VALUATION OF GOODS AND SERVICES

[Mr. M. GOVINDARAJAN]

Section 15 of the Act provides that the value of a supply of goods or services or both shall be the transaction value. The transaction value 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. If both of them are related persons there is a separate procedure for valuation which is prescribed in the rules. Before going into the detailed discussed it is highly required to know the definition of some expressions.

Basic fare

The expression ‘basic fare’ means that part of the air fare on which commission is normally paid to the air travel agent by airline.

Related person

Explanation to Section 15 provides that for the purposes of this Act-a person shall be deemed to be ‘related person’ if-

• such persons are officers or directors of one another’s business;
• such persons are legally recognized partners in business;
• such persons are employer and employee;
• any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them;
• one of them directly or indirectly controlled by a third person;
• both of them are directly or indirectly control a third person; or
• they are members of the same family.

The 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.

Person

The term ‘person’ also includes legal persons.

Open market value

‘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 is being valued is made.

Supply of goods or services or both of like kind and quality

‘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.

Pure agent

‘Pure agent’ means a person who-

• enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
• neither intends to hold nor holds any title to the goods or services or both so procured or provided as pure agent of the recipient of supply;
• does not use for his own interest such goods or services so procured; and
• receives only the actual amount incurred to procure such goods or services.

Illustration

Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of Companies. The fees charged by the Registrar of the companies registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

Section 15(2) of the Act provides what are the items to be included in the valuation. Section 15(3) of the Act provides that discounts are not to be included in the value of supply.

Includible items

The value of supply shall include-

• any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than-
  • CGST Act;
  • 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.

• 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;
• 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 delivery of goods or supply of services; or
  • before delivery of goods or supply of services.
• interest or late fee or penalty for delayed payment of any consideration for any supply; and
• subsidies directly linked to the price excluding subsidies provided by the Central Government and the State Governments.

The amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

Discount

The value of the supply shall not include any discount which is govern -

• 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
• after the supply has been effected, if-
  • 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
  • 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.

Powers of Government

Section 15(5) of the Act provides that 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.

Rules for valuation

Chapter IV of Goods and Services Tax Rules, 2017 deals with the procedure for determination of value of supply.  This Chapter has been inserted vide CGST (Second Amendment) Rules, 2017 which came into force with effect from 01.07.2017.

Value where the consideration is not wholly in money

Rule 27 provides that where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall-

• be the open market value of such supply;
• if open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply;
• if the value of supply is not determinable as above, the value of goods or services or both of like kind and quality;
• if value is not determinable under the above three methods, be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by application of Rule  30  or Rule 31 in that order.

Illustration :

1. Where a new phone is supplied for Rs. 20,000/- along with the exchange of an old phone and if the price of the new phone without exchange is Rs. 24,000/-, the open market value of the new phone is Rs. 24,000/-.

2. Where a laptop is supplied for Rs. 40,000/- along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is Rs.4,000/- but the open market value of the laptop is not know, the value of the supply of laptop is Rs. 44,000/-.

Value of supply of goods made or received through an agent

Rule 29 provides that the value of supply of goods made or received through an agent shall-

• be the open market value of the goods being supplied, or at the option of the supplier be 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient;
• where the value of supply is not determinable as above the same shall be determined by application of rule 4 or rule 5 in that order.

Illustration

Where a principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of Rs. 5,000/- per quintal on the day of supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of Rs. 4550/- per quintal. The value of the supply made by the principal shall be Rs. 4550/- per quintal or where he exercises the option the value shall be 90% of Rs. 5,000/- i.e., Rs. 4500/- per quintal.

Value of goods between distinct or related person other than agent

Rule 28 provides that the value of the supply of goods or services or both between distinct persons or where the supplier and the recipient are related, other than where the supply is made through an agent, shall-

• be the open market value of such supply;
• if open market value is not available, the value of supply of goods or services of the like kind and quality;
• if the value is not determinable as above, be the value as determined by application of rule 4 or rule 5, in that order.

Application of Rule 30 or Rule 31

Rule 30 deals with the value of supply of goods or services or both based on cost. Where the value of a supply of goods or services or both is not determinable by any of the above discussed rules, the value shall be 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.

Rule 31 deals with the residual method for determination of value of supply of goods or services or both. Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and genera provisions of Section 15 and the rules.

In the case of supply of services, the supplier may opt for this rule ignoring Rule 30.

Determination of value in respect of certain supplies

Rule 32(1) provides that the value in respect of supplies specified below shall be determined in the manner provided as below-

• Value in relation to purchase or sale of foreign currency

Rule 32(2) provides that the value of supply of services in relation to purchase or sale of foreign currency, including money changing, shall be determined by the supplier of service in the following manner-

• for a currency, when exchanged from, or to, Indian rupees, the value shall be equal to the difference in buying rate or the selling rate and the RBI reference rate for that currency at that time, multiplied by the total units of currency;
• in case where RB reference for a currency is not available, the value shall be 1% of the gross amount of Indian rupees provided or received by the person changing the money;
• in case where neither of the currencies exchanged in India rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by the converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI;
• a person supplying the services may exercise option to ascertain value in terms of the following point, for a financial year and such option shall not be withdrawn during the remaining part of that financial year.
• at the option of supplier of services, the value in relation to supply of foreign currency, including money changing, shall be deemed to be-
• 1% of the gross amount of currency exchanged for an amount up to Rs. 1 lakh subject to a minimum of Rs. 250/-;
• Rs. 1,000/- and 0.5% of the gross amount of currency exchanged for an amount exceeding Rs. 1 lakh and up to Rs. 10 lakhs; and
• Rs. 500/0 and 0.1% of the gross amount of currency exchanged for an amount exceeding Rs. 10 lakhs, subject to maximum amount of Rs. 60,000/-
• Value of booking of tickets for travel by air

Rule 32(3) provides that the value of supply of services in relation to booking of tickets for travel by an air travel agent, shall be deemed to be an amount calculated @ 5% of the basic fare in the case of domestic bookings and @ 10% of the basic fare in the case of international bookings of passage for travel by air.

• Value in relation to life insurance business

Rule 32 (4) provides that the value of supply of services in relation to life insurance business shall be-

• the gross premium charged from a policy holder reduced by the amount allocated for investment, or savings on behalf of the policy holder, if such amount is intimated to the policy holder at the time of supply of service;
• in case of single premium annuity policies other than the above 10% of single premium charged from the policy holder; or
• in all other cases, 25% of the premium charged from the policy holder in the first year and 12.5% of the premium charged from policy holder in subsequent years.

Where the entire premium paid by the policy holder is only towards the risk cover in life insurance nothing in this rule shall apply.

• Value of second hand goods

Rule 32 (5) provides that where a taxable supply is provided by a person dealing in buying and selling of second hand goods i.e. used goods as such or after such minor processing which does not change the nature of the goods and where no input tax credit has been availed on purchase of such goods, the value of supply shall be the difference between the selling price and purchase price. If the value of such supply is negative it shall be ignored.

The purchase of value of goods reprocessed from a defaulting borrower, who is not registered, for the purpose of recovery of loan or debt shall be deemed to be the purchase price or such goods by the defaulting borrower reduced by 5% points for every quarter or part thereof, between the date of purchase and the date of disposal by the persons making such representation.

• Value of a token/voucher/coupon/stamp

Rule 32 (6)  provides that the value of a token, or a voucher or a coupon, or a stamp, other than postage stamp, which is redeemable against a supply of goods or services or both, shall be equal to the money value of the goods or services or both redeemable against such token, voucher, coupon or stamp.

• Value of services as notified by the Government

Rule  32(7) provides that the value of services provided by such class of service providers as may be notified by the Government on the recommendations of the Council as referred to in Entry 2 of Schedule I between distinct persons as referred to in section 25, where input tax credit is available  shall be deemed to be NIL.

Value of supply of services in case of pure agent

Rule 33 provides that the expenditure costs incurred by the supplier as a pure agent of the recipient of supply of services shall be excluded from the value of supply, if all the following conditions are satisfied-

• the supplier acts as a pure agent of the recipient of the supply, when he makes payment to third party on authorization by such recipient;
• the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
• the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Rate of exchange of currency, other than Indian rupees, for determination of value

Rule 34 provides that the rate of exchange for determination of value of taxable goods or services or both shall be the applicable reference rate for that currency as determined by Reserve Bank of India on the date when the point of taxation arises in respect of such supply in terms of Section 12 of Section 13 of the Act.

Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax

Rule 35 provides that where the value of supply is inclusive of integrated tax or as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner,

Tax amount =	Value inclusive of tax x tax rate in % of IGST or CGST, SGST or UTGST
	(100 + sum of taxes as applicable in %)