Is fair market value fitting for valuation of services?

Fair market value (FMV) is generally understood as the price for which a specified asset or property would be sold in the market and that a knowledgeable, willing, and unpressured buyer would pay to a seller. As a concept, FMV has been widely used for a long time across many areas of law to determine the value of assets for payment of taxes, excise duty, insurance claims, etc.

However, it is interesting to note that it was only in 2012 – the year when the service tax law was comprehensively revamped with the introduction of a negative list approach to taxation of services – that the concept of FMV was introduced for the purpose of payment of service tax in relation to specified services of construction, works contract and supply of food by restaurants and caterers.

The Service Tax (Determination of Value) (Second Amendment) Rules, 2012, and abatement Notification No. 26/2012, provided that while determining the value for the payment of service tax for the services of construction, works contract and supply of food by restaurants and caterers, the FMV of any goods provided by the service recipient to the service provider during the course of provision of such service should form part of the amount for discharging the service tax.

Kumar Visalaksh is an associate partner and Rahul Khurana is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.