In a recent ruling in Bhayana Builders Pvt Ltd, while deciding whether the value of goods supplied free of cost by the service recipient for use in the provision of service by the service provider should be included in the “gross amount charged” for the service of construction so provided, the Larger Bench of the Customs, Excise and Service Tax Appellate Tribunal has held that such “free supplies” would be outside the taxable value, i.e. would not form part of the gross amount charged by the service provider for provision of the service.
The above issue arose, on reference by a division bench of the tribunal, in order to resolve conflicting views in two rulings of coordinate benches of the tribunal – in Cemex Engineers (Bangalore Bench) and Jaihind Projects Ltd (Ahmedabad Bench). While the ruling in Cemex Engineers provided for non-inclusion of free supplies in the computation of gross amount charged for discharge of service tax liability, in Jaihind Projects it was held that the value of goods supplied free of cost by the service recipient to the service provider ought to be included in the taxable value for payment of service tax.
Basis for proposed inclusion
In the case of Bhayana Builders, the revenue authorities demanded tax by including the value of goods supplied free of cost by the service recipient in the gross amount charged by the service provider for the service provided.
The demand for tax was based on the premise that the value on which service tax is payable under section 67 of the Finance Act, 1994, includes both monetary and non-monetary consideration and the free supplies in this case, representing non-monetary consideration, ought to be included in the gross amount charged by the service provider for providing the service.
Basis for non-inclusion
The Larger Bench held that the value of only those materials supplied, provided or used by the service provider for incorporation into the construction service, which belonged to the provider and for which the service recipient is charged and the corresponding value of which was either received by the service provider or accrued to its benefit, would alone constitute the gross amount charged by the service provider for the provision of such taxable service, and therefore be liable to service tax under section 67.
For any monetary or non-monetary consideration to be included in the taxable value of a service, such consideration ought to have flowed or should flow from the service recipient to the service provider and should accrue to the benefit of the latter, i.e. be charged to the service recipient. Free supplies would not constitute non-monetary consideration remitted by the service recipient to the service provider for the provision of such service since no part of such goods and materials would accrue to or be retained by the service provider. It was thus held that section 67, as currently structured, does not permit inclusion of free supplies in the gross amount charged for provision of taxable services and discharge of service tax liability based on it.
On this basis, it was observed that the finding in Jaihind Projects that section 67 mandates inclusion of the value of free supplies provided by the service recipient for valuation of the taxable service is incorrect.
Impact of the decision
The ruling in Bhayana Builders settles the position that only when the benefit of something provided by the service recipient to the provider actually accrues to the latter would it amount to consideration for the service so provided.
This ruling is likely to benefit not only the construction sector where such arrangements are common (owing to centralized procurements, quality considerations, economies of scale, etc.) but also other sectors where the recipient of any taxable service provides goods free of cost to the provider.
This ruling may be challenged further, and it will have to be seen whether the position pronounced attains finality and is upheld by the Supreme Court of India on appeal, if any. An appeal filed by the assessee against the ruling in Jaihind Projects has been admitted and is pending before the Supreme Court.
Given the divergence in views, and ever-changing tax position, asseessees would do well to tread cautiously on this issue and carefully draw up contracts.
Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune, Ahmedabad and Bangalore. Ranjeet Mahtani is a senior associate and Anuradha Mohanty is an associate manager at the firm.
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