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CESTAT rules on materials supplied free of cost
The larger bench of the CESTAT Delhi Bench (LB) has held that the value of materials supplied free of cost by a service recipient is not included in the ‘gross amount charged by the service provider’ for the purpose of 67% abatement under Notification No 15/2004. Taxand India discusses the case which led to this judgment.
The taxpayers in question were engaged in providing the taxable service of ‘commercial or industrial construction'. In the course of providing the service the taxpayer was in receipt of certain free supplies which were used for providing the construction service. The taxpayers availed the benefit of abatement under the Notification No 15/2004 however the taxpayers did not include the value of free supplies in the ‘gross amount charged’ for the purpose of valuation of taxable service provided by them under the Section 67 of the Finance Act.
The Revenue Authorities contended that Section 67 of the Finance Act provides that the value discussed in 'gross amount charged by the service provider' includes both monetary and non-monetary consideration. Therefore non-monetary 'payment', ie free supplies, is also a consideration.
The LB ruled in favour of the taxpayers and stated Section 67 of the Finance Act does not require inclusion of free supplies in the ‘gross amount charged’ for computation of value of taxable services. Any consideration, whether monetary or otherwise, should flow from the service recipient to the service provider. In this specific case the LB held that the value of free supplies should not be included in the ‘gross amount charged’ by the service recipient as it was neither monetary nor non-monetary consideration bringing any benefit to the service provider. Also the value of free supplies does not comprise a part of the ‘gross amount charged’ for availing the benefit under the Abatement Notification.
This decision is a crucial judgment with respect to the understanding of the expression ‘gross amount charged’ and ‘consideration’ not only with respect to construction services but other services as well. The judgment emphasises an important aspect that consideration is something, the benefit of which is enjoyed by/accrues to the service provider. This principle can be applied as a test to ascertain whether any of the obligations of the service recipient qualify as consideration or not.
This decision may not apply in a situation where the agreement requires the service provider to supply the goods at his own cost but later the service recipient provides the goods and recovers the value from the service provider.