Free Issue Materials and GST Valuation: Andhra Pradesh High Court Revives the Bhayana Builders Principle By Adv. G. Jayaprakash (Former Central Excise Officer)

1. Introduction

One of the recurring controversies in indirect taxation has been whether materials supplied free of cost (FOC) by a service recipient should be included in the taxable value of services. The issue has repeatedly surfaced in construction contracts, contract manufacturing arrangements, and works contract services.

During the service tax regime, this controversy culminated in the landmark judgment of the Supreme Court in Commissioner of Service Tax Etc. Versus M/s. Bhayana Builders (P) Ltd. Etc. - 2018 (2) TMI 1325 - Supreme Court, where the Court decisively held that the value of materials supplied free by the service recipient cannot be added to the value of taxable services.

With the advent of the Goods and Services Tax regime in 2017, similar valuation disputes began to arise once again. Tax authorities in several instances attempted to include the value of free supplies while determining the 'value of supply' under Section 15 of the CGST Act, 2017.

A recent judgment of the Andhra Pradesh High Court in M/s. Balaji Ready Mix Concrete Versus Union of India, Represented By Its Secretary, Ministry of Finance, New Delhi. - 2026 (3) TMI 395 - ANDHRA PRADESH HIGH COURT has once again brought clarity to this issue. The Court held that materials supplied free of cost by the recipient cannot be included in the value of supply for the purpose of levy of GST.

The ruling is significant not merely for the ready-mix concrete industry but also for construction contracts and works contract services involving builders and developers.

2. Valuation Under GST - The Statutory Framework

The starting point for GST valuation is Section 15(1) of the CGST Act, which provides that the value of a supply shall be:

'the transaction value, that is the price actually paid or payable for the said supply where the supplier and the recipient are not related and the price is the sole consideration.'

The provision clearly emphasises actual consideration flowing from the recipient to the supplier.

Section 15(2) further expands the value of supply by including certain elements such as:

• taxes other than GST,
• incidental expenses,
• interest or late fees,
• subsidies linked to price.

However, Section 15 does not authorise the addition of values which are not part of the consideration received by the supplier.

This principle is consistent with the basic architecture of GST, which taxes supplies made for consideration, not hypothetical values.

3. The Bhayana Builders Doctrine Under Service Tax

The controversy regarding free issue materials was first conclusively addressed in the service tax era.

In Commissioner of Service Tax v. Bhayana Builders (P) Ltd. (Supreme Court), the issue was whether the value of materials supplied by the client free of cost to a construction contractor should be included in the taxable value of construction service.

The Supreme Court held:

1. Taxable value must be restricted to consideration received by the service provider.
2. Materials supplied by the service recipient do not constitute consideration for the service.
3. Therefore, their value cannot be included in the taxable value.

The Court emphasised that tax cannot be imposed on something which never formed part of the consideration for the service provider.

This judgment became the governing precedent for valuation disputes in construction services.

4. Re-Emergence of the Dispute Under GST

Despite the clarity provided by the Supreme Court under service tax law, the issue resurfaced under GST due to differing interpretations of Section 15(2)(b) of the CGST Act.

This provision states that the value of supply shall include:

'any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply.'

Tax authorities in certain cases attempted to argue that where the recipient supplies materials free of cost, such supplies should be treated as additional consideration and therefore included in the taxable value.

This interpretation effectively sought to resurrect the very controversy which had already been settled by the Supreme Court.

5. Andhra Pradesh High Court Judgment

The Andhra Pradesh High Court in Balaji Ready Mix Concrete Pvt. Ltd. v. Union of India examined this issue in detail.

In that case, the service recipient supplied certain materials free of cost for manufacturing purposes. The department sought to include the value of those materials in the taxable value under GST.

The High Court rejected the department's contention and held that:

• GST is leviable only on the consideration actually received by the supplier.
• Materials supplied free of cost by the recipient do not constitute consideration.
• Therefore, their value cannot be artificially added to the taxable value of supply.

The Court also emphasised that Section 15 does not permit taxation of hypothetical values.

The reasoning adopted by the High Court clearly resonates with the doctrine laid down earlier by the Supreme Court in Bhayana Builders.

6. Implications for Builders and Works Contract Services

The judgment has considerable relevance for the construction sector.

In many construction contracts, the contractee supplies certain materials such as:

cement, steel, tiles, fixtures.

Where the contractor is engaged only for labour, supervision, or execution of construction, the value of such materials is often supplied free of cost by the project owner.

Following the principles laid down by the Supreme Court and reaffirmed by the Andhra Pradesh High Court:

• GST should be levied only on the amount charged by the contractor.
• The value of materials supplied free of cost by the contractee cannot be added to the taxable value.

This principle becomes particularly important in works contract arrangements, where the valuation disputes frequently arise.

7. Distinction in Joint Development AgreementsWhile the principle is clear in ordinary works contracts, a distinction must be drawn in the case of joint development agreements (JDAs) between landowners and developers.

In such arrangements:

• The landowner contributes land, and
• the developer provides construction services.

Under GST law, the land provided by the landowner is treated as non-monetary consideration for the construction services rendered by the developer.

Therefore, the valuation principles applicable to JDAs are governed by specific GST notifications and valuation mechanisms.

Consequently, the doctrine relating to free issue materials cannot automatically apply to land supplied as consideration in development agreements.

8. The Larger Principle in Tax Jurisprudence

The Andhra Pradesh High Court decision reinforces an important constitutional principle of taxation:

Tax can be levied only on the value that actually forms part of the consideration for a supply.

Artificially inflating the taxable value by adding hypothetical elements undermines the structure of GST and leads to excessive taxation.

The judgment therefore restores the balance between statutory interpretation and economic reality.

9. Conclusion

The ruling of the Andhra Pradesh High Court marks an important reaffirmation of the principle earlier laid down in Bhayana Builders. It clarifies that free issue materials supplied by the recipient cannot be included in the value of supply under GST, unless such supplies form part of the contractual consideration.

For the construction industry and works contract services, the decision provides much-needed clarity and protects taxpayers from artificial valuation practices.

Ultimately, the judgment reiterates a fundamental rule of indirect taxation - what is taxed must be real consideration, not imagined value.