In Part I of the article, we looked at the Valuation Rules as well as the requirement of payment of invoice within 180 days as a condition to take Input Tax Credit vis-à-vis Stock transfers.  

In this Part, we look at the transaction value; the basis for valuation – its inclusions and exclusions, and understand the same better by applying the provisions to some practical illustrations. In the final and concluding part (Part 3), we will look at changes as may be brought out by GST council, interplay between the valuation rules and rules for input tax credit and tax invoice. Also, we will look at the primary and secondary adjustments under transfer pricing provisions of Income-tax and the consequential impact under GST.

Transaction Value: 

Section 15(1) of CGST Act, 2017 reads as under

“The value of 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 supplier and the recipient of the supply are not related and the price is the sole consideration for the supply”.

Consideration is the payment made or to be made, whether in money or otherwise for the supply whether by the recipient or by any other person - Sec 2(31)(a).

The twin conditions for accepting the value agreed between the supplier and recipient are:

1. Supplier and recipient should not be related and
2. Price is the sole consideration

Meaning of related person: Explanation (a) to Section 15 of CGST Act defines related person as under

“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 recognized partners in business;

(iii) Such persons are employer and employees;

(iv)any person directly or indirectly owns, controls or holds twenty-five percent 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; or

(viii)they are members of the same family;”

Illustration 1: ‘A ltd’ a textile manufacturer its sends semi-finished goods to ‘B ltd’ for further processing. Seventy percent of the capacity of the facility set up ‘B ltd’ is used for ‘A ltd’ and its machinery is funded by ‘A ltd’. The employees of ‘B ltd’ are trained at the factory of associate enterprise of ‘A ltd’ in Malaysia. The training includes the operation of machinery and as well as on GMP. The quality of goods is checked by ‘A ltd’ and upon its acceptance only the processed goods are supplied back to ‘A ltd’. Are ‘A ltd’ and ‘B ltd’ related persons?

A person is deemed to control another when the former is legally or operationally able to exercise restraint or direction over the latter.

The funding by ‘A ltd’ is a financing activity and is not an activity of exercising operational control.  Similarly training by an associate enterprise as an independent activity cannot be termed as an act for exercising control. The only control exercised by ‘A ltd’ is the quality checking. Any contract would specify certain legal rights and performance obligations, for example quality specification’s; such performance obligations cannot be considered as controlling the activities of other.

However, when we look at all the activities together coupled with the fact that seventy percent of the facility is dedicated to ‘A ltd’, there is a clear indication that ‘A ltd’ would like to see ‘B ltd’ operate as one of its unit.  One may be inclined to consider ‘A ltd’ and ‘B ltd’ as related parties. Further fact finding as to the scope and limitation of training and quality at micro level, process dependence on ‘A ltd’ and evaluation of business risk to ‘B ltd’ for tying up 70% would have to be made for establishing relationship between ‘A ltd’ and ‘B ltd’.

Price is the sole consideration: Where price is not the sole consideration and the supply is influenced by some additional considerations flowing to the supplier either in cash or kind or in any other way, then transaction value cannot be considered as value of supply. In such cases the money equivalent of the additional consideration should be determined and the value of supply is determined under rule 1 (Determination of value of supply).

The contract for supply needs to be looked at to identify whether any additional consideration is flowing to the supplier.

Illustration 2: ‘A ltd’ is an Indian consumer goods manufacturer. It manufactures a new model of refrigerator and fixes the dealer price at Rs 25,000. The market response is not as expected as an equivalent model is imported from China by the dealers at Rs 21,000. The dealers don’t show much interest in promoting the product of ‘A ltd’. ‘A ltd’ is confident that in long term the consumer market would recognize value in terms of quality and durability and would set a high price for its model as compared to the Chinese goods. However, as a strategy for market penetration, ‘A ltd’ reduces its price to Rs 21,000 and offers an additional year of warrant than offered by the Chinese manufacturer. Is the price of Rs 21,000 the transaction value on which GST would be levied?

Additional consideration flowing from a market penetration is something that is subjective and can be misleading.  Readers may recall the decision of the Hon’ble Supreme Court in the case of FIAT INDIA[1] specific to the facts of the case, the subsequent clarificatory circular[2] and amendment to rule 6 of Central Excise Valuation (Determination of price of Excisable Goods) Rules, 2000.

There is not much clarity as to how this will be dealt in GST. Section 15(1) of the CGST Act accepts transaction value as value for levy only if the price is the sole consideration. Where price is not the sole consideration value of supply will be determined under Determination of value of supply rules and there is no specific reference in Sec 15(4) to additional consideration, if any, flowing directly or indirectly to the supplier and how to deal with it. Interestingly the only Rule to look at is Rule 1 which covers situation where consideration is not wholly in money. Whether this would cover a case of additional consideration flowing to supplier directly or indirectly, apparently not in money, is also not clear. How a price lower than cost of supply will be dealt in GST is something we will know in the years to come.

Inclusions to transaction value:  

Section 15(2) of the CGST Act - the following items shall only be considered as inclusion to transaction value

1. any taxes, duties, cesses, fees and charges levied other than GST under any other law and charged separately by the supplier;
2. any amount that the supplier is liable to pay in relation to such supply but has been paid by the recipient and not included in the price charged by the supplier;
3. incidental expenses, including commission and packing, charged by the supplier;
4. any amount charged for anything done by the supplier either at the time of or before delivery of goods or supply of services;
5. interest or late fee or penalty for delayed payment of consideration; and
6. subsidies directly linked to the price excluding subsidies provided by the Central or State Governments

Illustration 3: ‘I Co’ an Indian company is in the business of software development. It pays USD 1 million to ‘F Co’ a German company for licensing of software product owned by ‘F Co’. As ‘F Co’ doesn’t agree for any WHT, ‘I Co’ grosses up the payment and pays WHT of USD 0.1 Mio. Should ‘I Co’ include the WHT tax to transaction value for paying GST on reverse charge? (see i above)

Firstly, WHT paid by ‘I Co’ is not a tax levied on it and secondly ‘I Co’ doesn’t charge the same on ‘F Co’. Hence the value on which GST must be paid by ‘I Co’ cannot include the WHT paid by grossing up.

Illustration 4: ‘B ltd’ a truck wheel manufacturer. It undertakes to carry out manufacture of 3 lakh wheels, for a price of Rs 1000 per wheel for ‘A ltd’, a heavy trucks manufacturer. As ‘B ltd’ was unable to raise funds for a specific machinery required, ‘A ltd’ agrees to fund and pays to the vendor directly. The cost of the machinery is Rs 3 crores. It is expected that during the life time of the machinery 6 lakh wheels can be manufactured. ‘A ltd’ and ‘B ltd’ amend their contract and the new price agreed is Rs 900 per wheel. What is the transaction value for supply of wheel by ‘B ltd’? (see ii above)

The cost of machinery used for this supply has been paid by ‘A ltd’ and the same is recovered as a reduction from the price of supply. GST will be levied on a value including the amount recovered i.e. Rs 900 plus Rs 100.

Illustration 5: ‘X’ buys a mobile for a price of Rs 15,000. Further ‘X’ pays Rs 150 for a 24 hour quick’ delivery and Rs 100 for gift packing. What is the transaction value for the supply of mobile? (see iii &iv above)

The amount charged towards quick delivery and gift packing will be added to the transaction value. The value of supply will be Rs 15,250.

Illustration 6: Facts are same as in illustration 4. Additional fact for consideration is ‘B ltd’ is obligated under the contract to submit a test report for  an agreed sample of wheels tested on actual road condition. The cost of the testing is Rs 10 lakhs. ‘B ltd’ doesn’t charge ‘A ltd’ for this cost. Will the testing cost be included in the transaction value? (See iv above)

The amount incurred for testing is not charged by ‘B ltd’ and hence the same will not be added to the transaction value.

Illustration 7: ‘A ltd’ buys goods from ‘B ltd’ for a price of Rs 1 lakh. The contract provides for a 60 days’ credit and an interest of 12% p.a for any delay in payment. “A ltd’ pays after 90 days. What is the transaction value of supply of goods? (see v above)

Section 15(2)(d) merely states that any interest or late fee or delayed payment of consideration is to be added to the transaction value. It doesn’t state that such interest is paid or charged. Hence an accrual as per contractual terms would have to be included in the transaction value. Hence the interest for the delay by 30 days i.e. Rs 1000 would have to be added to the transaction value.

Illustration 8: ‘Clean water’ an NGO for providing clean drinking water in rural India sets up water purifying facilities at various panchayats in Maharashtra. It supplies purified drinking water to consumers at Rs 5 for a 50 liter can. It supplies at this price as it gets electricity at a subsidized price from a private distribution company at Rs 1.50 per unit as against a normal tariff rate of Rs 3.00 per unit. What is the transaction value of supply of water if the subsidy in terms of cost reduction is Rs 0.50 per can? (see vi above)

The subsidy of Rs 1.50 is directly linked to the supply and hence will be added to the transaction value. The value of supply will be Rs 5.50 per 50 liters can.

Exclusions from transaction value: 

Section 15(3) of the CGST Act – value of supply shall not include

i.  any discount given before or at the time of supply provided it is recorded on the invoice

ii. any discount given after the supply provided such discount is in terms of agreement entered at or before the time of supply and is specifically linked to the relevant invoices and the recipient has reversed the input tax credit attributable to the discount

Illustration 9: ‘A ltd’ a consumer goods manufacturer offers various discounts to its dealers like cash discount, quantitative discount, seasonal discounts, special annual discounts etc. Cash and seasonal discounts are given before the supply and are recorded on the invoice. Quantitative discounts are given after the supply and are based on targets and are adjusted by way of credit note once the target is met. The credit note reflects the lumpsum discount value. Special annual discounts are given after the year end to the best dealer of the region by way of a cash award.  Are these discounts deductible from the transaction value?  

i. Cash and seasonal discounts given before supply and recorded on the face of invoice are deductible   from the transaction value.

ii. Quantitative discounts and special annual discount given after the supply are not linked to the relevant invoices. A mere lump sum amount is recorded on the face of the credit note or a payment in cash is made. Hence the quantitative discount and special annual discount will not be reduced from the transaction value.