Annexure 10: Check list for Key points for value of supply and details of value of supply - Model All India GST Audit Manual 2023 [CBIC] - GST

Annexure 10: Key points for value of supply and details of value of supply TABLE II: KEY POINTS FOR VALUE OF SUPPLY SR.NO. KEY POINTS IN RELATION TO SCOPE OF SUPPLY Reference Points from returns Accounts 1 Whether the transaction value is in accordance with the terms of the contract? Contracts/Agreement Purchase order Invoices File of Correspondence with Client/Customer 2 Whether the discounts allowed are in accordance with regular practice of the taxpayer and the purchaser has paid the sum originally charged less the discount? Price Circular Invoice linked to Discount 3 Whether any amount that the supplier is liable to pay but incurred by the purchaser has been included in the value of supply? Price circular Contract/Agreement 4 Whether interest or late fee or penalty for delayed payment of any consideration for any supply collected from the purchaser is included in the value of supply? Debit Notes 5 Whether there are supporting documents for the credit notes issued for supplies made? Price circular Contract/Agreement 6 Whether there are supporting documents for the debit notes issued for supplies made? 7 Whether terms of contract detail any consideration flowing from the third party? Contract/Agreement 8 Whether the taxpayer has engaged in any supplies to related persons as defined in section 15 ? If so, check whether there is significant variation in the value in comparison to similar transactions with unrelated buyers. List of related persons Inter-unit movement check through delivery challan. 9 Whether the taxpayer has made any supplies where money is not the sole consideration? 10 Whether any exchange offer or scheme has been offered by the taxpayer? Exchange offers during festive months. Value of supply The GST is applied on the value of supply of goods and services. The consideration may be in money or in other forms. Buyer can also pay for his inward supply with non- monetary considerations by giving the seller other goods or services in exchange. There may be a situation when there is no consideration at all. Then what will be the value of supply? Hence it is really important to calculate the value of supply properly as per provisions of laws. There are several situations where valuation takes a vital role, such as the case of different sales offers, free distribution, combo offers etc. Therefore, what can be part of the value of supply or what does not, is very important to understand to levy GST. A. The methodology of valuation of a particular supply is exclusively discussed in Section 15 of the CGST/SGST Act, 2017. What is the value of supply under GST? As per Section 15(1) , the value of supply is the transaction value actually paid or payable for the supply of goods and / or services between parties not related and where price is the sole consideration. 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 CGST Act, SGST Act, UTGST Act and the GST (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. The above provisions of Section 15(1) are applicable to determine value of supply when the parties are not related. So, it is important to know first as to who are related parties and who are not. Related Parties The supplier and recipient of a particular supply will be considered as related persons if they satisfy the below mentioned situations enumerated in the explanation to Section 15(5) of the CGST /SGST Act 2017: (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; Where persons are related, price determined under section 15(1) is irrelevant and is subject to verification under section 15(4) by reference to the rules applicable. Price is the sole consideration It is important then to understand the term price is the sole consideration . If there is any consideration not in money, the money actually paid cannot be taken as the basis of valuation. Any additional consideration received apart from the monetary consideration shall also be considered to arrive at the actual transaction value. In fact, the consideration can be both monetary and non-monetary which is well defined in Section 2(31) of the CGST / SGST Act. There is an important clause in the provisions of valuation 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.. This clause is a check to ascertain that any amount of a supply may not be diverted by the supplier from the actual value of supply. Example : There is a supply agreement between a principal and an agent where the principal fixed his supply value to the agent at Rs.500/- per unit for a taxable item and also fixed the sale price of the agent to any buyer at Rs.600/- per unit of that item where Rs.50/- per unit will be retained by the agent as commission and balance as incidental expenses. Question arises now, what will be the supply value of principal to the agent? As per the above clause of valuation provision, the supply value should include this commission and incidental expenses of the agent. The supplier (here the principal) manages to escape from the liability of paying commission and incidental expenses to the agent by transferring them to the buyer. But, it shall be part of supply value from principal to agent. Incidental expenses as a part of supply value Incidental charges incurred before or at the time of supply shall form part of supply value. Example There is a supply contract of door delivery of fragile goods with proper packing. Suppose, the value of the goods is Rs.10,000/-, packing charges are Rs.500/- and door delivery cost is Rs.600/-. Then, it will be a composite supply with the supply of that goods as principal supply and value of supply is Rs.11,100/-. So, the incidental charges incurred before or at the time of supply shall be part of supply value. But, if such charges incurred after the supply whether that should not be part of supply value? Let us explain it with an example Warranty supply of parts to end-customers through a dealership Suppose a company sold a car with a consideration of Rs.10 Lakh to a customer with 3 years free service warranty. An authorised service centre of that car company supplies service of servicing of the car to that car owner. This service is actually provided by the car company (as per terms of purchase of car), through the authorised service centre. There may be replacement of parts under warranty also. Now, the transaction of free service and / or warranty replacement between the car company to the customer is not liable to GST not because it is free now, but since the price for the replacement is built into the price of the car originally supplied and therefore tax has already been paid by the car company at the time of selling of the car. Now, the question arises then what is the role of the service centre here? In fact, the service centre delivers the part and rendered service to the customer but supplies it to the car company. Hence, there is another supply involved here between the service provider and the car company which is taxable supply in GST. [ Reference: Mohd. Ekram Khan s decision of SC in 144 STC 542 . As such, warranty involves two supplies and neither of which are free from tax. One is tax pre-paid and another is currently taxed though not involving the end customer]. Interest, late fee or penalty for delayed payment are also part of supply value- All these special charges are linked to an underlying original supply, therefore, shall be part of supply value. So many questions may arise what will be the time of supply for these special charges? Whether the rate of tax of original supply will be applied for the special charges also? Whether all such special charges are liable to GST? It is better to explain it with an example Example: A contractee awarded a contractor with a turnkey project to build a road with an agreed price of Rs.100 Cr (Excluding GST). Some of the terms of agreement were as follows i. The contractor must pay earnest money Rs.5 Cr in the form of FD as a security to abide by the terms and conditions to use machinery and materials not below the specified standard and also for timely completion of the project. However, if completion is delayed by more than 6 months, 50% of the security will be forfeited. Similarly, any breach in the condition of quality is liable to forfeiture of 10% of the security. At the same time, if it is completed 2 months prior to the date, the company will provide prize money of Rs.50 Lakh to the contractor. There was also a clause that if the contractee fails to provide land in time the contractor will charge 1 Cr. for each month of delay. ii. The contractor finished the work 2 months prior to scheduled time. Due to bad quality of machinery used, the contractee forfeited 5% of earnest money. The contractee failed to deliver land to the contractor in due time therefore, the contractor charged Rs. 4 Cr extra to the contractee. The contractor also charged interest of Rs.60 lakh for late payment. In this example, there are so many incidental charges. But, all are not taxable in GST. Earnest money is a kind of security only. So, GST is not leviable on the same. The taxability of the above charges is explained the table below Sl. No. Description Amount Remarks 1 Turnkey project of construction of road 100 Cr Taxable as works contract service. 2 Security 5 Cr. Not a supply in GST 3 Forfeiture of security by the contractee 2.5 lakh It is a penalty for not using the specified quality of machinery and hence it is not a supply 4 Award for early completion 50 Lakh Taxable service being a supply ancillary to the main supply of construction service 5 Penalty for delay to handover land. 4 Cr It is a penalty (hence not a supply) for not adhering to the terms of the contract which stipulated transfer/providing land on a specific date 6 Interest for delayed payment of contractual price 60 Lakh Taxable and shall be part of the value of construction service. Thus, there are so many special charges but only the last one is for the underlying original supply of construction service. Discounts to be excluded from Taxable Value As per Sec 15(3) value of supply will not include discount, provided: It is allowed before supply, or It is allowed after supply, provided that it is established in agreement linked to specific supplies and corresponding credit is reversed by the recipient. Example: M/s. A of Kolkata supplied 10 pcs of i-Phone to M/s. B of Kolkata on 20.09.2019 where basic price of such phones is Rs. 10 lakh. A discount of Rs. 1 lakh is offered and courier charges of Rs.1000.00 is charged at the time of supply. What is the value of supply in the above transaction if the tax rate of such i-phones is 12%? As per the conditions, 50% payment was made at the time of delivery and further condition was that if balance payment is made within 20.10.2019 then 10% further discount on basic price will be allowed. If such payment is made in time, whether this discount will also be deducted from the supply value? In this example, courier charges are to be added to the value of supply as incidental charges and discount is to be deducted as it is offered at the time of supply. Hence, taxable value will be Rs. 9,01,000/-. GST @ 12% is to be added to Rs. 9,01,000/- to get the value of supply i.e. Rs. 10,09,120/-. If 50% of the amount is paid and rest is paid within 20.10.2019, further discount of 10% on basic price will be allowed. Though it is a post-sale discount, the condition was fixed at the time of supply. So, the discount is allowed as a deduction. Accordingly, M/s A may decrease his output tax subject to the condition that M/s B reverses an equal amount of ITC. In lieu of discounts if promotional items are offered by the supplier to increase sales volume and to attract new customers for their products, such promotional items are not discounts as not satisfying the requirements of section 15(3) . Example: Two goods, say A (tax rate 12%) B (tax rate 18%) are offered for a single price of Rs. 3000/- under the scheme Buy one get one free . Now, what will be the transaction value? What will be the rate of tax on such supply? In this example, it may appear first at a glance that one item is being supplied free of cost without any consideration. But it is not an individual supply of free goods rather a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one. Hence, here transaction value will be Rs. 3000/-. Taxability of such supply will be dependent upon whether the supply is a composite supply or a mixed supply. If it is a composite supply, then the tax rate of the principal supply will be applicable and if it is a mixed supply, tax rate shall be 18%. B. Determination of Value of Supply as per GST Rules: Reference to GST Rules related to valuation is permitted only if the transaction value cannot be determined as discussed above. These are cases where either the parties are related/distinct/agent or the price is not the sole consideration. Valuation Rules are prescribed under Chapter IV of the CGST /SGST Rules, 2017 from Rule 27 to Rule 35 . The above Rules are explained below: 1. Where consideration is not wholly in money - Rule 27 This rule is applicable for the supplies like barter, exchange and transactions listed in schedule I where the transaction is not wholly in money as they fail to qualify for application of section 15(1) . Now, the order of application of the methods to determine the value of supply has to be maintained in the following sequence. Example 1: (a) X Co. supplied a car to Mr. Sen in exchange for Mr. Sen s old car and on payment by Mr. Sen of Rs. 5,00,000/-. If the price of the new car without exchange is Rs. 9,00,000/-, then the open market value of the new car is Rs. 9,00,000/-. (b) If the open market value of the new car is not known, and the price of the old car is Rs. 4,00,000/- at the time of supply, then the value of supply of the new car will be Rs. 9,00,000/-. (c) A customized air conditioning unit whose open market value is not available is installed at an office wherein the consideration is paid in the form of money of Rs. 40,000 and an old air conditioning unit whose price is not available at the time of supply. A similar air conditioning unit in terms of characteristics, quality, functional components, materials and reputation etc. has been installed by the company at another client s premises for Rs. 60,000/-. Since, the value of goods of like kind and quality is available, the value of Rs. 60,000/- will be taken under Rule 27 . (d) value determined by rule 30 or rule 31 . 2. Where supply is made between related persons with or without consideration and distinct persons without consideration - Rule 28 The value of supply under this rule will be: (a) Open market value: Example: A cell phone dealer gifts a cell phone set worth Rs. 23,000/- to his son. Since, this is the open market value, it will be the value of supply for the mobile set supplied to a related person. (b) Value of Supply of Like kind and quality: If open market value is not available, then value of supply may be determined on the basis of supply of like kind and quality. (c) Value determined by rule 30 or rule 31. The two provisos to this rule are of significance: (i) If the supply to a related or distinct person is for further supply, then the value may be an amount equivalent to 90% of the value of supply of like kind quality to non-related person. (ii) where it is the recipient, who is entitled to full credit, the value declared in the invoice is deemed to be open market value. This provision appears to accommodate internal preferences between distinct persons. [ Reference: In a case of GKB Lens Pvt Ltd, Advance Ruling had been sought on whether goods supplied to the branches in the States other than West Bengal can be valued in terms of the Cost Price under the Second Proviso to Rule 28 of CGST Rules, 2017 , instead of 90% of MRP as required under the First Proviso of the same Rule. AAR West Bengal held - The Applicant has the option of not supplying goods to its branches under the First Proviso of Rule 28 and is eligible to value these goods by applying the terms of the Second Proviso to Rule 28 of GST Act.] 3. Where supply is made or received through agent - Rule 29 This rule is applicable only in case of supply of goods and not supply of services . The value of supply under this rule will be: (a) Open market value or at the option of supplier 90% of the price charged for goods of like kind and quality by the Agent. Example: Agent supplies groundnut @5000/- per Qtl. Agent is purchasing groundnut from a non-related supplier @4550/- per Qtl. What should be the supply value from principal to agent? It should be 90% of Rs. 5000/- ie. Rs. 4500/- (b) Value determined by rule 30 or rule 31. This rule is applicable only in case of those transactions where the Agent handles the goods of the Principal. It is clarified vide Circular No. 73/47/2018-GST dated 05-11-2018 that in case of supply of goods, if the invoice is issued by supplier to customer either himself or through del credere agent (DCA) then it does not fall under the ambit of agent. However, in a case where the invoice is issued by the del credere agent then it would fall under the ambit of an agent. 4. Value of supply based on cost - Rule 30 This rule is applicable for valuation of supply of goods and services, only where the other methods of valuation do not apply. It provides that the value will be cost plus 10% . Example: Suppose ABC Limited is a manufacturer of office furniture. Say, the cost of manufacturing a chair is Rs. 4,000/-. Similar chair in the open market is valued at Rs. 4,500. These chairs are supplied to a furniture showroom at the rate Rs. 3,000 and balance in non-monetary consideration. Now since the open market value is available Rs. 4,500 will be considered for valuation of supply. However, if Open Market Value is not available, the value of supply as per cost method will be 110% of the cost of manufacturing i.e. Rs. 4,000*110% = Rs. 4,400. 5. Residual method of valuation - Rule 31 As per the residual method, where the value of supply of goods or services or both cannot be determined under the cost method, the same shall be determined using reasonable means consistent with the principles and general provisions of the GST law. Unitary method or number of man hours required to complete a job can be examples of such valuation method. 6. Lottery, betting, gambling and horse racing - Rule 31A Supply Value in case of Lottery: Value shall be 100/128 of the face value of ticket or of the price as notified in the Official Gazette by the Organising State, whichever is higher. Note: The above Rule is as amended by the CGST/SGST (Second Amendment) Rules, 2020, w.e.f. 1-3-2020. Prior to the amendment, the Rule provided for determination of value of supply for lottery run by state Government as 100/112 of the face value of ticket or the price as notified in the Official Gazette by the organising State whichever is higher. Value of supply for the lottery authorized by a State Government is determined as 100/128 of the face value of ticket or the price as notified in the Official Gazette by the organising State whichever is higher. Betting, Gambling or Horse Racing: Actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid to the totalisator. This implies that the value on which GST has to be paid will be the amount of bet placed or the amount paid to the totalisator instead of the commission or share of revenue of the race club. Actionable claim is goods under section 2(52) . Hence, actionable claim in the form of chance to win betting, gambling and horse racing with reference to the above definitions will be goods and not services. The tax rate notifications issued for goods states that actionable claim in the form of chance to win in betting, gambling, or horse racing in a race club is liable to tax at the rate of 28%. The rate notification issued for services also specifies that the gambling as an activity involving services and accordingly, liable to tax at 28% (refer entry No. 34(v) of Notification No. 11/2017 (Rate)). With the above ambiguities there may be some confusion whether to tax actionable claims as goods or services. 7. Specific valuation provisions Rule 32 Rule 32 is only an option available to the supplier for determination of valuation of certain specific supplies. He may opt for the mechanisms specified in rule 32 or in rules 27-31 or in section 15 as the case may be. (a) Purchase and sale of foreign currency including money changing: Option 1 Option 2 Difference between buying-selling rate and the RBI reference rate. Where reference rate is not available, 1% of gross Indian Rupee provided/received. And where the conversion is not into Indian Rupees, then 1% of the lesser of the Indian Rupee equivalent of each currency exchanged. Example: Suppose a company M/s Thomas Cook Ltd, a money changer, converts 1000 Euro into rupees @90 per Euro. The RBI reference rate for Euro is Rs. 88. So, the value of supply shall be = (90-88) * 1000 = Rs. 2000/-. For currency exchange Rs.1 L: 1% or Rs.250/- which one is higher. For currency exchange Rs.1Lbut 10L 0.5% of exchanged amount exceeding 1 L plus Rs.1000/- For currency exchange Rs.10L: 0.1% of exchanged amount exceeding 1 L plus Rs.5500/- but maximum Rs.60000/- Example: Suppose a money exchanger received Singapore Dollar and provided Indian Rs. 5,00,000/-. The value of supply shall be (4,00,000*0.5%) +1000 =Rs. 3000/- (b) Value of service in relation to air travel agents: 5% of basic fare in case of domestic booking and 10% of basic fare in case of international booking of passengers by air. 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. (c) Supply of services in relation to life insurance (i) If in the policy allocation for investment of certain amount is intimated to the policy holder: Gross premium - Investment amount (ii) In case of single premium other than (i): 10% of single premium (iii) In cases other than (i) (ii): 25% of premium charged for first year 12.5% for subsequent year (d) Supply of services of person dealing in second-hand goods (i) If supplied as it is or after minor processing without changing nature of goods and without availing ITC: Sale price - Purchase price (If this difference is negligible, that shall be ignored) (ii) Purchase price in case of repossessed goods from a defaulting borrower who is unregistered: Purchase price - 5% from purchase price for each quarter from date of purchase to date of disposal after repossession. (e) Supply of voucher: The value will be the redemption value of the voucher. Voucher includes coupon, stamp, token, et 8. Service of pure agent - Rule 33 This rule applies only to supply of services. The cost incurred by the supplier shall be excluded from value of supply if the following tests are satisfied: (a) the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party on authorisation by such recipient; (b) the payment made by the pure agent on behalf of the recipient of supply is separately indicated in the invoice issued by the pure agent to the recipient of service; (c) 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. Pure agent: A person who enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure in the course of supply of goods or services or both; Neither intends to hold or holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply. Does not use for his own interest such goods or services so procured as pure agent. Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account. Example: Mr. A is an importer who goes to Mr. B for Customs clearance work in respect of import of a consignment. The clearance of goods would also require taking of transporter service. Mr. A also authorizes Mr. B to incur expenditure on his behalf for procuring the transporter service and agrees to reimburse such expenses. In this scenario, Mr. B is providing custom broker service to Mr. A, which is principal to principal basis and the transportation services procured by Mr. B on behalf of Mr. A is a pure agent service and expenses incurred by Mr. B on transportation shall not form part of the value of the Customs broker service. 9. Rate of exchange of foreign currency - Rule 34 Any transactions undertaken in foreign currency must be converted into INR and the rate of such exchange is as follows: (a) For determination of the value of taxable goods the rate of exchange shall be the applicable one as notified by the Board under section 14 of the Customs Act, 1962 . (b) for determination of the value of taxable services rate of exchange shall be the applicable one determined as per the generally accepted accounting principles for the date of time of supply of such services in terms of section 13 of the Act. 10. Value of supply inclusive of integrated tax, central tax, state tax, union territory tax Rule 35 In such cases, the tax amount shall be determined in the following manner: Tax amount = (Value inclusive of taxes X tax rate in % of IGST or, as the case may be, CGST, SGST or UTGST) (100 + sum of tax rates, as applicable, in %)