Service Tax
This query is : Resolved
25 March 2021
Services rendered including some amount of equipment. Whether cost of equipment could be reduced from service receipts for calculation of service tax. Caselaws if any.
24 July 2025
Yes, the cost of equipment can potentially be excluded from the value of taxable service, but only under certain conditions as per the Service Tax (Determination of Value) Rules, 2006, and subject to proper documentation and bifurcation in the invoice.
✅ Legal Position:
Rule 5(1) of Service Tax (Determination of Value) Rules, 2006:
Where any expenditure or cost is incurred by the service provider in the course of providing a taxable service, all such expenditure or cost shall be included in the value of the taxable service.
🔴 However, as per the Supreme Court judgment in Bhayana Builders Pvt. Ltd. vs CST [2013 (32) STR 49 (Tri-Del) LB], it was held that:
The value of goods and materials sold by the service provider to the recipient of the service is not includable in the value of taxable service if the goods are sold as such (with VAT/CST charged) and property in goods is transferred.
✅ Key Conditions to Exclude Equipment Cost from Taxable Value:
To deduct equipment cost from service receipts:
✅ Equipment must be sold and not merely used/rented.
✅ There must be a clear transfer of ownership/title of equipment to the recipient.
✅ VAT/CST should be charged on the equipment portion.
✅ Separate line-item in the invoice must reflect value of goods and services.
📚 Relevant Case Laws:
Bhayana Builders Pvt. Ltd. v. CST (2013)
Citation: 2013 (32) STR 49 (Tri.-LB)
✔ Goods supplied free of cost by service recipient are not to be added to the gross value of service.
✔ Emphasized actual consideration must be the basis of taxation.
Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India
Citation: 2018 (10) GSTL 401 (SC)
✔ SC held that reimbursements (e.g., travel, accommodation, etc.) cannot be included in service value unless expressly authorized by statute.
ABB Ltd. v. CST [2011 (23) STR 97 (Kar)]
✔ Cost of goods sold during the course of providing service can be excluded if VAT paid and properly shown.
🧾 Illustration:
If invoice reads:
Particulars Amount (INR)
Supply of Equipment (VAT charged) 1,00,000
Installation Service (Service Tax) 20,000
Then service tax is chargeable only on ₹20,000, provided:
Proper bifurcation,
Equipment cost includes VAT/CST,
No rental/lease — full transfer.
⚠️ Important Notes:
If equipment is rented or temporarily used, no exclusion allowed — whole value taxable.
If contract is a composite service (with no bifurcation), entire consideration may be taxable.
Under GST regime (post-July 2017), this issue is governed differently
✅ Legal Position:
Rule 5(1) of Service Tax (Determination of Value) Rules, 2006:
Where any expenditure or cost is incurred by the service provider in the course of providing a taxable service, all such expenditure or cost shall be included in the value of the taxable service.
🔴 However, as per the Supreme Court judgment in Bhayana Builders Pvt. Ltd. vs CST [2013 (32) STR 49 (Tri-Del) LB], it was held that:
The value of goods and materials sold by the service provider to the recipient of the service is not includable in the value of taxable service if the goods are sold as such (with VAT/CST charged) and property in goods is transferred.
✅ Key Conditions to Exclude Equipment Cost from Taxable Value:
To deduct equipment cost from service receipts:
✅ Equipment must be sold and not merely used/rented.
✅ There must be a clear transfer of ownership/title of equipment to the recipient.
✅ VAT/CST should be charged on the equipment portion.
✅ Separate line-item in the invoice must reflect value of goods and services.
📚 Relevant Case Laws:
Bhayana Builders Pvt. Ltd. v. CST (2013)
Citation: 2013 (32) STR 49 (Tri.-LB)
✔ Goods supplied free of cost by service recipient are not to be added to the gross value of service.
✔ Emphasized actual consideration must be the basis of taxation.
Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India
Citation: 2018 (10) GSTL 401 (SC)
✔ SC held that reimbursements (e.g., travel, accommodation, etc.) cannot be included in service value unless expressly authorized by statute.
ABB Ltd. v. CST [2011 (23) STR 97 (Kar)]
✔ Cost of goods sold during the course of providing service can be excluded if VAT paid and properly shown.
🧾 Illustration:
If invoice reads:
Particulars Amount (INR)
Supply of Equipment (VAT charged) 1,00,000
Installation Service (Service Tax) 20,000
Then service tax is chargeable only on ₹20,000, provided:
Proper bifurcation,
Equipment cost includes VAT/CST,
No rental/lease — full transfer.
⚠️ Important Notes:
If equipment is rented or temporarily used, no exclusion allowed — whole value taxable.
If contract is a composite service (with no bifurcation), entire consideration may be taxable.
Under GST regime (post-July 2017), this issue is governed differently
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