CA Sandesh Mundra

CA Sandesh MundraTaxability of free Issue Material has been a very controversial issue especially in the service tax regime. Earlier under the erstwhile positive list era of service tax, where the construction sector enjoyed the benefit of 67:33 rule (Notification No. 15/2004), the service providers started planning the transactions in a way that the major purchases were being shifted to the client account. This was with a view to reduce the impact of service tax on the activity. To plug the said loophole, department amended the notification 15/2004 vide notification no. 4/2005 so as to say that even if the client to whom the services are being rendered provides certain materials free of cost, the same would form part of the gross value of the consideration only for the purpose of calculation of service tax under the abatement scheme.

Now since the amendments under the act was made applicable immediately instead of only for the fresh contracts entered into after the amendment, all the contractors whose contracts were already under progress started facing the wrath of this notification from their clientele. This was so as no client was willing to reimburse the extra component of service tax on the free issue material by strictly interpreting the clauses of the agreement which in several cases were in their favour.

Thus several big contractors like L&T, Nagarjuna, Jaihind Projects etc, were not left with an option but to raise their voice against the department’s action of raising demands on the value of free issue material incorporated in their contracts. They thus decided to appeal. Although they were bound to loose at the first appellate forum knows for its biased attitude when it comes to protecting the government revenue, forgetting their quasi judicial responsibility. Interestingly the matters started receiving different interpretations by the difference benches of CESTAT. The president of CESTAT was thus not left with any option but to constitute a higher bench to resolve the matter and preserve the dignity of this forum. Finally the three judge bench of CESTAT in the case of Bhayana BHAYANA BUILDERS (P) LTD. vs. COMMISSIONER OF SERVICE TAX, DELHI reported at 2013 (32) S.T.R. 49 (Tri. – LB) delivered a thumping verdict in the favour of the assessee. The verdict was thumping as the judgement had read down the notification bringing in a mechanism to add value of free issue material by interpreting the same as against the principles laid down under Section 67 of the Finance Act, 1994. This truly is the characteristic of our legal hierarchy where Constitution is at the top, act comes second the rules are even below the acts. So unlike in the real life, here a child can-not go against his own father.

Now the moot question that arose was whether this judgement would even apply to the post negative list regime which now had a new rule mechanism for works contracts under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 , but with the same Section 67 in place.

Well we as professionals may normally tend to have a very protective attitude towards our clients and may thus not advice them to follow this judgement, for some of these reasons :-

o   It is a judgement of Tribunal which can be run down by high court or Supreme court in the future.

o   With new rule framework in place, which is now using different set of words, it will again be a battle of sorts to convince the lower authorities

o   Even on the principles of equity, it seems fine to add the value of free supplies in determining the service tax liability.

However, I am sure that some of our professional brothers, would like to take this gamble by advising their clients not to pay any service tax on value of free issue supplies as the act and in particular Section 67 has remained the same even now.

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  1. JOHN says:

    Thats fine Agarwal ji,

    service tax on free issue of materials again causing tax liability over the service recipient. for eg: if anyone building a house, using wood, rocks, sand etc or got free from any one or getting huge discount over the products. they have to pay again 4.944% of service tax – what a tragedy???
    so I think judiciary will solve this problem

  2. Ajay Pujara says:

    Dear Learned Readers,

    It is mentioned in this Article that “…It is a ‘judgement’ of Tribunal -CESTAT (‘constituted’ higher bench of three judges of CESTAT) in the case of BHAYANA BUILDERS (P) LTD. Vs COMMISSIONER OF SERVICE TAX, DELHI, reported at 2013 (32) S.T.R. 49 (Tri. – LB)….”.

    In light of the above, unless & untill this ‘judgement’ is “…run down by high court or Supreme court in the future….”, seating ‘silent & idle’ -by having/keeping such fear in mind, and that too -when we ‘believe’ that “…characteristic of our legal hierarchy where ‘Constitution’ is at the TOP, ‘act’ comes SECOND the ‘rules’ are even BELOW the acts…”.

    Therefore, I truly believe that in light of this ‘judgement’, if it is ‘adviced’ by any ‘Professional(s)’ -for not to pay Service Tax in any ‘such’ cases, should not / cannot be ‘considered/taken’ as ‘playing of Gamble’.

    I would definitely like to have/view some more coments on this please.

    Best Regards,

  3. jayagrawal says:

    I agree with the author. However I bag to differ from author’s opinion that inclusion of free issue material’s value for determining Service Tax liability is based on principal of equity.
    The tax is charged when there is a commercial transaction and ownership of the material/services undergoes changes. In case of free issue material the ownership of material does not change nor it involves any commercial transaction. In view of same it is not just and proper to include the value of Free issue material in the consideration.

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