GST - Inclusion of Free Supplies by the Contractee under Model GST Law
Posted on: 11/Oct/2016 3:39:31 PM
In a historic day for the Republic of India, The Constitution (One Hundred and First amendment) Bill, 2016 was passed by the Rajya Sabha on the 3rd of August, 2016 with the Lok Sabha approving the amendments on the 8th of August, 2016.
One month later, almost 18 states have approved the same in their State Assemblies, crossing the required threshold of 16. With this being done, and only the presidential assent remaining, it is virtually certain that Goods and Service Tax (hereinafter referred to as GST) may be implemented in India for the Fiscal Year 2016-17 with the Government setting a Target Date of 1st April 2017 for GST Roll Out .
Is this target realistic? In the very words of our Hon`ble Finance Minister Shri Arun Jaitley-it is better to have a Target than not have any. So with the impending onset of GST, it is prudent that the economy wakes up to the concept of GST. The Model Law on GST has been notified by the Government for Public Comments, and hence, this would be the proper time to go in and study the Model Law, and in general prepare ourselves as to how the same will impact existing Issues in Indirect Tax Law. Read on…
Inclusion of Free Supply of materials provided by Contractee-Service Tax
One of the pressing issues that existed in erstwhile Indirect Tax Legislation is the inclusion of Materials supplied by the ontractee/Buyer to the Contractor/Supplier, for execution of Works/Manufacture of Items.These are often referred to in trade parlance as Free of Cost (FOC) Supplies.
Let us take an Example: Imagine a Contract for Erection and Installation of Pipes by a Contractor for a network of Storage Tanks of a Large Corporation dealing in Petroleum and Petroleum Products. Usually, these Pipes and valves are provided by the Principal Contractor without any sale price/Sales Invoice. Their exact nature, type, chemical composition, tensile strength, which influences the determination of value such items are also neither known nor disclosed to the Service Provider/Contractor. By any stretch of imagination, such value of pipes cannot be included in the Value of the Service more precisely Works Contract Service.
However, the Department known for its counter-intuitive thinking usually contends that Materials are supplied by the Contractee as part of the impugned contract, is to be included in Gross Amount Charged for levy of Service Tax treating the same as Non-monetary consideration and hence, includible in value under Section 67(ii) of Chapter V the Finance Act, 1994.
The argument that such FOC Supplies are includible in the Gross Amount Charged is augment by the following decisions in favour of the revenue - Simplex Infrastructure Limited vs. Commissioner of Service Tax 2011 (21) S.T.R. 11 (Cal.) Jaihind Projects Ltd vs. CST Ahmedabad (2010 18 STR 650 (Tri - LB)) VPR Mining Infrastructure Pvt Ltd vs. CCE Hyderabad (2011 (23) STR 279 (Tri - Ban))
However, the above cases have been overruled and are not valid precedents based on the foregoing discussions. That Free Supply of Materials by the Service Receiver cannot be included in the Gross Amount Charged, as has been held in the following cases - Inox Air Products Ltd. [2012 (28) S.T.R. 570 (Bom.)] Larsen & Toubro Ltd., Chennai vs. Union of India-2007 (7) S.T.R. 123 (Mad.) Era Infra Engineering Ltd. vs. Union of India—2008 (11) S.T.R. 3 (Del.)
NM Goel and Co vs. STC (1989) 72 STC 368, Karyapalak Engineer vs. Rajasthan Taxation Board (2004) 136 STC 641
More recently, the Larger Bench of the Tribunal has in the case of BHAYANA BUILDERS (P) LTD. vs. COMMISSIONER OF SERVICE TAX, DELHI (2013 (32) S.T.R. 49 (Tri. - LB) in a similar situation had held that Free supplies, incorporated into construction (cement or steel for instance), even on extravagant inference, would not constitute non-monetary consideration remitted by service recipient to service provider for providing service,particularly since no part of goods and materials so supplied accrues to or is retained by service provider. Wherever monetary consideration is charged for providing taxable service and no non-monetary consideration forms part of agreement between parties, the value of taxable service would in such case be gross amount charged by service provider and paid by service recipient. Hence, contrary conclusion in Jaihind Projects Ltd. [2010 (18) S.T.R. 650 (Tribunal)] found to be incorrect, proceeding on flawed interpretation of Section 67 ibid.
The above information are based on the discussion paper on the Inclusion of Free Supplies by the Contractee under Model GST Law in ICAI Journal - October 2016 Edition.
