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Free of cost material (FOC) not to form part of value of service

Service Tax - By: - DEV KUMAR KOTHARI - Dated:- 5-3-2018 - Recent judgment: Commissioner of Service Tax Etc. Versus M/s. Bhayana Builders (P) Ltd. Etc. 2018 (2) TMI 1325 - SUPREME COURT OF INDIA Judgments referred to in above: Commissioner, Central Excise & Customs Versus M/s Larsen & Toubro Ltd. and others - 2015 (8) TMI 749 - SUPREME COURT Shabina Abraham And Others Versus Collector of Central Excise & Customs - 2015 (7) TMI 1036 - SUPREME COURT M/s Bhayana Builders (P) Ltd. & .....

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of manpower, technical and professional knowledge and experience, infrastructure and also material, tools, equipment and facilities. Some of material may be provided by the service receiver to the service provider to use in the work of service receiver and return extra / unused quantity. Likewise service receiver can also provide some facilities, equipment, tools etc. to the service provider for use in execution of the contract. These may be provided free of cost or at some charge. When FOC supp .....

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goods but for material provided which is to be returned in form of execution of contract. Therefore, in such situation also there is FOC supply, and there is no sale of goods. While working out consideration payable for services, such free of cost (FOC) items are considered in negotiation process. Some material are used as such without any changes like components to be assembled. Some may have to undergo some processes undertaken by the service provider. For example, in case of shirt making inne .....

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hich is in nature of value addition by way of providing service. Service can be without material or with material. Material can be provided by service receiver and /or service provider. Even if service provider provide some material it may be supply of goods and not service. Therefore, when FOC goods are provided for use of them in execution of work, there is no service addition by use of material in execution of contract. However, in some circumstances supply of material being part of service c .....

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Earlier There have been cases on this aspect. In recent case of Bhayana Builders (supra.) the honourable Supreme Court has considered matter in view of specific provisions and settled that material supplied by service receiver to service provider for use in execution of contract will not be part of service or value of service provided by service provider. The case related to works contract for construction activity. However, the principal is applicable to all cases wherein service receiver provi .....

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ue of materials/goods supplied free of cost by the service recipient to the service provider/assessee is to be included to arrive at the gross amount , or not. The Court noted that on this aspect, there is no difference in amended Section 67 from unamended Section 67 of the Act and the parties were at ad idem to this extent and on this there is no dispute. The Explanation 3 to subsection (1) of Section 67 had remove any doubt by clarifying that the gross amount charged for the taxable service sh .....

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, (2) and (3). No such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value. In the related cases the service tax is to be levied in respect of taxable services and for the purpose of arriving at 33% of the gross amount charged, unless value of some goods/materials is specifically included by the Legislature, that cannot be added. Exemption under Section 93 can only be granted in respect of those activities wh .....

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