IMPORTANT POINT
Service tax valuation must strictly adhere to the gross amount charged for services rendered, excluding any additional costs or expenses not directly related to the service.

ORDER :

Bhargav D. Karia, J.

1. Heard learned Senior Advocate Mr. Mihir Joshi with learned advocate Mr. Parth Contractor for the petitioners and learned advocate Mr. Utkarsh Sharma for the respondent No.3.

2. Though served, no one appeared for the respondents Nos.1 and 2.

3. Rule returnable forthwith. Learned advocate Mr. Utkarsh Sharma waives service of notice of Rule for the respondent No.3.

4. Having regard to the controversy in narrow compass and with the consent of learned advocates for the respective parties, the matter is taken up for hearing.

5. The brief facts of the case are as under:

5.1 The petitioner No.1 is engaged in the business of plant engineering and construction, and is inter alia engaged in the provision of consulting engineering and other services to various entities located in and outside India. The petitioner No.1 has been periodically filing its Service Tax Returns and has been paying appropriate Service Tax in accordance with law.

5.2 On 23rd February 2016, a communication came to be addressed by the Superintendent (R-II), Service Tax Division-II, Vadodara, directing the petitioner No.1 to submit certain documents and along with the said communication, a letter addressed by the Assistant Audit Officer / CERA-IV was also provided to the petitioner No.1 communicating that the petitioner No.1 was to effectively levy and collect service tax on the difference between the actual cost incurred and the contract price (when the actual cost incurred was higher than the contract price.

5.3 In response to the aforesaid letter, the petitioner No.1, vide its letter dated 26th May 2016, submitted as under :

(i) that the methodology of accounting adopted by the petitioner No.1 was in consonance with Accounting Standard 7 issued by the Institute of Chartered Accountants of India and which was mandatorily required to be adhered to by the petitioner No.1.

(ii) that the said methodology adopted by the petitioner No.1, would have no bearing on the determination of the value of service rendered by the petitioner No.1, in a particular year as the same would only be governed by the provisions of Section 67 of the Finance Act, 1994 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006.

(iii) that the entire premise to levy and collect service tax from the petitioner No.1, purportedly on the ‘revenue never to be billed’ is absurd and alien to service tax law. The petitioner No.1 categorically submits and represents that there is no such ‘revenue never to be billed’.

(iv) that the petitioner No.1 collects and pays service tax on all the amounts bills to the service recipient, in accordance with the provisions of the Act and the Valuation Rules.

5.4 However, the petitioner No.1 received a further letter dated 1st September 2017 from the Superintendent (R-II), Service Tax Division-II, Vadodara. The petitioner No.1, vide its reply dated 26th September 2017, responded to the said letter of the Superintendent (R-II) and provided details as sought for.

5.5 Thereafter, the respondent No.3 issued show cause notice to the petitioner No.1 relying upon the observations of the Audit Officer alleging as under :

(i) based on the revenue recognition methodology adopted by the petitioner No.1, as mandated in Accounting Standard 7, the petitioner No.1 was liable to pay service tax on the ‘revenue never to be billed’;

(ii) the petitioner No.1 had not paid service tax on the excess expenditure incurred over the contracted price which was not included in the value of service rendered;

(iii) the action of the petitioner No.1, in not paying service tax on the losses incurred by the petitioner No.1, was in violation of the provisions of Section 67 of the Act read with Rule 2(c) and Rule 5(1) of the Valuation Rules.

5.6 Consequently, the petitioner No.1 is directed to show cause as to why an amount of Rs.20,49,63,134/- along with applicable interest and penalty should not be recovered from the petitioner No.1.

5.7 Along with the aforesaid show cause no