VALUE OF TAXABLE SUPPLY, Goods and Services Tax - GST

[Sadanand Bulbule]

VALUE OF TAXABLE SUPPLY

1. As per Section 15(1) of the GST Act, 2017, 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, including the non-monetary consideration, if any, where the supplier and the recipient of the supply are not related and the price is sole consideration for supply.

2. Further Section 15[2][b] states 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;

3. From the conjoint reading of Section 2[31] read with Section 15[2][b] above, it is clear that the GST Act contemplates to treat the transaction value as the value of supply of goods or services and the value has to be determined as per Section 15 of the GST Act.

4. Coming back to issue, the precise example is like this: “ABC”, the service recipient, agrees to supply “HSD” free of cost to the “XYZ”, the service provider, for use in mining support services as per the written agreements. HSD per say is never the part and parcel of the agreed price per ton or per hour. Further ABC does not debit [or no reimbursement of cost of HSD] any amount towards the free supply of HSD to XYZ for use in the supply of services to ABC. The consideration paid to XYZ is as per tax invoices issued to ABC. The notional cost of “HSD” is never the integral part and parcel of the price fixed in terms of MOU.

5. Factual position being so, the inspecting authorities are insisting XYZ to pay GST even on the cost of HSD freely supplied by ABC in terms of Section 15[2][b] of the GST Act.

6. In this regard, there are couple of Advance Rulings which are contrast to each other. Since Advance Ruling is not binding law, other than on the applicant, I have not quoted them here to avoid confusion.

QUERY

7. The Government of India has issued a Circular No. 47/21/2018-GST, F.No. CBEC- 20/16/03/2017-GST dated 8-6-2018, vide Sl. No. 1, it clarifies that the value of free supplies need not be added to the value of supply in terms of Section 15[2][b] of the GST Act.

8. Although this Circular clarifies in respect of “moulds & jigs” supplied free of cost to the job workers, can the intent of this Circular be applied to all such free supply of goods and services including HSD for use mining support services?

9. A fine distinction is required to be made to establish the correct GST treatment on free supply of “HSD” in question either to include it under Section 15[2][b] or exclude it from the ambit of Section 15 itself. So the experts are requested to throw light on this query with supporting judicial rulings/circular/notification.

Happy Sunday. Relax

Posts / Replies

[Sadanand Bulbule]

Dear all

Further to add here is , in the complete supply chain of goods or services or both, entire cost of mining operation including cost of HSD gets subsumed in the cost/price of final product. As such the Government certainly gets its due share of GST on HSD freely supplied or otherwise by the recipient of services or goods as the case may be. Thus the whole mechanism of value of taxable supply culminates in yielding full and correct amount of GST in a neutral manner. Anyway the cost of HSD freely supplied or otherwise does not escape the tax net. Therefore there is no threat of revenue to the State.

With this backdrop also, expert may post their opinions.

[Amit Agrawal]

Issue raised is very complicated and hugely controversial.

In my view, the concept of 'Consideration' differs for a contract for 'Sale of Goods' and 'Provision of Services'. And for better understanding of this difference, one needs to go through history of British & American court cases where damages is claimed by one of parties to the contract alleging breach of contract by other party (read with / in context of provisions of our 'Sale of goods Act, 1930').

For specified case - under discussion here - following things are clear:

A. Its contract for provision of services and NOT that of sale of goods

B. As per agreed terms, “ABC”, the service recipient, agrees to supply “HSD” free of cost to the “XYZ”, the service provider, for use in mining support services as per the written agreements.

Here, Section 15 (2) (b) of the CGST Act, 2017 does NOT come into play at all because the amount / expenses towards HSD was NOT payable by the supplier to pay in relation to such supply. And cost of HSD has been incurred / borne by the recipient of the supply being his responsibility as per agreed terms of contract.

I also believe that cost of HSD does NOT form part of 'Consideration' (as defined u/s 2 (31 of the CGST Act, 2017) for XYZ to provide his services to ABC in given situation.

In this regard, one needs to note legal principals enumerated from Apex Court ruling/s and its application by lower court, some of them are listed below:

1. COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. (2018 (2) TMI 1325 - SUPREME COURT)

2. M/S ASSOCIATED SOAPSTONE DISTRIBUTING COMPANY PVT. LTD. VERSUS COMMISSIONER CENTRAL EXCISE COMMISSIONERATE, UDAIPUR (RAJ.) (2023 (1) TMI 250 - CESTAT NEW DELHI). This cases deals with 'mining services' where diesel and explosives were provided free of cost by the service-recipient and same were consumed during the mining process.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan Kollengode]

Agreed with Ld. Amit Ji,

A. The terms of the contract is highly relevant here. From the query, it appears that from the terms of the contract that the supplier is not liable to procure the HSD himself but it is the responsibility of recipient to provide it to supplier.

B. Had it been a case where the supplier was responsible for procuring the HSD from any source, and incidentally the recipient provided it to supplier by adjusting the cost of HSD from the contract amount payable to supplier, then Section 15(2)(b) will kick in.

C. The facts of the query can clearly distinguished from facts mentioned in Para B above. Hence, in this case section 15(2)(b) is not applicable. The service provided from supplier to recipient and HSD provided by recipient to supplier are two independent activity. supply of HSD without consideration will not be treated as "supply" under section 7(1) and moreover, HSD is not taxable under GST also.

[Sadanand Bulbule]

Dear experts

Thank you so much for meaningfully expanding the purpose and purport of Section 15[2][b] of the GST Act, 2017. Every contribution of deciphered thought is purposeful.

As already referred, my above view is corroborated by the Government of India Circular No. 47/21/2018- GST dated 08.06.2018 wherein it was inter-alia it was clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of Section 15(2)(b) of the GST Act,2017.

The intent of the Circular squarely applies to the precise facts of the present case, as the free supply of HSD is the mandatory responsibility of the service recipient as per MOU and never the risk and responsibility of the service provider. Th terms of MOU are categorically clear and distinguished.

In my considered opinion, the authorities are bound to follow such statutory clarifications issued by the Government of India. Hope so.

[Amit Agrawal]

Dear Shri Sadanand Bulbule Ji,

With greatest respect and with no intention to offend anyone, I find that Clarification for Issue No. 1 by the Circular No. 47/21/2018- GST dated 08.06.2018 is grossly confusing - both for revenue and tax-payer - & validity / meaning of this clarification will be seriously tested in higher courts in time to come. Some of my reasons are as follows:

A. This circular is NOT issued using powers u/s 168 of CGST Act, 2017. Hence, even some revenue officers will consider it as non-binding on them.

B. For valuation issue/s, said clarification only deals with Section 15(2)(b) while NOT dealing with 'Consideration as defined under Section 2 (31)' at all. I feel it as major flaw in given clarification.

C. Difference between consideration for 'selling goods' ((For example: goods (i.e. components) manufactured using moulds / dies of OEM (i.e. received on FOC basis by the manufacturer) and sold to OEM by such component manufacturer), where raw material (i.e metal / aluminium) is owned by component manufacturer)) and 'providing services' ((For example: goods (i.e. components) manufactured using moulds / dies as well as raw material such as aluminium of OEM (i.e. received on FOC basis by the manufacturer) on job-work basis and given back to OEM by such component manufacturer on labour-charge basis)) is ignored while giving said clarifications.

C. Clarifications given in Para 1.2 & 1.3 are contradictory to each other or at-least confusing and resultantly, open for different interpretation.

C1. Scenario described in Para 1.3 does NOT happen in real word. And even hypothetically taking given scenario on its face-value, Section 15(2)(b) does not apply, as agreed price already includes cost of mould / dies' in scenario described in Para 1.3.

D. Everyone is free to interpret given clarifications from Para 1.1 to Para 1.3 against Question raised at serial no. 1, as per own convenience and suitability.

E. Given clarifications lack legal maturity on multiple levels.

So, I will be somewhat reluctant to use said circular while defending a case such as under discussion here. This is more so, when we have long list of judicial precedence/s favouring 'tax-payer providing services'.

P.S I will use said circular's Para 1.1 to 1.3 while defending valuation for 'sale of goods' (as it favours tax-payer, even wrongly in some situations in my respectful submission) specially while defending case arising from specific industry dealt in those Paras. I will be doing this because it suits my client's case and NOT because I believe in everything said in those clarifications.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Just to add to my last post:

With greatest respect, I am not a great fan of relying on any of Board's circular while deciding upon any legal issue under consideration before me for opinion. I read all those circulars to understand how Board / Dept. thinks about the legal issue/s involved as well as to prepare my defences better (specially when Board's views are unfavourable to a client's case). But, I self-conveniently & unabashedly rely on any of those circulars while defending when it suits my client's case.

With regard to clarifications given for Issue No. 1 by the Circular No. 47/21/2018- GST dated 08.06.2018, frankly, I am not sure what it really means due to reasons explained in brief above. So, I intend to use it in a limited situation/s where it suits directly my client's case.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Dear Sir,

In my view, the cost of HSD (free supply) is not required to be included in transaction value for the purpose of payment of GST inasmuch as Section 15(2)(b) of CGST Act is not in picture here. Asking for payment of GST on the cost of HSD supplied free of charge is stretching the law like anything.

Demanding tax on the cost of HSD in the above scenario can be termed as the officers' jingoism.

In this context, you can take cue from the following case law :-

(1) Valuation (Service Tax) — Value of free supplies made by service recipient to service provider not includible in gross value of Site Formation and Mining services (2) Mining services — Activity of removing overburden/waste rock/secondary ore in mines whether covered under Site Formation, Clearance, Excavation, Earthmoving and Demolition services?

The Supreme Court Bench comprising Hon’ble Mr. Justice A.K. Sikri and Hon’ble Mr. Justice Ashok Bhushan on 5-3-2018 dismissed the Civil Appeal Nos. 4965-4966 of 2016 and partly allowed the C.A No. 16991 of 2017. C.A. Nos. 4965-4966 of 2016 filed by Commissioner of Central Excise, Customs and Service Tax, Guntur (Respondent being BGR Mining & Infr. Pvt. Ltd.)  - 2015 (9) TMI 1471 - CESTAT BANGALORE against the CESTAT Final Order Nos. 21845-21850/2015, dated 7-9-2015 (S.V. Engineering Constructions v. Commissioner). C.A. No. 16991 of 2017 filed by Commissioner of Central Excise & Service Tax, Jaipur-II against the CESTAT Final Order No. ST/A/52776/2017-CU(DB) - 2017 (4) TMI 704 - CESTAT NEW DELHI, dated 11-4-2017 (Teknomin Construction Ltd. v. Commissioner) - 2017 (10) TMI 965 - SC ORDER While dismissing/partly allowing the appeals, the Supreme Court passed the following order :

“Civil Appeal Nos. 4965-4966 of 2016

The question raised in these appeals stands covered by the judgment of this Court delivered on 19th February, 2018 in ‘Commissioner of Service Tax etc. v. M/s. Bhayana Builders (P) Ltd. etc. [2018 (2) TMI 1325 - SUPREME COURT].

These appeals are, accordingly, dismissed.

Civil Appeal No. 16991 of 2017

Two issues are raised in this appeal. The first issue pertains to the coverage of the respondent under the Service Tax Act. As per the Department, the respondent is undertaking the activities of excavation and removal of overburden/waste rock/secondary ore by the assessee at the mines of M/s. Hindustan Zinc Ltd. and the question raised is as to whether these activities during the period from 16-6-2005 to 30-11-2007 were covered under the ‘Site Formation, Clearance, Excavation, Earthmoving and Demolition Services’ under Section 65(97a) of the Finance Act, 1994.

Mr. Lakshmikumaran, Learned Counsel appearing for the respondent, fairly accepts that insofar as this issue is concerned, it is yet to be decided.

The second issue pertains to valuation of the service tax, which is covered by judgment dated 19th February, 2018 in ‘Commissioner of Service Tax etc. v. M/s. Bhayana Builders (P) Ltd. etc. [2018 (2) TMI 1325 - SUPREME COURT], and decided in favour of the respondent.

On the first issue, let the matter be tagged along with Civil Appeal Nos. 3987-3988 of 2009.”

The Appellate Tribunal in its impugned order had followed the decision in Sushee Infra - 2015 (6) TMI 1075 - CESTAT BANGALORE and held that the value of free supplies made by service recipient was not includible in gross value of Site Formation and Mining services provided to them by the service provider.

[Commissioner v. BGR Mining & Infr. Pvt. Ltd. - 2018 (3) TMI 2001 - SC ORDER]

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, I find no ambiguity on the issue raised in query. I also support the views of Sh.Amit Agrwal Ji and Sh.Padmnathan Kollengode Ji.

However, I further add that non-leviabilty of GST on HSD cannot be ground for non-inclusion of cost of HSD supplied free of charge in the transaction value. I do not agree with Sh.Padmnathan Kollengode Ji to this extent.

[KASTURI SETHI]

Dear Sir,

Truly honestly speaking, such a comprehensive reply by Sh.Amit Agrawal Ji has clicked as 'springboard' for me to make further search and form an opinion on the issue.

[Padmanathan Kollengode]

Ld Kasturi sir,

Agreed with you that non-taxability cannot be a reason to exclude from valuation when there is a specific provision.

But I am on the point that its a separate activity altogether and it is not taxable.

[KASTURI SETHI]

Dear Sh.Padamanathan Kollengode Ji, I got your point. I agree with you

[Sadanand Bulbule]

Dear experts

Your valuable time, attention and energy is efficient and effective enough on the subject query. After all, not every bamboo becomes a flute in the hands of a Master. The bamboo has to be worthy of a Master. So three of you together have made an exemplary flute out of a raw bamboo [query]. Let such intelligent discussion continue to dispel the darkness. Kudos.

Warm regards

[KASTURI SETHI]

Dear Sir, I have saved your drafting (flowery language) on my desktop with an intent to 'plagiarise ' the same for any purpose other than GST. Thanks & regards. K.L.Sethi

[Sadanand Bulbule]

Dear all

Further to the lengthy discussion on free supply of HSD, refer the following the divergent ruling dated 28/02/2022 of the Appellate Authority for Advance Ruling, Chattisgarh rendered in the case of M/s. Shree Jeet Transaport reported in 2022 (5) TMI 966. It's quite interesting with sugar and salt.

Valuation of supply - diesel filled free of cost by the service recipient in the engaged chartered (dedicated) vehicles - would form part of value of supply of service charged by the Appellant or not - levy of on value of diesel filled free of cost by the service recipient or otherwise under GTA service - difference of opinion - HELD THAT:- The issue is not answered and it is deemed that no ruling is issued under Section 101(3) of the CGST/ CG SGST Act, 2017 because of the divergence of opinion between the two members.

 

[KASTURI SETHI]

Dear Sir,

Whenever SCN is issued to the registered person, please post major contents here. I may be able to help you on the issue.

[Sadanand Bulbule]

Dear Sri. Kasturi Sir

Thanks for your concern, care and I shall do it.

Regards.