FREE SUPPLY OF GOODS – LATEST JUDICIAL VIEW POINT ON TAXABILITY

[Dr. Sanjiv Agarwal]

Provision of free supply of goods during the course of rendering of any service (say repairs, construction etc) has always been a point of dispute – both on the issue of taxability as well as valuation thereof.

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. Notification No. 24/2012-ST, dated 1-7-2012 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.

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 ).

Recently, in view of conflicting decisions, larger of bench of Tribunal analyzed the issue of taxability of free supply of goods or materials in cases of construction of services in a bunch of 23 appeals (order dated 06.09.2013 in Bhayana Builders Pvt. Ltd. v. CST, Delhi - 2013 (9) TMI 294 - CESTAT NEW DELHI yet to be reported) and its inclusion in value for the purpose of exemptions. There are certain exemption in Service Tax which are allowed subject to non-availment of Cenvat Credit or no benefit been taken under any other notification or exemption subject to full value including free supply being considered.

In Cemex Engineers v. CST, Cochin 2009 (3) TMI 423 - CESTAT, BANGALORE , it was held  that the value of goods supplied and provided by the client cannot be included for calculating service tax; that insisting on including cost of  materials supplied by the service receiver would be contrary to Section 67 of the Act, (which specifies that the value of taxable service shall be gross amount charged by the service provider for such service) and therefore, cost of materials supplied by the service receiver would not be covered, in terms of Section 67.

However, later, contrary view was held in Jaihind Projects Ltd. v. CST, Ahmedabad, 2010 (1) TMI 186 - CESTAT, AHMEDABAD so as to include value of goods or material supplied by the service provider free off cost.

Larger bench in Bhayana Builders case has observed that section 67 of the Act  deals with valuation of taxable services  and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided.  Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should  accrue to the benefit of the later.  “Free supplies”, incorporated into construction (cement or steel for instance), even on an  extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider.  Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient. 

Thus, section 67 does not require inclusion of free supplies in the gross value charged for computation of the value of taxable services. Based on a reasoned interpretation, the bench concluded that - "goods and materials, supplied/ provided/ used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/ provision / use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/ goods incorporated or otherwise, would alone constitute the gross amount charged.,  This is not to say that an exemption Notification cannot enjoin a condition that the value of free supplies must also go into the gross amount charged for valuation of the taxable service.  If such intention is to be effectuated the phraseology must be specific and denuded of ambiguity."

The final conclusion is thus as follows : -

" (a)  The value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, would be outside the taxable value or the gross amount charged, within the meaning of the later expression in Section 67 of the Finance Act, 1994; and

(b)  Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-ST, including the Explanation thereto as introduced by Notification No. 4/2005-ST."

 In view of the above, assessees (both service providers and service receivers) may feel safe as Department can no longer seek to levy Service Tax on free supplies, unless the matter is appealed further and decided in favour of revenue.