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?

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.