1. High Court (HC) of Singapore has rendered an interesting decision in the case of Herbalife International Singapore Pte Ltd (hereinafter referred to as ‘Herbalife International’) [2023] SGHC 54 on the issue of valuation of the goods supplied by Herbalife International to its members under the “direct selling” business model. We summarize the key findings of the Court and consider the useful lessons in the Indian context.
The issue before the Court
2. Herbalife International (appellant) is engaged in the business of marketing, selling and distributing Nutritional Products through a “direct selling” business model wherein the goods are sold only to the members who are registered with Herbalife International who in turn consume or sell to customers. The goods are sold by Herbalife International at varying discount tiers depending on the Volume Points accrued to the concerned member. The members are not registered under GST since their turnover does not exceed the minimum threshold. Herbalife International discharged GST on the net sale price (after deducting the tiered discounts) recoverable from the members. The Comptroller of GST issued assessment notices stating that the said supplies shall attract GST at the open market value (i.e., the price at which the members sell the goods to the customers). The basis for issuing the notice was that the business structure results in revenue leakage since the GST is not recovered on the full sale price owing to the fact that the members are not registered under GST. The Comptroller, therefore, asserted that the said revenue leakage is addressed by Sec. 17(3) of the GST Act, 1993 (Singapore) which provides that the value of supply shall be open market value where the supply is for a consideration not wholly consisting of money. The Comptroller asserted that the activities undertaken by the members and stipulated in the membership agreement constitute a non-monetary consideration received by Herbalife International and hence the value of supply made to the said members shall be the open market price. On the other hand, Herbalife International contended that the supply in question does not attract Sec. 17(3) since the same has been made only for a consideration in money and hence falls under Sec. 17(2) wherein only the money value is considered to be the value of supply. Herbalife International also contended that unlike the UK Value Added Tax Act 1994 which to plug the leakage of Revenue makes special valuation provisions for taxing the full sale price in the case of such a “direct selling” business model, there are no similar provisions under the Singapore law and hence even on this ground, only the money value recoverable from the sale to members shall attract GST.
Findings of the High Court
3. The High Court while allowing the appeal gave its findings on the two broad contentions as under:
The obligations of the members cannot be treated as a non-monetary consideration
- The expression ‘consideration’ has not been defined in Singapore law, unlike UK law which defines the term in a very broad sense.
- The term ‘consideration’ in the context of Contract Law cannot be applied to GST statute. Contract Law is concerned with the enforceability of the contract and the sufficiency of consideration and hence defines the said term in a broad sense to include “some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility”. On the other hand, GST law is concerned with the levy of the tax and consideration (what was the payment in the taxable transaction?) is a measure to quantify the liability. It is for this reason that GST law includes consideration flowing from third parties or brings to tax transactions lacking consideration, unlike the Contract Law. Further GST Law is based on self-assessment and hence the factor of determinacy of the consideration is essential to the interpretation of the said term and in the absence of such determinacy the taxpayer will not be able to undertake the self-assessment.
- The undertaking of obligations can constitute non-monetary consideration if (a) the undertakings were independent of, and not ancillary to the supply of the Nutritional Products and (b) the undertakings provided a benefit which goes beyond the monetary transaction in question.
- In the context of (a) it has been held that the terms of trade would not constitute non-monetary consideration except where they contractually demand the provision of something non-monetary in exchange for the supply. A distinction must be drawn between contractual conditions which are imposed on the recipient of a supply that regulates what the recipient can or cannot do with that good, and contractual obligations which stipulate the consideration that the recipient must furnish in exchange for the supply.
- In the context of (b) it has been held that the expression ‘benefit’ which arises from terms of trade would not constitute non-monetary consideration as if held otherwise then the contracting parties do not contract in vain, and every contractual term could be said to “benefit” the contracting parties in some way permitting the disregard of the actual sale price. In this regard, a useful indicator of whether a “benefit” is provided in exchange for the supply is whether there is parity of value between the non-monetary “benefit” and the good received. The non-monetary benefit should “make up” for the discrepancy between the money paid and the regular price of the product. It was further held that there can be either a contractual apportionment of the non-monetary value or is to be derived from the facts of the case. Also, the presence of de minimis value of non-monetary consideration can lead to draconian taxing outcomes as the law then seeks to tax the transaction based on the open market value and not based on the inclusion of the value of such non-monetary consideration to the actual price payable.
- From the facts of the case, it was held that the obligations of members are part of the terms of trade and hence do not constitute a benefit flowing to Herbalife International so as to disregard the actual price for assessment of GST.
Revenue leakage cannot be plugged by the Court
- In the context of UK law, High Court held that the expression ‘consideration’ in UK Law is defined very broadly and therefore it permits the making of special valuation provisions for taxing the sales under the “direct selling” business model. The High Court also held that in absence of such special valuation provisions, even the obligations (not meeting the test of ‘consideration’) were not brought to tax under UK law. It was thus held that the revenue leakage can be plugged only by the Parliament and not by the Court.
Lessons in the Indian context
4. In the context of Indian Law, the provisions dealing with the valuation are ambiguous and hence shall require interpretation in times to come. To illustrate the issue, consider the following:
- 9(1) of the CGST Act, 2017 provides for the levy of tax on the value determined u/s 15 of the said Act.
- 15(1) provides for considering the transaction value where the supplier and the recipient are not related and the price is the sole consideration for the supply.
- 2(31) defines ‘consideration’ in an expansive sense as it includes any payment made as well as the monetary value of any act or forbearance in respect of, in response to or for inducement of the supply.
- Once the transaction value is rejected u/s 15(1) owing to the alleged presence of non-monetary consideration, Rule 27 provides for a progressive step analysis wherein first the open market value is considered as the value of supply and only in absence of open market value, other methods are applied in the given order.
5. The above law illustrates a peril similar to the one faced in the Herbalife International case. The expansive definition of ‘consideration’ coupled with the first preference of open market value if the transaction value stands rejected, can lead to disastrous consequences. For example, if the transaction value of supply by let us say a supplier similar to Herbalife International to a member is at Rs. 50 (50% discount) and the said value is disputed owing to the alleged presence of non-monetary consideration, then the open market value of Rs. 100 (the full sale price at which the member sells to the consumer) will get adopted. It must be remembered that the difference of Rs. 50 does not represent the value of consideration for the alleged presence of obligations of members but represents the profit margin on the trading activity undertaken by the said member.
6. Hence in our view, it is worthwhile for the GST Council to provide a framework on the following principles:
- Every benefit under the contract cannot be equated to the presence of a non-monetary consideration. Benefits as per the terms of trade are conditions of the contract.
- Non-monetary consideration can be alleged only if it can be demonstrated that the non-monetary benefit “make up” for the discrepancy between the money paid and the regular price of the product and nothing else. Further presence of a de minimis value of non-monetary consideration cannot lead to the rejection of transaction value and adoption of the open market value as the preferred route.
- The value of non-monetary consideration, if found, is required to be determined considering the facts of the case and industry practice and hence the selling price of the recipient to a consumer cannot automatically be assumed to be the value of supply. The terms of the agreement between the parties and the method of arriving at the consideration is pivotal.
(Views are strictly personal)
Author Bio
Yes more clarity should be provided.
I have query as below :
Mr A is running health club(Herbalife).He make members and charge monthly fee for shake/food suppliment. Two Modes are provided to serve the member:
1.Member may visit to club and consume shake/diet at club itself.
2.Member may provide home address where ingredients are delivered for shake/food suppliment.
Club is charging GST @18% from members and claiming ITC on inputs on both of above.
A-Do the club following correct rate 18% and ITC claim on inputs allowable ?
B-Can club be treated as restaurant and should charge 5% GST without ITC ?
Thanks In Advance