Inclusion of separate supply value: exclude supplies under distinct contracts if execution or payment occurred before the amendment, so no addition.

Whether the value of goods supplied under a separate supply contract is includible in the gross value of a distinct works/service contract was decided by applying the prospective amendment to the Works Contract Composition Scheme and the departmental clarification: the explanation making free supplies includible operates only from the amendment's effective date and does not apply where execution commenced or payment was made on or before that date. Consequently the separate supply value was excluded from the works contract gross value and the revenue appeal was dismissed with the demand set aside.

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Issues: Whether the value of goods supplied under a separate supply contract (Contract I) is includible in the gross value of a separate works contract/service contract (Contract II) for determination of service tax liability under Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

Analysis: The contracts for supply and for services were distinct written agreements executed prior to 07.07.2009 with invoices issued and payments received. Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 was amended by Notification No. 23/2009-ST dated 07.07.2009 by adding an explanation making free-of-cost supplies includible prospectively; Circular No. 150/1/2012-S.T., dated 08.02.2012 clarifies that the explanation applies only from 07.07.2009 and does not apply where execution commenced or payment was made on or before 07.07.2009. Pre-07.07.2009 commencement or payment therefore excludes the value of free supplies from the gross amount for the composition scheme. Prior Tribunal decisions applying these provisions and the CBEC circular hold that separate supply contracts entered into and paid before 07.07.2009 cannot have their supply value added to the works contract value for service tax assessment.

Conclusion: The value of goods supplied under the separate supply contract is not includible in the gross value of the works contract for service tax purposes; the appeal by the Revenue is dismissed and the demand is set aside, with no penalty payable.

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