SERVICE TAX ON SUPPLY OF FREE SERVICES AND GOODS

[Dr. Sanjiv Agarwal]

Valuation Rules

Service Tax (Determination of Value) Rules, 2006 in rule 3 addresses the issue of determining the value of taxable service. It addresses two situations — one where consideration is not wholly or partly in money and two, where consideration is not ascertainable. In both the cases, there must be some consideration, whether in money form or in non-ascertainable form. The valuation rules shall apply only when some consideration is received or given. There is no deeming provision in section 67 or the rules framed thereunder.

Free Services

The definition of ‘consideration’ as explained in Section 67 is clear i.e., any amount that is payable for the taxable services provided. If no amount is paid (including past, present and future liability), there is no consideration involved. In general understanding, consideration means, something in return. It is an act or forbearance or its promise. Section 2(d) of Indian Contract Act, 1972 defines consideration to mean anything regarded as compense or equivalent for what one does or undertakes for another’s benefit.

If there is no consideration, there is no value of taxable service or its value is nil and therefore, there cannot be any levy of service tax thereon [also see Chandravadan Desai v. CCE, Calcutta-I 1997 (9) TMI 1 - CEGAT (CALCUTTA) ]. The Tribunal held that section 67 does not have the concept of deeming provision of valuation of taxable service. The departmental appeal before Supreme Court was dismissed. [(1999) 105 ELT A 193 (Supreme Court)].

Applicability of Valuation Rules

The Service Tax (Determination of Value) Rules shall come into operation only when —

      i)        Consideration is involved.

     ii)        Consideration is partly in cash or partly in other than cash (say, kind).

    iii)        Consideration is there but it is not ascertainable or cannot be determined.

   iv)        All costs are not included in the value of taxable service and reimbursement of expenses are excluded from the value.

    v)        Question of ‘pure agent’ has to be decided.

Notification No. 24/2012-ST, dated 6-6-2012 has amended valuation rules w.e.f 1-7-2012. Accordingly, in relation to works contracts, outdoor caterers and restaurant services, it has been provided that taxable value will include fair market value of all goods and services supplied.

Free Supply of Goods

Valuation of taxable services covers gross amount charged or collected from service receiver against a service which also, includes monetary equivalent of non-monetary consideration.

According to section 67 of Finance Act, 1994 as amended and Service Tax (Determination of Value) Rules, 2006, gross amount is chargeable to service tax. The inclusion of money value of free supplies of items in taxable value of services rendered is consistent with intention of legislative as reflected in the language of Act and Valuation Rules. If this value is not included, the assessee will also not get the benefit of exemption under Notification No. 1/2006 or 12/2003, as the case may be.

Receipt of free supply of items by a manufacturer is similar to receipt of materials free of cost by a service provider, as both the manufacturer and the service provider will have to otherwise incur cost of these items to produce excisable goods or to render taxable service. In both the cases, receipt of free supply of materials does not yield any additional return to the assessee.

However, it is well recognized that for the purpose of section 4 of the Central Excise Act, free supply of items constitutes additional consideration received by a manufacturer. Therefore, inclusion of money value of free supply on items in the taxable value of the service rendered is consistent with the intention of the Legislature as reflected in the language of the Act as well as the Service Tax (Determination of Value) Rules, 2006. In a case where the service recipient does not provide such items to the service provider, the assessee will include the value of the materials used in rendering the taxable service and charge the same from the client. The assessee cannot exclude the value of these material in computing the taxable value. The Commissioner rightly relied on the judgment of Supreme Court in Burn Standard Co. Ltd v. Union of India 1991 (7) TMI 102 - SUPREME COURT OF INDIA wherein it was held that value of free supply of items was includible in the assessable value under section 4 of Central Excise Act. (Refer VPR Mining Infrastructure Pvt. Ltd v. CCE, Hyderabad 2011 (3) TMI 183 - CESTAT, BANGALORE).

Notification No. 24/2012-ST, dated 6-6-2012 has amended valuation rules w.e.f 1-7-2012. Accordingly, in relation to works contracts, outdoor caterers and restaurant services, it has been provided that taxable value will include fair market value of all goods and services supplied.