GST India Forum – Goods and Services Tax (GST) in India › Forums › Bare Law › Sec 15 – Value of taxable supply
- CA Ashish BadalaModeratorApril 14, 2017 at 11:47 AMPost count: 184Topics: 181
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(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
(2) The value of supply shall include—
(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
(b) 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 for the goods or services or both;
(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and
(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.
Explanation.–For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.
(3) The value of the supply shall not include any discount which is given–
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if-
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
(4) Where the value of the supply of goods or services or both cannot be determined under sub-section – (1), the same shall be determined in such manner as may be prescribed.
(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.
Explanation.-For the purposes of this Act,–
(a) persons shall be deemed to be “related persons” if–
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
(b) the term “person” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.Priya MadrechaModeratorMay 23, 2017 at 12:07 PMPost count: 280Topics: 4
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Consideration is quid pro quo in a contract and price is the consideration expressed in money terms. Value is the price prevalent when a transaction takes place under controlled conditions. Valuation is the study of all those circumstances and assessment of steps to reverse or rectify the effect of contractual or other arrangements that may suppress or understate the value of the transaction.
“transaction value” which is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
This section applies to both goods and services supplied for purposes of valuation of the taxable supply.
Although contained in the CGST Act, the valuation method Provided in this section applies to UTGST, SGST, CGST and IGST. Valuation must be as Provided exclusively in this section.
‘Transaction value’ has not been defined but is Provided
in the section itself as the ‘price’. Price is consideration in money terms. Value, as stated earlier, is price that would be prevalent under controlled conditions. These conditions being:
• Transaction having a price
• Between persons not related
• And that price being the sole consideration
In other words, the exercise of valuation is aimed to recreate the above conditions and take any given transaction through to see the result – price – that would emerge. In addition to this price, certain express inclusions are Provided:
• Taxes levied under any other law(s)- this clause provides for exclusion of GST from the value and therefore all other taxes charged must be included in the value before quantifying GST. Taxes other than GST will cause cascading and this is deliberate;
• Any amounts paid by recipient that are obligation of supplier to pay- this clause removes any doubt about the inclusion of costs paid by the recipient to a third party in the value of supply by the supplier. The prescription in this clause is to identify any occasion where costs – in respect of which the supplier is the principal creditor / obligor – are diverted away from the principal such that the recipient directly makes the payment resulting in lowering the rightful value of supply. At the same time, this clause does not authorize every payment where the recipient is the principal creditor / obligor and require these also to be included in the value of supply. This point may be illustrated by an example of – payment of commission to agent for facilitating the supply. If the payment is ‘buying commission’ which is paid by the recipient, then the obligation to pay the agent is always of the recipient and does not require to be included in the value of supply. But if the payment is ‘selling commission’ which happens to be paid by the recipient, then the obligation to pay the agent being that of the supplier is required to be included in the value of supply. In this case (of selling commission), the underlying obligation is that of the supplier because it is the supplier who engages the agent to identify customers to make a supply. And if, somehow, the supplier manages to pass this obligation to pay the agent (the amount towards selling commission) to the recipient, then the price paid to supplier is not the true value of supply. Had the recipient refused to pay this selling commission to the agent, then the supplier would have paid the agent and made a corresponding increase in the price of the supply. It is this objective that is being achieved by this clause. There are several other examples that can be considered, please also refer to the discussion on value of supply for further illustration on this point.
(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.
• Incidental expenses charged by the supplier- this clause addresses a completely different aspect compared to the previous clause. Here, costs that the supplier incurs ‘at’ or ‘before’ supply is liable to be included in the value of supply. For example, cost of packing and transportation has been debated under the VAT laws whether they are incurred before or after the ‘transfer of property’. In GST, the point when title passes is irrelevant. To address the issues that had been so vigorously debated under VAT laws, this clause lays down that any cost that the supplier incurs including commission and packing which is charged to the recipient will be included in the value of supply. With this clause there is no opportunity the claim that certain charges recovered by the supplier ‘after supply’ are not to be included in the value of supply. If it is a charge recovered from the recipient, then the same is includible in the value of supply provided it is not incurred ‘after’ the completion of supply. An example of cost incurred after date of supply yet not liable to be included in the value of supply could be amount of input tax credit, considered as eligible in pricing of supply, but denied to the supplier by (say) section 16(4). And an example of a cost incurred by the supplier after the date of time and includible could be cost of in-warranty parts (actual or scientifically estimated provision) supplied after the date of supply is not to be excluded from the value of supply.
• Interest, late fee or penalty for delayed payment- – this would also have been a charge recovered by the supplier ‘after’ the supply that would not be includible in the value of supply but due to the express words of this clause will be included. Please refer detailed discussion regarding this clause under time of supply as ‘special charges’
• Subsidy realized by supplier on the supply- this clause expressly provides for the limited exclusion of subsidy from value of supply, that is, subsidy given by the Government alone is excluded from value of supply. This clause makes an interesting requirement that any transaction where there is any form of price-intervention that behaves like a ‘subsidy’ is liable to be included in the value of supply. In today’s economy, there are many transactions that ‘behave like subsidy’. For example, contribution of consideration by third party to contract, incentive to supplier given by brand holder linked to each supply, etc. Please note, extended credit terms to one customer and upfront payment terms to another customer cannot be interfered with by relying on this cause. There appears to be no room to accommodate include ‘notional additions’ by this clause because unlike Central Excise which relies upon ‘assessable value’ for quantifying the duty, GST relies upon ‘transaction value’ for quantification. Also, please note ‘no cost EMI’ and ‘cash back’ are a form of price-intervention by third party but not included in this clause because these forms of price-intervention is reaching the recipient of supply and not the supplier.
The value of supply will not include discount Provided:
• It is allowed before supply
• It is allowed after supply Provided that it is established in agreement linked to specific supplies and corresponding credit is reversed by recipient
If and only if the transaction value cannot be determined as above is reference to Valuation Rules permitted. Hence, recourse to the Valuation Rules is permitted only in the following circumstances:
• Supplies not covered by section 7(1)(a)
• Supplies covered by section 7(1)(a) but between related persons
• Supplies covered by section 7(1)(a) and not adjusted for aspects Provided by subsection 2
Government is free to notify tariff values in specific cases to determine the tax payable on such cases. This would prevail over the valuation Provided for in sub-section 1.
(a) Consideration not wholly in money
It is important to consider the difference between ‘free’ and ‘no consideration’. It is probably common to consider that these two are synonymous. At the outset, there can be no contract without consideration. Experts in Contract Law will see the gross illegality if one were to say that there is a contract but has no consideration in it. If the contract is valid, then there is nonmonetary consideration which is erroneously stated as having ‘no consideration’. It is impermissible that a contract subsists but lacks consideration. It is just impossible. Now, if there is a contract with non-monetary consideration, Rule 1 of the Valuation Rules comes into operation. Although this rule states that it applies when ‘consideration is not wholly in money’, it applies when the consideration is partly in money or wholly in non-monetary form. This rule provides that the value of supply “shall be” and not be “based on” or “guided by”, so that mandatory nature of the prescription of this rule can be appreciated. The value of supply shall therefore be:
(i) Open market value (OMV)– which is the ‘full value in money payable by an unrelated person as its sole consideration at the same time as the supply under inquiry. OMV is a new phrase but not too far from its scope and covered from its explanation. Transaction value is price of the supply under inquiry and open market value is the price of the same supply but without the circumstances that impairs the use of transaction value for quantification of tax. OMV is not comparable price to unrelated customer. The definition of OMV does not allow comparison of supplies in comparable circumstances. It only requires supply ‘at the same time’. So, OMV is not price in another ‘comparable’ supply at a close proximity in time. This provision does not provide the manner of adjustments to be made to overcome the effect of those disqualifying circumstances present but simply states that OMV ‘shall be’ the value of the supply. As such, this clause is not of much avail in addressing the deficiency which was the reason for arriving at the Rules as no resolution was possible in the section itself.
(ii) Sum total of monetary consideration and ‘money-equivalent’ to consideration not in money – here two aspects are involved – one, to establish that OMV is not available (a task that will be discussed shortly) and two, to arrive at the money value of the nonmonetary consideration. Having identified that OMV is not very specific to be able to clearly be determined, it becomes more acute to establish that OMV is not available before proceeding to clause (ii). Onus lies on the one who asserts – the taxable person would have admitted that the circumstances of section 15(1) are not fulfilled and warrants recourse to the Rules but having arrived at the rules, the onus remains with the taxable person to establish that OMV is not available. OMV is not comparable alternate price. Supplies to unrelated persons are always taking place although in different ‘commercial circumstances’ which is not Provided in the definition of OMV. As such, overcoming the first aspect – OMV not available – is a challenge which tax administration can be stubborn about. Then, arriving at money value of non-monetary consideration is not guided by requirement to use standards of Cost Accounting, etc. Rule of reasonableness is the only guide for arriving at the value which can be shot down by tactic of arbitrariness of the tax administration. Suitable guidance is much needed in this entire exercise
(b) “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.
(iii) Value of supply of ‘like kind and quality’ – here again two aspects are involved – one, to establish that clause (a) and (b) are not determinable and two, to identify ‘likeness’ of kind and quality. This is a salutary method where there is much experience in Customs Valuation in successfully arriving at the comparable value. Subjectivity must be overcome which is possible by applying data that is reliably substantiated rather than arbitrary factors. The definition provides guidance on the manner of finding this ‘likeness’ for identifying whether the comparable are really comparable without being subject to any arbitrariness in tax compliance or tax administration
(iv) Sum total of monetary consideration and value determined by rule 4 or rule 5 in respect of consideration not in money – similar to the previous clause, the first of the two aspects – value is not determinable as above – is the one that presents the greatest difficulty. Expect that it is crude to import values from rule 4 or 5, the rest of this clause is simple in its application. Please note that rule 4 must be applied first and then rule 5, more on that in the discussion of those rules. Some illustrations are Provided in rule 1 that may be referred for understanding its application
Now, reverting to the discussion on a valid contract but having non-monetary consideration, it is important to understand some of the common instances when the supply is claimed of this nature, namely:
• Warranty supply of parts to end customer through a dealership – the parts are supplied ‘free’ to the end customer. At first, it is important to determine whether the parts replaced are actually covered by warranty in the supply contract or whether there is any replacement request entertained for out-of-warranty equipment for brand building exercise. Then, the warranty obligation lies only with the original equipment manufacturer (OEM) but the actual replacement is carried out at the dealership. When a warranty claim is made with the dealership by the end customer, the dealer seeks approval from OEM. Only after ‘in-warranty approval’ is received from OEM does the dealer replace the part. Now, the warranty replacement between OEM to end customer is not liable to GST not because it is free but because the price for the replacement is built into the price of the equipment originally supplied and therefore tax has already been paid by OEM. However, the dealer who replaces the part does not carry any role in the warranty fulfilment. In fact, the dealer ‘delivers’ the part to customer but ‘supplies’ it to OEM. Hence, there is another supply embedded here between dealer to OEM because dealer uses a tax-paid part from his inventory to replace it for the end customer. Alternatively, the OEM issues credit note to dealer for the part used in the warranty replacement. Reference may be had to Mohd. Ekram Khan’s decision of SC in 144 STC 542. As such, warranty involves two supplies and neither of which are free. One is tax pre-paid and another is currently taxed not involving end customer
• Physician’s sample of drugs Provided through sales representatives – these drugs are distributed by the physician during clinical consultation with patients. As such, the fee paid by patient to physician is one supply (whether taxable or exempt in GST) but the supply by pharmaceutical company to physician is another supply. If the company includes the cost of such samples in the price of units sold, then there may be no requirement to again impose GST based on OMV on the samples. If it is established that there is a non-monetary consideration flowing to the supplier then, samples will be liable to GST as determined by rule 1. This would be true not only of drugs but samples of any kind that are permanently given away. As regards physician’s samples, there is raging debate that Courts are currently engaged in addressing due to the far reaching implications and no final outcome has yet been reached in this regard
• Defaced samples of garments given to supplier by brand-holder – in comparison with physician’s samples, defaced samples are those which are ‘not suited’ for resale or end-use. Such kinds of samples are given in B2B transactions for helping suppliers to study the expected final product to prepare quotation for further orders. As these samples have been deliberately defaced and rendered unsuited for resale or end-use, there can be no argument that consideration flows from recipient of defaced samples back to brand-holder
• Impairment of assets accounted in books – as per AS 28 (Ind AS 36) where impairment provision is to be made or reversed every time the assessment is done, the implication in GST needs to be kept in mind as to whether there is a supply and whether there is any corresponding impact of credit denial u/s 17(5)(h) in respect of these assets. No view on the liability of impairment is stated in this background material. Readers may cautiously consider this issue.
• Leased car Provided by employer disclosed in Form 12BA as perquisite – the reporting of perquisites admits a personal element involved in the enjoyment of the company car and the supply that is excluded in sch III is the service ‘by’ employee ‘to’ employer. But the present case is of supply of leased car ‘by’ employer ‘to’ employee which is not covered by sch III. By this admission in Form 12BA, GST becomes applicable but the valuation will not be as adopted in Rule 3 of Income-tax Rules but by GST Valuation Rules
• Free-issue-material Provided by client to contractor – is admittedly not a supply in itself, but the question that arises is whether there is any consideration flowing from the client to the contractor vis-à-vis the free-issue-material (FIM). Care should be taken in the drafting of the contract whether the work was awarded for a full rate and then deductions are made towards FIM by reducing the running-account-bill of the contractor or whether the contract itself was awarded for the reduced rate. Reference may be had to NM Goel’s decision 1989 AIR 285 (SC) in relation to sales tax and Bhayana Builders decision 2013 (9) TMI 294 (CESTAT) in the context of service tax. Please note that FIM is not a open-shut case of having no GST impact due to the changes made in the Act compared to the Model Law published earlier but needs to be carefully considered to ensure that this is not regarded as extraneous consideration to be included in valuation
These illustrations do not cover all possible scenarios but lay down some pointers that need to be considered while determining the valuation and GST impact of various transactions.
(b) Supply between related persons (Rule 2)
A supply between related persons or between distinct persons (with same PAN) is prima facie not fulfilling the requirements of section 15 to admit the transaction value for quantification of GST. In such cases, the value of supply will be:
(i) Open market value – please refer to previous discussion
(ii) Value of supply of ‘like kind and quality’ – please refer to previous discussion
(iii) Value determined by rule 4 or rule 5 – please refer to subsequent discussion
The proviso to this rule is of significance where it is the recipient, who are entitled to credit, the value declared in the invoice is deemed to be OMV. In other words, in a case of supply eligible by this rule – related parties or distinct persons – the supplier is entitled to unquestioned admittance of ‘any price’ that may be charged. This provision appears to accommodate internal preferences of the parties where the tax paid is revenue neutral. However, caution is advised in taking recourse of this proviso and charging a price lower than cost.
In the case of inter-branch supply of services, valuation of these supplies will involve additional tax due to costs such as salary, amortization, etc which do not involve any input tax credit. For example, if a Head Office incurs certain entity-level expenses that are common to all registered taxable persons in other States, it is not permissible for the HO to retain the whole of these common credits due to the limitation in the language of section 16(1) – used by him in his business – although a portion of this credit may still be available. Currently, such HOs are registered as ISD under service tax but this may not be the case in GST. Please refer to discussion in section 19 for some analysis of these issues. Now, surely the HO is not ‘merely an office receiving invoice for services’ but is actually the ‘seat of management and control’ performing very significant services that are supplied to all branches. HOs ought not to continue as ISD but recognize the nature of the supply of services to all branches. And on this basis, apply these Rules for quantifying tax to be discharged. The proviso in this rule does not authorize payment of tax on cost because the value to be determined under this rule is OMV or else like-kind-and-quality or else rule 4 / 5 value. Hence, HO may be required to invoice for its services appropriately and not distribute credit as ISD.
(c) Supply through agent (Rule 3)
Every supply involving an agent is not a taxable supply. As discussed in chapter III, supply by principal and agent inter se all though merely a channel to supply to the end customer is treated as a supply in sch I where the goods are handled by the agent or principal. Please note that this rule is applicable only in case of ‘supply of goods’ and not ‘supply of services’ or ‘supply involving goods treated as supply of services’. When this rule is applicable, the value of supply will be:
(i) open market value or ‘at the option’ of supplier 90% of the price charged for goods of ‘like kind and quality’ by the agent– this rule provides for an ad hoc reduction of 10% from the price otherwise charged to accommodate the incentive or margin left for the agent in pricing. Where margins are lower than 10%, this rule can cause great anguish. But, discarding the use of this clause is not permitted freely.
(ii) value determined by rule 4 or rule 5 – please refer to subsequent discussion
Transactions treated as supply by Schedule I of the CGST Act, which need to be subjected to tax requires a valuation mechanism. Principal and agent do not ipso facto become related persons for rule 2 to be applicable to them.
Please note that agency cannot be inferred but must be express or implied. Agency may be understood as ‘delegated authority’ and ‘detached consequences’. Within the scope of agency, the Principal will be obligated to third parties without any limit by actions of the Agent. As such, the authority to of the Agent to act is delegated by the Principal and the Agent is not obliged to the consequences arising from his actions, provided they are within the scope of the agency. Undisclosed Principal still obligates the Principal because the lack of disclosure is to the third party and not that the Principal is unaware of the possible obligations accruing.
(d) Cost based value (Rule 4)
Where cost is used as a base for determining the value of supply and when any of the more specific methods prescribed are unavailable for specific reasons, this rule may be applied. It provides that the value will be ‘cost plus 10%’. Please note that this rule applies to both goods and services supplied.
Every supply claimed to be free but involving non-monetary consideration faces the threat of tax being determined on this method. Cost Accounting Standards may be relied upon to determine cost for purposes this rule. Please refer to the few illustrations discussed in previous sections such as warranty replacement, physician’s samples, etc., tax administration may be kept at bay if valuation is not lower than ‘cost plus 10%’. Although this method appears simple, it is important to note that only when it is established that the other more specific rule and the specific methods under those rules are unable to yield an acceptable value for the supply under inquiry.
In respect of supply of services (also transactions involving goods treated as supply of services), the supplier is permitted to apply rule 5 instead of rule 4, if that were more favourable.
(e) Residual valuation (Rule 5)
Where value cannot be determined by any other method, this rule authorizes the use of ‘reasonable means to arrive at the value. It is important to consider that these reasonable means must be commensurate with the principles of section 15.
Supplies which are currently under some form of abatement of value are found in this rule Where cost is used as a base for determining the value of supply and when any of the more specific methods prescribed are unavailable for specific reasons, this rule may be applied. It provides that the value will be ‘cost plus 10%’. Please note that this rule applies to both goods and services supplied.
(f) Specific supplies (Rule 6)
Supplies which are currently under some form of abatement of value are found in this rule, namely:
(i) supply of services involving sale/purchase of foreign currency, the value of supply will be:
(a) option a – difference between buying-selling rate and the reference rate published by RBI. Where reference rate is not available, 1% of gross Indian Rupee value of the transaction. And where the conversion is not into Indian Rupees, then 1% of the lesser of the Indian Rupee equivalent of each currency exchanged
(b) option b – 1% of gross amount upto Rs.1 lac, 1/2% after Rs.1 lac upto Rs.10 lacs and 1/10% after Rs.10 lacs. This option (b) once exercised cannot be withdrawn during the financial year
(ii) supply of services by travel agent of booking of tickets for air-travel, the value of supply will be 5% of basic domestic fare or 10% of basic international fare. Please note that commission to the travel agent may flow from passenger or airline or any other person and the value determined here will be the tax for all the sources of commission
(iii) supply of services in relation to life insurance, the value of supply will be gross premium reduced by investment allocation, in the case of single premium policy will be 10% of premium and in all other cases will be 5% of first year’s premium and 12.5% for other year’s premia. This rule will not apply to premium related to coverage for risk-of-life
(iv) supply of services of person dealing in second-hand goods, the value of supply will be difference between purchase price and selling price. Please note ‘second-hand goods’
refers to goods used or otherwise employed in some process without causing any change in their nature. Used goods and not the same as pre-owned goods which need not have been put to use. For example, a motor car where mark of registration has been assigned by RTO, even if left unused for long time will not be able to satisfy that is has not been used. And similarly, the odometer reading showing ‘0 kms’ but duly registered by RTO will not override the conclusion that it is used. Please note that most appropriate tests for identifying whether the goods have been used or not may be examined. Also, this rule does not apply only to ‘supply of second-hand goods’ but to supply of services of person dealing in second-hand goods. In other words, disposal of leased car will also come within the operation of this rule
(v) supply of voucher, the value will be the redemption value of the voucher. Please note voucher includes coupon, stamp, token, etc. Please refer to the discussion on vouchers under section 13 for the various forms that voucher can take including digital vouchers to which this rule will apply
(vi) supply of services between distinct persons, that are notified by Government and where no input tax credit is availed will be NIL. Please note that the implications of denial of credit u/s 17(2) in case of supply being exempt will be attracted in these cases
(g) Service of pure agent (Rule 7)
Agency supplies are different from ‘pure agent’ in relation to valuation. This rule applies only to supply of services. It provides for the exclusion from valuation of any supply of certain costs and expenses if and only if the following tests are satisfied:
(i) contract of supply (actual or implied) subsists between a third party and beneficiary of supply
(ii) actual recipient uses the supply for the purposes of the beneficiary
(iii) beneficiary of supply liable to pay third party (due to contract)
(iv) beneficiary authorizes (actual or implied) payment to third party by actual recipient
(v) beneficiary aware that supply is by such third party and not by actual recipient claiming reimbursement
(vi) invoice of actual recipient indicates separately the reimbursement claim
(vii) actual recipient claims actuals only from beneficiary
(viii) actual recipient supplies (goods or services or both) independent of the reimbursementsupplies
Please note that these eight clauses appear to overlap each other in some way but the following key as aspects may be considered:
• there is a payment made to third party by a payer
• payer is a supplier of goods or services or both to a beneficiary (client)
• underlying obligation to pay third party is of the beneficiary (client)
• payment by payer is to discharge beneficiary’s obligation toward third party
• third party enjoys recourse to beneficiary in case of non-payment by payer
For example, income-tax liability of a client is paid by the CA, the above test is satisfied as follows:
• there is a payment made to third party by a payer CA pays the income-tax amount to the tax department
• payer is a supplier of goods or services or both to a beneficiary (client) CA is otherwise providing tax consultancy services to the client (tax assessee)
• underlying obligation to pay third party is of the beneficiary (client) Obligation to pay the income-tax amount is always of the client (tax assessee)
• payment by payer is to discharge
beneficiary’s obligation toward third party Payment of income-tax amount to tax department is deposited against PAN of client (tax assessee) even though the amount may be transferred from CA’s bank account
• third party enjoys recourse to beneficiary in case of non-payment by payer In case CA defaults in the payment to tax department, recovery action will lie only against the client (tax assessee) and never against the CA however much the CA may have contractual accepted with the client to pay tax promptly
Now, the above example may be re-examined against the clauses referred to in this rule:
(i) contract of supply (actual or implied) subsists between a third party and beneficiary of supply Only an obligation exists between client
(beneficiary) and Government (third party)
(ii) actual recipient uses the supply for the purposes of the beneficiary CA (recipient) uses the discharge of tax for benefit of client (beneficiary)
(iii) beneficiary of supply liable to pay third party (due to contract) Client (beneficiary) liable to pay Government (third party)
(iv) beneficiary authorizes (actual or implied) payment to third party by actual recipient Client (beneficiary) authorizes payment to Government (third party) by CA (recipient)
(v) beneficiary aware that supply is by such third party and not by actual recipient claiming reimbursement Client (beneficiary) aware that tax belongs to Government (third party) and not CA
(vi) invoice of actual recipient indicates separately the reimbursement claim CA (recipient) issues invoice for tax consultancy PLUS taxes paid
(vii) actual recipient claims actuals only from beneficiary CA (recipient) issues invoice for taxes paid at actuals from client (beneficiary)
(viii) actual recipient supplies (goods or services or both) independent of the reimbursement-supplies CA (recipient) supplies tax consultancy independent of reimbursement of tax claimed
Due to the overlap of the eight clauses in this rule, there appears to be some concern but the result will not vary however it is applied. Now, take another example of travel expense claimed by CA from a client where the travel is incurred exclusively for the benefit of the client
• there is a payment made to third party by a payer CA pays the travel agent for tickets of auditteam staff who travelled to client’s factory
• payer is a supplier of goods or services or both to a beneficiary (client) CA is otherwise providing audit services to the client
• underlying obligation to pay third party is of the beneficiary (client) Obligation to pay travel agent is of the CA and not of the client
• payment by payer is to discharge
beneficiary’s obligation toward third party Payment to travel agent is to discharge the bills issued to CA
• third party enjoys recourse to beneficiary in case of non-payment by payer Travel agent cannot claim payment from client in case of delay / default by CA
As such, travel cost incurred by CA even though claimed as actuals will not be excluded from valuation as a pure agent. Now in the same example, if the travel agent is identified by the client with instructions to CA to send travel details for making necessary bookings, the above tests may be applied and since the bill for the tickets will be issued in the name of the client by the travel agent, there is no question of CA claiming any travel cost and this application of this rule does not arise.
(h) Exchange rate to be used (Rule 8)
Transactions undertaken in foreign currency must be translated into Indian Rupees. Due to the availability of multiple exchange rates such as RBI rate, SBI rate, FIDAI rate, Customs rate, etc. this rule prescribes that rate of exchange will be ‘RBI rate’ and the date of the rate of exchange will be the time of supply under section 12 and 13, respectively.
Transaction value: Recourse to Rules
A. Where value cannot be determined u/s 15(1), i.e., when:
1. Price is not the sole consideration
2. Supplier-recipient are related persons: Recourse to Rules even if the SupplierRecipient relationship:
• Did not influence the price;
• Precedes agreement to the supply;
• Has no bearing on pricing;
• Has no bearing on Agreement to the Supply;
• Has no relevance to the Supply;
• Was to meet with different criteria or purpose;
(Rules will apply both ways – supplier to recipient and recipient to supplier)
B. In case of notified supplies
15.3. Comparative Review
Valuation Rules in Customs, Central Excise and Service Tax have been tested for applicability in various circumstances. All that experience and judicial interpretation may be brought to provide a good understanding of the words used in these Rules and the purpose for such usage. They are:
— Customs Valuation (Determination of Price of Imported Goods) Rules, 2007
— Customs Valuation (Determination of Price of Export Goods) Rules, 2007
— Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000
— Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008
— Service Tax (Determination of Value) Rules, 2006
Illustrations on Section 15 read with valuation rules:
Q1. Mrs. Jaya purchases a Samsung television set costing Rs. 85,000 from Giriyas, in exchange of her existing TV set. After an hour of bargaining, the shop manager agrees to accept Rs.78,000 instead of his quote of Rs.81,000, as he would still be in a profitable position (the old TV can be sold for Rs.8,000).
Ans. Where the price is not the sole consideration for the supply, the ‘open market value’ would be the value of the supply. Therefore, Rs. 85,000 would be the value of the supply. The supplier Giriyas would also be liable for paying tax on receipt of the old TV from Mrs. Jaya, as it would amount to an inward supply from an unregistered person. Thus, he would be liable to pay tax on the open market value applicable on such TV i.e., on Rs. 8,000.
[Section 15(4) r/w Rule 1(a) of Valuation Rules]
Q2. Mr. Mohan located in Manipal purchases 10,000 Hero ink pens worth Rs.4,00,000 from Lekhana Wholesalers located in Bhopal. Mr. Mohan’s wife is an employee in Lekhana Wholesalers. The price of each Hero pen in the open market is Rs.52. The supplier additionally charges Rs.5,000 for delivering the goods to the recipient’s place of business.
Ans. Mr. Mohan and Lekhana Wholesalers would not be treated as related persons merely because the spouse of the recipient is an employee of the supplier, although such spouse and the supplier would be treated as related persons. Therefore, the transaction value will be accepted as the value of the supply. The transaction value includes incidental expenses incurred by the supplier in respect of the supply up to the time of delivery of goods to the recipient. This means, the transaction value will be: Rs.4,05,000 (i.e., 4,000,000 + 5,000).
[Section 15(1) r/w Section 15(2)]
Q3. Sriram Textiles is a registered person in Hyderabad. A particular variety of clothing has been categorised as non-moving stock, costing Rs.5,00,000. None of the customers
were willing to buy these clothes in spite of giving big discounts on them, for the reason that the design was too experimental. After months, Sriram Textiles was able to sell this stock on an online website to another retailer located in Meghalaya for Rs.2,50,000, on the condition that the retailer would put up a poster of Sriram Textiles in all their retail outlets in the State.
Ans. The supplier and recipient are not related persons. Although a condition is imposed on the recipient on effecting the sale, such a condition has no bearing on the contract price. This is a case of distress sale, and in such a case, it cannot be said that the supply in lacking ‘sole consideration’. Therefore, the price of Rs.2,50,000 will be accepted as value of supply.
[Section 15(4) r/w Rule 1(d) r/w Rule 5 of Valuation Rules]
Q4. Rajguru Industries stock transfers 1,00,000 units (costing Rs.10,00,000) requiring further processing before sale, from Bijapur in Karnataka to its Nagpur branch in Maharashtra. The Nagpur branch, apart from processing units of its own, engages in processing of similar units by other persons who supply the same variety of goods, and thereafter sells these processed goods to wholesalers. There are no other factories in the neighbouring area which are engaged in the same business as that of its Nagpur unit. Goods of the same kind and quality are supplied in lots of 1,00,000 units each time, by another manufacturer located in Nagpur. The price of such goods is Rs.9,70,000.
Ans.: In case of transfer of goods between two registered units of the same person (having the same PAN), the transaction will be treated as a supply even if the transfer is made without consideration, as such persons will be treated as ‘distinct persons’ under the GST law. The value of the supply would be the open market value of such supply. If this value cannot be determined, the value shall be the value of supply of goods of like kind and quality. In this case, although goods of like kind and quality are available, the same may not be accepted as the ‘like goods’ in this case would be less expensive given that the transportation costs would be lower. Therefore, the value of the supply would be taken at 110% of the cost, i.e., Rs. 11,00,000 (i.e., 110% * 10,00,000).
[Section 15(4) r/w Rule 2(b) & (c) r/w Rule 4 of Valuation Rules]
Q5. M/s. Monalisa Painters owned by Vasudev is popularly known for painting the interiors of banquet halls. M/s. Starry Night Painters (also owned by Vasudev) is engaged in painting machinery equipment. A factory contracts M/s. Monalisa Painters for painting its machinery to keep it from corrosion, for a fee of Rs.1,50,000. M/s. Monalisa Painters sub-contracts the work to M/s. Starry Night Painters for Rs.1,00,000, and ensures supervision of the work performed by them. Generally, M/s/ Starry Night Painters charges a fixed sum of Rs.1,000 per hour to its clients; it spends 120 hours on this project.
Ans.: Since M/s. Monalisa Painters and M/s. Starry Night Painters are controlled by Mr.
Vasudev, the two businesses will be treated as related persons. Therefore, Rs.1,00,000 being the sub-contract price will not be accepted as transaction value. The value of the service would be the open market value being Rs. 1,20,000 (i.e., Rs. 1,000 per hour * 120 hours) *.
Note: This view is based on the grounds that there are no comparables to this supply.
[Section 15(4) r/w Rule 2(a) of Valuation Rules]
Q6. Prestige Appliances Ltd. (Bangalore) has 10 agents located across the State of Karnataka (except Bangalore). The stock of chimneys is dispatched on Just-In-Time basis from Prestige Appliances Ltd. to the locations of the agents, based on receipt of orders from various dealers, on a weekly basis. Prestige Appliances Ltd. is also engaged in the wholesale supply of chimneys in Bangalore. An agent places an order for dispatch of 30 chimneys on 22-Sep-2017. Prestige had sold 30 chimneys to a retailer in Bangalore on 18-Sep-2017 for Rs. 2,80,000. The agent effects the sale of the 30 units to a dealer who would effect the sales on MRP basis (i.e., @ Rs.10,000/unit).
Ans.: The law deems these supplies between the principal and agent to be supplies for the purpose of GST. Therefore, the transfer of goods by the principal (Prestige) to its agent for him to effect sales on behalf of the principal would be deemed to be a supply although made without consideration. The value would be either the open market value, or 90% of the price charged by the recipient of the intended supply to its customers, at the option of the supplier. Thus, the value of the supply by Prestige to its agent would be either Rs. 2,80,000, or 2,70,000 (i.e., 90%*10,000 * 30), based on the option chosen by Prestige.
[Section 15(5) r/w Rule 3(a) of Valuation Rules]
Q7. Mr. & Ms. Mehta purchase 10 gift vouchers for Rs. 500 each from Crossword, and 5 vouchers from Four Fountains Spa costing Rs. 1,000 each, and gives them as return gifts to children and their parents for their son’s birthday party. The vouchers from Four Fountains Spa had a special offer for couples – services for both persons at the price chargeable to one.
Ans. The value of the supply would be the money value of the goods redeemable against the voucher. Thus, in case of vouchers from Crossword, the value would be Rs. 5,000 (i.e., Rs.500 * 10) and the value of vouchers in case of Four Fountains Spa would be Rs. 10,000 (i.e., Rs. 1,000 * 2 * 5).
[Section 15(5) r/w Rule 6(6) of Valuation Rules]
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