this is clearly and unequivocally the effect of the statutory provision' (Furniss v Dawson [1984]AC 474 at 525.)

Our Apex Court has often reiterated this principle of common law and recently the Apex Court cited with approval the following words;-

"Another question that arises for consideration in this connection is whether sub-section (1) of Section 127-A and the proviso to sub-section (2)(b) should be construed together and the annual letting values of all the buildings owned by a person to be taken together for determining the amount to be paid as tax in respect of each building. In our considered view this position cannot be accepted. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter. [Mathuram Agrawal v. State of M.P., (1999) 8 SCC 667 quoted with approval in CCE Kerala vs Larsen and Toubro 2015(39) STR 913 SC]

xiii. Though it is not given to courts to travel beyond the clear meaning of the words especially in tax matters, but for sake of discussions we could assume a situation in which a court considered it an incongruity that law seeks to tax activities on the basis of nature of agreements rather than content of activity, and decided to make a strained construction. The court then would be faced with few options before it. The option suggested by department is to raise the level of taxation for those who receive free supplies to a notional high level in which all supplies whether billed by them or not get valued and included in the definition of 'gross amount charged'. This devise creates a practical stumbling block apart from it being in conflict with the principle enumerated by Evans J and the Apex Court in Mathuram Agarwal case cited above. The value of supplies are known to the service receiver and not the service provider. This interpretation is inviting the court to create a system of best judgment which flies against the other principle of taxation that taxes must be efficiently collected (Reed principle cited above). Apart from violating property rights of the assessee, the court would be encouraging inefficiency in tax collection too.

xiv. The other alternative would be to bring other service providers who do not get free supplies from their clients at par with the service tax assessee who does. This legal consideration is beyond the scope of the present dispute beyond the assessee and the department. If such a plea were to be taken but those other assessee who do not receive free supplies what possibly could be the measure they can suggest to which they should be brought up. The quantum of free supplies is dependent on the nature of transactions. Each contract is bound to be different from the others and there is no fixed quantum of levy to which these assessee who find them in unfavourable position can be brought down to. Perhaps the court will beleft with just one option which is to declare the notification as unworkable. The Reed decision cited above clearly warns courts not to take such course as it would throw all tax machinery out of gear as the notification becomes void.

xv. There is no legal option available to the courts even if they became convinced that there is an awkwardness in the notification which allows assessees to pay tax depending on quantum of free supplies received by them and not the value of service rendered. This awkwardness exists in the text of the notification and it is not given to courts to cure what is essentially an issue of legislative drafting.

4. Conclusion

i) The thrust of department's arguments in the issue of free supplies is the economic implications of the literal interpretation of the notifications inasmuch as they see inequity as between two different service providers, both performing activity of the same value but being taxed differently, as would happen in the operation of this notification, if one service provider receives free supplies but the other does not. Their best case is that the free supplies are provided as a part of terms of agreement between the receiver and provider of works contract service and, therefore, they should be treated as a 'consideration' for supply of works contract itself. To give the word 'charged' such a large expanse of meaning amounts to straying much beyond the accepted usage of the word and it would be a very strained construction.

ii) Legal reasoning it is said (most famously by Prof. Aharon Barak) is a play of wisdom on logic. Dworkin says much the same thing when he argues that courts give the law it's 'best fit' and he demonstrates it with the 'Elmer case' in which a grandson murdered his testator grandfather and then claimed the inheritance [Riggs V Palmer 115 NY 506 (1889)]. Elmer could be proceeded against the under the criminal laws but the probate law seemed to allow him to take the inheritance since the will was valid. In this case the New York court was faced with two opposing principles; a principle says that "one cannot benefit from one's own wrongdoing" and the other says that "one should not be punished beyond the ways specified in the statute". Dworkin argues that the court preferred the first principle and denied him the inheritance because they felt compelled to opt for the option that leaves the society better for it. It was, therefore, wisdom which prompted the court in straying out of the legal text.

iii) Should the department expect the same treatment from a court as in Elmer case for supporting their stand in this tax matter? The answer is negative. Wisdom of a court will certainly see a higher purpose in defending the property rights of the tax assessee which can be taken away from him only by an express intention of the legislature. Where there is no discernible legislative intent in the words employed in the text of statute, in common law countries,courts would be bound by the dictum that a taxpayer shall not become liable to tax unless this be clearly and unequivocally the effect of a statutory provision. The design of the legislative provisions in service tax laws, admits only of the view adopted by CESTAT in Bhayana Builders vs CST - 2013-TIOL-1331-CESTAT-DEL-LB and for that reason this rule set by the Tribunal makes for good law.

(The author is Advocate and Adjunct Adviser, Hari Global Advisory Services. He is a former Chief Commissioner of Customs and Excise and CDR in CESTAT.)