#GSTCase-105- Value of Supply wherein material is supplied by the recipient of service- Imperative how agreement is drafted about who does what and how supplier is paid off
CA Arpit Haldia
Tejas Constructions & Infrastructure (P.) Ltd.  109 taxmann.com 311 (AAR – MAHARASHTRA)
How to calculate the taxable value as per section 15 of the Act wherein material is supplied by the recipient of service?
Applicant is providing construction service to Shri Gajanan Sahakari Soot Girni Maryadit (contractee), and consideration for the same will be paid to applicant subject to said conditions executed & completion of work shown as per the drawings, specifications & priced schedule of quantities. As per the agreement and Work Order, Cement, Mild Steel, Tor Steel and Structural Steel required for the work will be supplied by the contractee as per the rate decided. The applicant has submitted that the value of contract as per agreement is Rs. 600 lakhs which is inclusive of material and labour. They will be paid GST on the entire value of the contract and after payment of GST, the value of the materials supplied by the contractee would be deducted and the balance amount will be paid to the applicant.
- Observation by AAR
AAR observed that as per the terms of the contract value of outward supply of Construction services and GST will be paid on the total value of contract as per agreement, which is inclusive of material and labour. Further, certificate issued by the Architect (i.e. RA Bill) for the invoice to be issued contains total contract value and from that, the value of Cement, Mild Steel, Tor Steel and Structural Steel provided by the contractee was deducted.
AAR Relied upon Judgement of Apex Court in the matter of M/s. N.M. Goel & Co vs Sales Tax Officer, Rajnandgaon & … on 28 October, 1988 Equivalent citations: 1989 AIR 285, 1988 SCR Supl. (3) 657. In that case, appellant-company, a building contractor and registered as a dealer under the Madhya Pradesh General Sales Tax Act, entered into a Works Contract with the P.W.D. for construction of food grains godown and ancillary buildings. It was on item rate basis. In the tender submitted by the appellant, the prices of the materials to be used for construction including cost of iron, steel and cement were included. The P.W.D. had agreed to supply from its stores the iron, steel and cement for the construction work and to deduct the prices of materials so supplied and consumed in the said construction work from and out of the final bill of the appellant. On this set of fact the court has held that by use or consumption of materials in the work of construction, there was passing of the property in the goods to the Assessee from the PWD. By appropriation and by the agreement, there was a sale as envisaged in terms of clause (10) of the contract, and consequently such sale was liable to tax.
As per the provisions of section of GST Act, tax is payable on the entire contract value as per certificate issued by the Architect i.e. R A Bill without deducting the value of Cement, Mild Steel, Tor Steel and Structural Steel provided by the contractee.
Does the Judgement throws something new. Not really. It is the same thing that if any exclusion has to be made from valuation of a supply, it should be clear and express and there is a very thin line between the inclusion and the exclusion. It’s all in the writing as they say.
Judgement of AAR in the present case, supports the contention that not all and every free supply by the recipient would fall in the clutches of Section 15(2)(b) but only those supplies which are agreed upon to be provided by the supplier and are provided by the recipient and subsequently deducted from the value, would be included in the value of supply.
This contention is also fortified vide CBEC Circular No. 47/21/2018-GST Dated 8th June 2018 which further elaborates when moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer are leviable to tax?
It was clarified:
1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).
1.3 However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business.
The decision on similar lines have been given in the matter of Lear Automotive India (P.) Ltd.,  100 taxmann.com 311 (AAR – MAHARASHTRA), Nash Industries (I) (P.) Ltd.  103 taxmann.com 91 (AAAR-KARNATAKA), Shri Navodit Agarwal  104 taxmann.com 420 (AAR – CHHATTISGARH).