Free of Cost Supplies by Service Recipient- Inclusion of Value for GST

Though the ‘Transaction value’ is to be considered as the value for the purpose of discharging GST on supply of goods or services by the supplier, in terms of Section 15(1) of the CGST Act, certain components have been prescribed to be includible in the value of supply, as laid down in clauses (a) to (e) of sub-section (2). The focus of this article is on clause (b) of Section 15(2), which reads as under-

15(2) The value of supply shall include-

(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;

Let’s try to understand the implication of the said provision, by considering two scenarios-

SCENARIO 1 – SUPPLIER LIABLE TO PAY – A GTA service provider enters into an agreement with service recipient to provide trucks with drivers for transport of the goods of the service recipient and Fuel cost is to be borne by the GTA. However, in a few exigency instances, the service recipient had to bear the cost of the fuel.

Thus, in the above case, though the supplier is liable to pay for and bear the fuel cost, the service recipient incurs the cost of the fuel in a few instances and hence the cost of the fuel incurred by the service recipient will have to be added to the value of the freight charges charged by the GTA on the service recipient, in such cases, for the purpose of discharging GST under forward charge mechanism by the GTA, in terms of the above said provision.

SCENARIO 2 – SUPPLIER NOT LIABLE TO PAY – A GTA service provider enters into an agreement with service recipient to provide trucks with drivers for transport of goods of the service recipient. Further, as per the agreement, the GTA is responsible only for the safe delivery of the goods and the cost of the fuel is to be borne by the service recipient.

In the above scenario, the supplier is not liable to pay the cost of fuel and is to be incurred by the service recipient. Thus, as per the literary understanding of the provision, it could be said that this case is not hit by clause (b) of Section 15(2) and hence the value of the fuel cost incurred by the service recipient appears not includible in the value of freight charges charged by the GTA under forward charge mechanism.

Another example is that of supply of Moulds and Dies by Original Equipment Manufacturer (OEM) to the Component Manufacturer on FOC basis. In such cases, as the supplier i.e the Component Manufacturer is not liable to pay the cost of Moulds/dies, the same is not hit by Section 15(2)(b) and hence does not merit inclusion in the value of supply. However, it has been clarified vide Circular no. 47/21/2018-GST dated 8^th June 2018, that, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components.

Advance Ruling and HC Interpretation – A similar scenario, as pertaining to the GTA service case in scenario 2, emerged in the case of advance ruling sought by M/s.Jeet Transport before the Chhattisgarh, AAR, which proceeded to the Appellate Authority for Advance Ruling. The SGST member on the bench gave the ruling that, as it is not hit by the provision of Sec 15(2)(b) and further relying on the Apex Court decisions in the S.Tax era which laid down that FOC diesel cannot be added to the value of freight service, value of fuel does not merit inclusion in the value of supply.

However, the above ruling by the SGST member was in contrast to the ruling given by the CGST member, that the value of the fuel is to be added to the value of freight service mainly on the ground that supply of GTA service would essentially involve the supplier to bear the cost of the fuel, which cannot be isolated through a contractual agreement.

Due to the difference of opinion between the CGST and SGST member, the ruling sought could not be answered and no ruling was given in terms of Sec 101(3) of the CGST Act, which was challenged before the Chhattisgarh HC.

The Hon’ble HC after detailed deliberation on various aspects like the ‘Statement of Objects and Reasons’ for the introduction of GST; parallel provisions on ‘GTA’ in the erstwhile Law pertaining to S.Tax; differentiating couple of Apex Curt decisions passed in the S.Tax era which held that if certain goods or material is supplied by recipient free of cost and used for providing taxable service, only the gross amount charged by the service provider is to be charged to S.Tax, finally held that though the diesel was provided free of cost by the service recipient (and the supplier is not liable to pay) it would nevertheless be added to the value for the purpose of GST. This decision is in contrast to the literary understanding of the provision of Section 15(2)(b) and is mainly based on the following ratio-

1. In the case of GTA, the centrality of the object revolves around the service provided by GTA which is fully based on supply of fuel.

2. Section 7 of the Act explains that expression “supply” would include all forms of supply made or agreed to be made for consideration in furtherance of business by the supplier. So, the nature of business would be the decisive factor and if such consideration is shifted by entering into agreement, it would be encroaching upon the turf of G.T.A., and would only be a collective enthusiasm and that statutory liability cannot be evaded.

3. As has been laid down by the Supreme Court in CLP India Pvt. Ltd. Versus Gujarat Urja Vikas Nigam (2020) 5 SCC 185, the parties by agreement cannot over-ride the statutory provisions in relation to matter of tariff.

4. Fuel is an integral part used in providing the Transportation Service and is essential for GTA provider. Without fuel the entire business of GTA cannot survive. Therefore, fuel being an integral part cannot be bifurcated to overcome a tax liability.

5. Section 15(2)(b) imposes statutory obligation. The very existence of petitioner as GTA is for goods transport. Naturally, it would be the obligation for the GTA to run the vehicles and this factor needs a merited attention. The provision of Section 15(2)(b) has been tried to be by-passed by the agreement wherein the diesel was agreed to be supplied FOC by service recipient to the GTA.

6. The ratio of the Circular on Moulds and Dies have been distinguished as being due to the particular nature of business in the said case.

CONCLUSION – Thus, the provision of Section 15(2)(b) could be interpreted as under-

• SITUATION – SUPPLIER LIABLE TO PAY – In cases, where in terms of the agreement entered into by the supplier of goods or services with the service recipient, certain goods or services which are to be supplied by the supplier in the course of the supply, are supplied by the service recipient on FOC basis to the supplier ( i.e in other words, where the cost of such supply is incurred by the service recipient, which the supplier was liable to pay ), then in such cases, the value of such FOC supply is to be added to the value of supply by the supplier while discharging GST on goods or services being supplied to the service recipient.
• SITUTATION – SUPPLIER NOT LIABLE TO PAY – In cases, where in terms of the agreement entered into by the supplier of goods or services with the service recipient, if certain components of such supply have been agreed upon as not to be borne by the supplier but is to be borne by the service recipient, then the nature of business and the service of the supplier would be the decisive factor in determining whether the value of such supply is includible or otherwise. To put it plainly, if the goods or services being so supplied by the service recipient is an integral part of the goods or services being provided by the supplier, without which the goods or services cannot be provided by the supplier, then the value of such component of supply being provided by the service recipient will have to be included in the value of the supply by the supplier, even though in terms of the agreement the same is not liable to be borne by the supplier. In other situations, like in the case of Moulds/Dies being supplied on FOC basis by the OEM to the Component Manufacturer, Section 15(2)(b) not being hit, the value of such supply being supplied by the service recipient on FOC basis to the supplier is not liable to be added to the value of supply by the supplier.