Value Of Materials Supplied Free Of Cost By Service Recipient For Manufacturing Not Taxable Under GST: Andhra Pradesh HC

The Andhra Pradesh High Court has recently reiterated that the value of materials supplied free of cost by a service recipient for manufacture of a product cannot be included in the taxable value under GST, setting aside a tax demand raised on a ready mix concrete supplier.

A bench of Justice Cheekati Manavendranath Roy and Justice Tuhin Kumar Gedela observed that when components required for manufacturing a product are supplied free of cost, their value is not liable to tax.

The Court referred to a 2018 circular issued by the Central Board of Indirect Taxes and Customs clarifying that moulds and dies owned by an original equipment manufacturer and supplied free of cost to a component manufacturer do not constitute a supply because no consideration is involved.

The circular also clarifies that while determining the value of supply made by the component manufacturer, the value of moulds and dies supplied free of cost should not be added, as the cost of such items is not incurred by the manufacturer and does not merit inclusion in the value of supply under the GST law.

Referring to this clarification, the Court observed, “Thus, as per the above clarification given in the said Circular, it is obvious that when certain components, which are required for manufacture of a product, are supplied free of cost to the service provider or manufacturer, the value of the same is not exigible to tax. In other words, it is made clear that the value of the material that issupplied free of cost for manufacture of a product that is ordered is not exigible to tax."

The ruling came while allowing a writ petition filed by Balaji Ready Mix Concrete challenging an order passed on March 27, 2023 by the Joint Commissioner (CT), Guntur. The authority had levied tax on materials supplied free of cost to the firm by its contractees for the manufacture of site mix and ready mix concrete.

Balaji Ready Mix Concrete, a partnership firm supplying site mix and ready mix concrete, had received cement, admixture, and waterproofing material from BGR Energy Systems Limited and RVR Projects Private Limited free of cost for preparing concrete at their project sites in Krishna district.

The total value of these materials was about Rs.19,83,01,024. While paying GST on its supplies, the firm did not include the value of these materials. The tax authority treated this as undervaluation and imposed a demand of about Rs.35,694,184 on the value of the materials supplied free of cost.

The petitioner contended that the materials were supplied free of cost by the service recipients, and therefore their value could not be included in the taxable value of its supply. It relied on the CBIC circular and on Supreme Court rulings that held that goods supplied free of cost by a service recipient cannot be included in the value of taxable services.

The High Court agreed and noted that the legal position on the issue was already settled. Referring to the Supreme Court's interpretation of valuation provisions in Commissioner of Service Tax v. Bhayana Builders (P) Limited (2018),the court quoted.

“A plain meaning of the expression 'the gross amount charged by the service provider for such service provided or to be provided by him' would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the 'gross amount' simply, because of the reason that no price is charged by the Assessee/service provider from the service recipient in respect of such goods/materials.”

Holding that the tax authority had imposed the levy contrary to the precedent, the court set aside the demand imposed on the petitioner and allowed the writ petition.

For Petitioner: Advocate Dr. M.V.K. Moorthy for Advocate M.V.J.K. Kumar

For Respondents: Advocate B.V.S. Chalapathi Rao, Advocate Y.V. Anil Kumar