Free supplies in works contract service

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]).