Valuation under GST– Various issues and possible solutions

Introduction:

Valuation of any supply is a critical aspect under GST. For that matter it is important in any tax law. After determining the levy and tax rate on any supply next question raises as to on what value tax should be paid. In GST it is called as transaction value.

Why it is critical?

Generally, the amount of tax paid is as a percentage on the value of supply. If there is any reduction in the value of supply, tax liability reduces and if there is any increase in the value of supply, tax liability inflates. The quantum of tax liability is always depending upon value on which tax is to be paid. It is often that evaders evade the tax by showing lesser transaction value.

It is settled position of the law that machinery for assessment/computation provision is a sine qua non for operability of the charging provision otherwise charge of tax will fail. Govind Saran Ganga Saran (1985) 060 STC 0001 (S.C.). Recently the above principal is reiterated in context of service tax law also Supreme Court in case of CCE Vs Larsen & Toubro Ltd 2015 (39) S.T.R. 913 (S.C.).

How to value a transaction?

Section 15 of CGST Act, 2017 read with Rules 27 to 35 defines the scope of valuation and prescribes the items which needs to be added or deducted for determining the value of supply under GST along with various valuation methods under certain circumstances.

“Transaction value” for supply of any goods or services or both should be the price actually paid or payable for such supply of goods or services or both where price is the sole consideration and supplier and recipient both are not related parties. As per Section 15(4) of GST, 2017 where there is no price for transaction, both are related or where the price is not sole or only the consideration, valuation for such supplies shall be determined as per Rules. As per Section 15(5) of GST Act, 2017 irrespective of transaction value/price paid or payable, the Government can fix value through Rules, 2017 on which taxpayer can discharge his liability.

The following should be included or excluded to the value of supply in determining Transaction Value.

Various issues involved in valuation are as follows:

1. When the price is not sole consideration, transaction value is not applicable, and we must refer the valuation Rules. There is no Rule, like Rule 6 of the Central Excise Valuation Rules prescribing the method for determination of additional value in case the price is not sole consideration.

2. In case the consideration is not received wholly in money, as per Rule 27 we must identify the open market value for such supply. For the services it is not possible to identify open market value. It is also difficult to identify value of like kind & quality services. So for the services, it is difficult to identify the market value and Rule will become redundant.

3. Section 15(4) of GST Act prescribed Rule making power on prescribing the value for certain supplies. Accordingly Rules 31 to 34 were framed prescribing the value for certain supplies. However, Explanation 2 to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 prescribed value of supply in the case of sale of residential flat by builder as 2/3rd of total consideration.

4. Rules were empowered to prescribe value, in such case Notification cannot prescribe the value. Notifications cannot override Rules. Conflict between Rules vis-à-vis Notification, Rules will prevail.

5. Hon’ble Delhi High Court in the case of Suresh Kumar Bansal Vs UOI 2016 (43) S.T.R. 3 (Del.)  held that levy of service tax was ultra vires as there was no statutory mechanism to ascertain value of services component in the case of sale of flat. Further it was held that abatement to extent of 75% by notification cannot substitute lack of statutory machinery provisions to ascertain value of services involved in composite contract.

6. The same challenge is very much possible in the GST also as the valuation for builder in case of sale of flat is prescribed in the Notification. The same challenge on valuation is applicable even for levy of GST on flats given to land over in consideration to land as Notification prescribed the value as similar flat value.

7. Material supplied by the service receiver/contractee to service provider/contractor at free of cost is not liable for GST in the hands of service provider. Only the care must be taken is that contract should specifically mention that list of materials that are going to be given by service receiver/contractee, it is in his scope & obligation of receiver and price is exclusive of free supplied material.

8. The above logic equally applicable for moulds, jigs and dies supplied by the ‘Original Equipment Manufacturer’ (OEM) to job worker free of cost. Such value or amortised value shall not include in value of job work charges for the payment of GST when contract provides these are going to be supplied by OEM at free of cost.

9. The hon’ble Supreme Court in the case of UOI vs M/s. Intercontinental Consultants and Technocrats Pvt. Ltd 2018-TIOL-76-SC-ST & CST Vs M/s. Bhayana Builders (P) Ltd 2018 (10) G.S.T.L. 118 (S.C.) have held that consideration charged by service provider for such service is only the value for assessment & nothing else.

10. Section 15 of GST Act, 2017 also uses similar expression that GST is applicable on consideration charged for “Said Supply”. The spirit/rationale of above judgments shall be implemented in GST also. Accordingly, various reimbursable expenditure should not be form part of value for the purpose of levy of GST as these are not price paid for supply.

11. Even if it is included, exclusion shall be provided as a pure agent under Rule 33 of CGST Rules, 2017 considering the beneficial provision cannot be denied with too technical interpretations by authorities & with impossible conditions in facts & circumstances of each case.

12. Electricity charges collected by landlord from tenant for the payment of same to DISCOM/Electricity Board not includible in gross value of Renting of Immovable Property service on the ground that:-
    • Power charges are not consideration for supply of renting service in hands of land lard
    • It is covered in State Jurisdiction vide Entry 53 of List-II (State List) of Seventh Schedule to Constitution of India.
    • Accordingly, States are levying and collecting electricity duty on power charges.
    • Further Electricity charges specifically exempted from GST vide serial no. 104 of Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017
    • The Government cannot grant a benefit on the one hand and take it away on the other.
    • What is not taxable directly, it cannot be taxed indirectly.

13. The above logic is equally applicable in case power generated through DG set, supplied to tenants and recovered actual power charges.

14. CCE, Pondicherry v. Acer India Ltd. - 2004 (172) E.L.T. 289 (S.C.) held that the definition of ‘transaction value’ must be read in the text of charging provision and context thereof and not de’hors the same. What is not taxed directly cannot be taxed indirectly also by implication or inference running counter to charging & valuation provisions.

15. In the case of D.J Malpani Vs CCE 2019 (366) E.L.T. 385 (S.C.) hon’ble Supreme Court held that Dharmada (Charity) amount collected from buyer voluntarily or mandatorily for supplying any product should not form part of transaction value provided such collected amount has been used for charity purposes and also it is not a consideration received for providing such supply. Amount not paid as valuable consideration for goods cannot go to make transaction value.

16. DMF (District Mineral Foundation) and Merit charges paid along with royalty by lease holder of mine (mining companies) to the fund maintained by District Collector for welfare of people & areas affected by the mining may not be considered as consideration paid for obtaining the quarrying/mining permit from the Government.

17. What is not paid for consideration towards mining rights cannot be a part of transaction value. The above larger bench decision is having impact on these types of issues. However, the issues are contentious and to be settled in GST also.

18. Discount received from manufacturers shall not be considered as separate supply in the hands of dealer-buyer. This issue is quite settled by tribunals in favour of taxpayers in service tax regime. Nomenclature of ‘discount’ from the manufacturer is irrelevant whatever name may be called such as price reduction/incentive/price support cannot be considered as separate supply in hands of buyer. Substance is important than the form of transaction. In transaction between manufacturer & dealer if something is coming from supplier it is nothing but discount on procurements.

19. When the supplier has not collected any tax separately from recipient cum-tax benefit can be availed i.e., treating the amount collected as including tax amount. Rule 36 of GST Rules, 2017 should not be interpreted hyper technically and be liberally interpreted to give the above benefit to suppliers wherever the GST is not collected from buyer for whatever the reason. There are instances where the revenue authorities interpreted the above provision and denied the cum-tax benefit on the ground there is no evidence that the price is inclusive of duty in the invoices.

20. All the damages/fines/penalties imposed by the buyer for delay in supply or low-quality supply as per terms of contract, deduction of same from sale price shall be provided in hands of supplier and net price/resultant price is only assessable to GST. Spirit of “Transaction value/net transaction value/net result of transaction value” evolved by hon’ble larger bench in CCE vs Victory Electricals Ltd 2013 (298) E.L.T. 534 (Tri. - LB) is applicable in GST also because it is tax on transaction value.

21. The amounts deducted towards damages/fines/penalties imposed by the buyer for delay in supply or low quality supply by the supplier as per terms of contract cannot be considered as separate supply in hands of buyer as these values are intrinsic, net, part & parcel of first supply & there is no second supply.

22. Compensation received from the buyer towards his failure of honouring minimum committed quantity of lifting for the specified period, cannot be considered as assessable value for payment of GST in hands of supplier.

  Conclusion:

Though many valuation issues got settled in excise regime over period of decades still there are lot more issues to be settled in due course of time in GST. Gujarat High Court in the case of Synergy Fertichem Pvt ltd Vs State of Gujarat 2020 (33) GSTL 513 told that nascent enactment in a nebulous field of taxation will have many teething troubles. GST is no exception. In its path to perfection, GST has much dust to settle-legislatively and judicially. These are the days of confusion and cacophony: many views, many interpretations, and many jurisprudential mumblings”. Through this article the author thrown some light on the some of the critical aspects in valuation in GST. Over a period in Excise & Customs context various Courts have evolved various principles of interpretation in valuation provisions. Unless the context requires otherwise, the same principles can be applied while determining transaction value in several similar situations in GST also. Those judgments are having the persuasive in GST valuation issues.