Free supplies to be free of service tax?

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.

Conflicting views

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.

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.