Free supplies in works contract service

[Ganeshan Kalyani]

Works contract service is a complex subject for discussion whether it may be for valuation of service in the contract price or for computing value added tax in the consideration. This complication manifolds while determining whether free supplies should form part of gross amount or not when there is free supplies from service receiver to service provider.

The CESTAT, New Delhi in case of M/s. Bhayana Builders (P) Ltd. and Others Vs. CST, Delhi [2013 (9) TMI 294 - CESTAT NEW DELHI (LB)] and others have dealt with whether value of goods/material supplied or provided free by a service recipient and used for providing taxable service of construction of commercial or industrial complex must be included in computation of gross amount for valuation of taxable service under Section 67 of the Act and that whether value of material supplied by recipient of taxable service free of cost (free supplies) should also be included for availing benefits under Notification No. 15/2004-ST, dated 10.09.2004 as amended by Notification No. 4/2005-ST dated 01.03.2005?

As per Section 67 of Act which deal with valuation of taxable services defines that any consideration whether monetary or otherwise should have flown or should flow from service recipient to service provider and should accrue to benefit of later. The value of free supplies by services recipient to service provider does not constitute a non-monetary consideration nor does it form part of gross amount charged for services provided. In fact, Section 67 of Act, as currently structured does not; require inclusion of free supplies in gross value charged, for computation of value of taxable services.

The Hon’ble CESTAT held that Goods and materials, supplied/provided/used by service provider for incorporation in construction, which belong to provider and for which service recipient is charged towards value of such supply/provision/use and corresponding value whereof was received by service provider, to accrue to his benefit, whether independently specified as attributable to specific material/goods incorporated or otherwise, would alone constitute gross amount charged. Value of goods and materials supplied free of cost by a service recipient to provider of taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from service recipient, accruing to benefit of service provider, would be outside taxable value or gross amount charged, within meaning in Section 67 of Act. And, mere enlargement of contours of “gross amount charged” in a condition incorporated in an exemption Notification would not amount to bringing to tax net a value which is not taxable under Section 67 of Act. And therefore free s

Therefore the value of free supplies by service recipient to service provider do not comprise gross amount charged under Notification No. 15/2004-ST, including Explanation thereto as introduced by Notification No. 4/2005-ST.

Though this judgment is favorable to assesses but the fact is litigation cannot be ruled out.

(The above article is authored by Ganeshan Kalyani and he can be reached via email on [email protected]).

Discussions to this article

[Ganeshan Kalyani]

Please discuss on this article. though there is case law in support but department tend to issue notices to claim inclusion of free issue for arriving at service tax amount.

[YAGAY AND SUN]

It was held in the matter of Bhayana Builders (P) Ltd., & Others Vs CST, Delhi & Others 2013 (9) TMI 294 CESTAT New Delhi that value of free supplies by service recipient do not comprise the gross amount charged under notification No.15/2004 under Construction of Commercial or Industrial Complex service.

But under the Negative List regime the free Issue of Material by Service Receiver is required to be included in the value of the invoice raised by the contractor.

1.1 Under works contracts, sometimes as per terms of contract, a service receiver may supply materials such as cement or steel free of cost or at reduced cost and contractor uses such materials for the execution of such works contract.

1.2 Now the question is whether the contractor is liable to pay service tax on value of material supplied by the service receiver if he chooses the composition scheme for payment of service tax on such contracts.

Answer to this question is provided in the definition of “total amount” provided under Rule 2A(d) of Valuation Rules. Rule 2A(d) defines “total amount” as under:

“total amount” means –

the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-

(a) the amount charged for such goods or services, if any; and

(b) the value added tax or sales tax, if any, levied thereon.

The underlined portion of the definition makes it clear that the contractor has to include the fair market value of free issue of materials in the composition scheme while calculating service tax under works contract.

 

[Ganeshan Kalyani]

Thank you sir for submitting your views.