Free of cost material in case of Works contractor

[ROHIT GOEL]

In one of our cases, contractor had entered into a contract wherein the contractee had provided certain Free of cost material. The contractor was paying service tax after considering 40% contract value as service portion and did not include the free material for such calculation. The period involved is Oct 2012-March 2017. The department now proposes to also collect tax on such Free of cost material.

However, SC in case of Bhayana Builders = 2018 (2) TMI 1325 - SUPREME COURT held that scheme of section 66-67 did not envisage charging of ST on non-consideration apart from certain specific cases and as such no ST can be charged on FOC Material. Even though the decision pertains to pre works contract regime, however text of section 66 remains the same and even the Works contract valuation rules are subject to such section.

In such a case, whether the position expressed by the department that the decision in Bhayana Builders = 2018 (2) TMI 1325 - SUPREME COURT would not apply in period under question and that ST needs to be paid on FOC material, correct?

[KASTURI SETHI]

SH.ROHIT GOEL JI,

You have said, "Text of Section 66 remains the same". Section 67 read with Valuation Rules is the most relevant and not Section 66 here. Analyse your issue in the light of Section 67 which was also amended. Period has also to be taken care of.

 

[ROHIT GOEL]

Kasturi sir,

Thank you for your reply. I inadvertently mentioned section 66 and correctly it should be section 67. You have correctly mentioned that section 67 came to be amended post 2012.

On my examination, I could see two amendments.

1) Amendment made vide Finance Act 2012 regarding ommission of definition of money contained in Explanation. I do not believe same would impact the valuation of works contract service as per Rules.

2) Amendment made vide Finance Act 2015 as per which definiition of consideration was expanded to include reimbursable expenditure incurred by service provider on behalf of receipent. This would not impact facts of the case as in this case no such expense was incurred by us but instead receipent has incurred expense on acquiring material.

My question is whether in a post October 2012 period after which no amendment to Valuation rules or section 67 has been carried out to specifically include FOC material, would same still be included as "total amount charged" under contract and thus liable to Service Tax?

[Rajagopalan Ranganathan]

Sir,

Clause a (ii) of explanation of Section 67 states that "any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;"

Department's contention may be that value of FOC materials is at par with any reimbursable expenditure or cost incurred by service provider and charged on the recipient and hence the same has to be included in the value of service provided.

However, the query raised by you has to be settled by adjudicating authorities of the Department or High Courts or Supreme Court.

[KASTURI SETHI]

SH.ROHIT GOEL JI,

I have perused/analyzed the whole issue in detail. In my view, to demand ST on FOC material in this scenario is stretching the law. FOC material is not integrated to taxable 'service'. I have perused the definition of 'Gross Amount Charged', 'consideration' etc. It has nothing to do with 'reimbursable expense or cost'. Such expense or cost is not reimbursable. All relevant phrases and definitions have been x-rayed in the following case law based on the Supreme Court judgement:-

[LARGER BENCH] COMMISSIONER OF SERVICE TAX, CHENNAI Vs. REPCO HOME FINANCE LTD. - 2020 (7) TMI 472 - CESTAT CHENNAI

This Large Bench decision of CESTAT will help you in fighting the case de jure, if you receive SCN. You must fight. Read this judgement thoroughly and word for word. This case law envisages how you can contest this case, if required.

In my view, you will be on a strong wicket from all aspects regarding merits.

AI Summary

Service tax on free of cost material: whether FOC materials form part of taxable value and must be included. The core question is whether free of cost materials provided by the contractee must be included in the taxable value of a works contract by treating them as reimbursable expenditure or part of consideration. The department may argue such materials equate to reimbursable costs and are includible, whereas contrary authorities and an analysis of the valuation rules support excluding non consideration FOC material from service tax valuation; affected taxpayers should contest notices relying on those precedents.