Free-Issue Materials: Do They Enter the Contract Value?

Free explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

An employer supplies cement and steel free of cost to its contractor. The contract price of ₹10 crore does not include them. Their market value is ₹2 crore.

Is the contractor's taxable value ₹10 crore or ₹12 crore?

The answer is not "it depends on the facts" in the vague sense. It depends on one specific fact, and it is written into the contract.

Section 15(2)(b) includes in value "any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable". The test is who was liable. Where the contract required the contractor to procure the materials and the employer procured them instead, their value is added. Where the contract always placed procurement on the employer, the contractor was never liable, and the value is not added.

The provision

Section 15(2)(b) has three cumulative elements:

1. an amount the supplier is liable to pay in relation to the supply;
2. which has been incurred by the recipient; and
3. which is not included in the price actually paid or payable.

All three must be present. Miss the first — because the supplier was never liable — and the sub-section does not engage, whatever the recipient spent.

The two contract structures

Structure A — contractor's scope, employer procures.

"The Contractor shall supply all materials required for the Works, including cement and steel. The Employer may, at its option, supply cement and steel to the Contractor, and the value thereof shall be recovered from the Contractor's running bills."

Here the contractor is liable to procure. The employer stepping in does not change the liability; it changes who does the buying. Section 15(2)(b) applies and the value is added — though in this drafting the recovery from running bills means the price already reflects it, so the effect is neutral.

Structure B — employer's scope.

"The Employer shall supply cement and steel at site, free of cost. The Contractor's scope excludes procurement of these materials. The Contract Price is exclusive of the value of Employer-supplied materials."

Here the contractor is never liable to procure. Element (1) of s.15(2)(b) fails. The value is not added.

The distinction is real and it is enforceable — but it must be in the contract from the outset. Redrafting after the materials have moved will not help, because the liability position at the time of supply is what matters.

The AAR line and the practical position

Advance rulings on free-issue materials have gone both ways, and the divergence tracks the contract drafting rather than any doctrinal disagreement. Rulings adding the value have generally involved contracts where the contractor's scope included the materials. Rulings excluding it have generally involved contracts where the employer's scope did.

For government and public sector contracts, the position is usually clearer than in private ones, because standard tender documents define scope precisely. The exposure sits in privately negotiated contracts with loose scope language.

The related questions

Is the employer's supply of materials itself a supply?

If the employer transfers title to the contractor for consideration, yes. If it is a genuine free issue where title remains with the employer and the contractor merely uses the materials in the works, there is no supply of goods by the employer — the materials are incorporated into the employer's own asset.

Where title does pass without consideration and the parties are unrelated, there is no supply under s.7(1)(a); but the employer's ITC on those materials may be affected by s.17(5)(h) if characterised as a disposal by way of gift.

What about equipment provided for use?

Providing scaffolding, cranes or site accommodation for the contractor's use is not a transfer of materials. Where the contract required the contractor to arrange them and the employer did instead, the same s.15(2)(b) analysis applies to the hire value.

What about employer-provided utilities?

Power and water supplied at site free of cost. Same test — was the contractor contractually obliged to arrange them?

Practical drafting

Where the intention is that free-issue material value should not enter the taxable value:

• state expressly that procurement of the specified materials is outside the Contractor's scope;
• state that title in those materials remains with the Employer until incorporation;
• state that the Contract Price is exclusive of them;
• avoid any clause permitting recovery of their value from the contractor;
• keep the material issue records separate from the running account bills;
• avoid describing them as "materials supplied to the Contractor" — the phrasing suggests a transfer.

Where the drafting is already unfavourable, quantify the exposure and take a documented position rather than discovering it in an audit.

Key takeaways

• s.15(2)(b) adds an amount only where the supplier was liable to pay it.
• Free-issue materials within the contractor's scope are added to value.
• Free-issue materials within the employer's scope are not.
• The determinant is the contract, at the time of supply.
• Title retention by the employer supports the exclusion.
• The same test applies to equipment, utilities and site facilities provided free.

Read next

• Inclusions in Value of Supply
• Works Contract: Why It Is Not a Composite Supply Question
• Transaction Value and the Sole Consideration Test
• Blocked ITC Under Section 17(5)

Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition). Advance rulings on this issue are not uniform; the contract drafting is decisive.