Free supplies and service tax abatement: recipient-provided materials excluded from gross consideration under the notification

Free supplies made by the service recipient were held not to form part of the gross amount charged by the service provider for abatement under Notification No. 1/2006-S.T. The larger bench ruling in Bhayana Builders was treated as the governing interpretation, confirming that goods and materials supplied free of cost are excluded from taxable value because they are not part of the consideration charged. The later Delhi High Court decision in G.D. Builders was not treated as overriding that view, as it did not directly decide the scope of the notification. On that basis, free supplies could not be added to deny abatement.

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Issues: Whether the value of free supplies made by service recipients could be included in the gross consideration for the purpose of denying abatement under Notification No. 1/2006-S.T.

Analysis: The larger bench decision in Bhayana Builders was treated as the governing interpretation of Notification No. 1/2006-S.T. The notification was understood to exclude from taxable value the value of goods and materials freely supplied by the service recipient, because such free supplies do not form part of the gross amount charged by the service provider. The later Delhi High Court decision in G.D. Builders was held not to displace that interpretation, since it did not directly rule on the scope of Notification No. 1/2006-S.T.

Conclusion: The value of free supplies by the service recipient was not includible in the gross consideration for denying abatement under Notification No. 1/2006-S.T., and the appeal succeeded.

Ratio Decidendi: For abatement under Notification No. 1/2006-S.T., free supplies made by the service recipient are not part of the gross consideration charged by the service provider and cannot be added to the taxable value.

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