Reading book after book the whole world died, and none ever became learned!
But understanding the root matter is what made them gain the knowledge! – Kabir
INTRICACIES IN VALUATION
1. Once it is determined that the transaction in question shall be leviable to GST, the next logical question shall be to determine the value of supply in question on which the rate of tax shall have to be applied to determine the amount of the tax which is payable. The present paper therefore seeks to discuss certain intricacies on the aspects of the value of supply.
2. Before we discuss the intricacies, it is very much important to understand the basics of the legal provisions under reference on the issue.
3. Sec. 9(1) of the CGST Act, 2017 as well as Sec. 5(1) of the IGST Act, 2017 provides for the levy of tax on the supplies of goods or services or both on the value determined under section 15. Therefore the given charging provisions itself provide for the manner in which the value shall be determined by referring to Sec. 15.
4. 15(1) of the CGST Act, 2017 provides that the value of a 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 where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Transaction value therefore shall be the first point of consideration to determine the value of supply. However, in situations where the supplier and the recipient are related or where the price is not the sole consideration, the transaction value will be accepted only if the said value is in accordance with the rules which we shall refer later.
5. 15(2) provides for certain inclusions in the transaction value to determine the value of supply. As an illustration Sec. 15(2)(c) provides that the value of supply shall include 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. Therefore the value of supply in normal situation (barring the related party transactions or where price is not the sole consideration) shall be the transaction value i.e. the price paid or payable inclusive of the specific inclusions provided u/s 15(2).
6. 15(3) provides for an exclusion from the value of supply in the form of discounts. Discounts reflected on the invoice itself as well as discounts given post supply (subject to certain conditions) shall not form part of the value of supply.
7. 15(4) provides that where the value of the supply of goods or services or both cannot be determined under sub-section (1) (i.e related party transactions or where price is not the sole consideration), the same shall be determined in such manner as may be prescribed. Chapter IV of the CGST Rules, 2017 prescribes the manner for determination of the value of supply.
8. 15(5) grants power to the Government notwithstanding anything contained in sub-section (1) or sub-section (4) to notify the supplies on the recommendations of the Council in respect of which the value of supply shall be determined in such manner as may be prescribed.
9. Explanation to Sec. 15 provides for deeming fiction to consider the given persons in the said Explanation as related persons. Said deeming fiction shall apply for all the provisions of the Act.
10. With the above brief background of the legal provisions let us delve into some the intricacies associated with the given provisions.
11. The first step to determine the value of supply shall be to consider the transaction value subject to the inclusions mentioned u/s 15(2). The said value of supply can be rejected only in two situations viz. (a) where the transaction is with related parties or (b) where the price is not the sole consideration for the supply in question. Only when the value is rejected at the first step, that the taxpayer needs to go to the second step in terms of applying the provisions contained in the CGST Rules, 2017.
12. Transaction value in the simplest form is the price agreed between the supplier and the recipient for the supply under consideration. It therefore accepts the business decisions on pricing bargained by the parties factoring several factors as the base for the determination of the value of supply. Displacing such agreed price shall therefore require a sufficiently high degree of proof, the burden of which is on the department. Hon’ble Supreme Court in the case of Commissioner of Customs v. Prodelin India Pvt. Ltd. 2006 (202) ELT 13(SC) under the context of Customs Act, 1962 which has similar provisions as far as transaction value is concerned observed that “it is settled law that the onus to prove that the declared price did not reflect the true transaction value is always on the Department”. Therefore the transaction value cannot be rejected merely because the supplier maintains a price list which is at variance with the transaction value (see Eicher Tractors Ltd. v. Commissioner of Customs 2000 (122) ELT 321 (SC)). Similarly discounted price offered to certain old customers cannot be taken as a base to disregard the transaction value by undertaking a simple comparison with the price offered to new customers (see Basant Industries v. Additional Commissioner of Customs 1996 (81) ELT 195 (SC)). Therefore at this stage, it may be understood that the transaction value deserves to be accepted as the value of supply unless the situation falls into the two exceptions viz. (a) where the transaction is with related parties or (b) where the price is not the sole consideration for the supply in question.
13. 15(2) of the CGST Act, 2017 provides for specific inclusions in the transaction value. Many intricacies would arise while applying the given provisions to certain situations.
14. 15(2)(a) provides for inclusion of any taxes, duties, cesses, fees and charges levied under any law (except GST) if charged separately by the supplier. Issue therefore will arise as to whether the value for the purposes of GST shall include the TCS amount (Income Tax) or not? The word “charged” would imply that the liability to pay the tax was on the supplier and then the supplier recovers the same by charging it to the recipient. TCS under Income Tax is collected by the supplier for payment of tax on behalf of the recipient (who in turn gets the credit of the same). Hence the TCS cannot be considered to have been levied on the supplier and then charged by the supplier to the recipient. Thus the same cannot be included in the value of supply. Said view also finds support from Corrigendum to Circular No. 76/50/2018-GST.
15. Sec. 15(2)(b) provides for the inclusion of 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. Issues would arise as to the situations where the said clause will be applied. It may be noted that the given clause seeks inclusion of the amount incurred by the recipient only if the supplier was liable to pay the said amount. Hence only if contractually the supplier was required to make a payment and the same has been incurred by the recipient that the said amount will have to be included in the value of supply. This provision is therefore reverse of the concept of pure agent which we shall discuss later. If therefore it can be demonstrated that the supplier in question was not liable to pay for the amount in question (since the same was contractually in the scope of the recipient), the given amount will not be included in the value of supply. One may refer to the decisions in the case of McDowell and Co. Ltd. vs. Commercial Tax Officer [1985 ] 59 STC 277 (SC), N.M. Goel & Co.  72 STC 368 (SC) and Ts Tech Sun (India) Ltd.  15 VST 559 (SC) wherein similar concept in the erstwhile regime has been appreciated. Additional issue would also arise in situations if it is found that the amount incurred by the recipient merits inclusion in the value of supply. Can it be said in such situations that the recipient by incurring such amount has made a corresponding supply to the supplier in question? For the amounts incurred, if the invoices of the vendors are in the name of the recipient, then the said recipients will only be considered to have received the supplies in question. The deeming fiction under Sec. 15(2)(b) may not be extended to the recipient. Said view also finds support from the second proviso to Rule 37(1) of the CGST Rules, 2017 in the context of ITC concerning the failure in making the payment within 180 days which stipulates that the said condition shall not apply to the inclusion u/s 15(2)(b).
16. 15(2)(c) provides for inclusion of incidental expenses charged separately. An interesting issue will arise when one considers the said inclusion in contrast with the concept of composite or mixed supply. Sec. 8 of the CGST Act, 2017 provides that for the determination of the tax liability the composite supply shall be treated based on the principal supply and the mixed supply shall be treated based on the supply which attracts the highest rate. Therefore for the purpose of the determination of the value of the principal supply in question, one may apply Sec. 15(2)(c) to include the incidental expenses (such as freight). Similar issue would not arise in the case of mixed supply as the said supply must be done necessarily for a single price. Hence in situations where the recovery of the incidental expenses stands represented as an independent supply by itself contractually (in which case it will no longer be incidental), the same cannot be included while determining the value of other contractually independent supplies. This principle of course needs to be applied only after careful reading of the contract in question.
17. Issue may also arise in the case of export of goods with payment of IGST u/s 16(3)(b) of the IGST Act, 2017 when the said exports are done on CIF basis. It can be contended that the provisions concerning the determination of the value of supply u/s 15 shall also apply to the export of goods as the same is also in the nature of supply. Therefore the IGST to be paid on the CIF exports shall be on the total value inclusive of incidental expenses and accordingly refund of the said IGST should be claimed.
18. Sec. 15(2)(d) provides for the inclusion of the interest or late fee or penalty for delayed payment of any consideration for any supply. As stated earlier one needs to ascertain whether the recovery of the interest amount has been contemplated as a separate independent supply of financial services or not. If not, then based on Sec. 15(2)(d) the same is required to be included in the value of supply. The time of supply for such inclusion shall be the date of receipt. Hence the supplier in question shall be required to issue a debit note at the time of receipt of such interest or late fee or penalty. Naturally, the tax rate as applicable to the underlying supply in question will have to be applied. An interesting issue may arise in such situations. The debit note in question may be issued beyond the month of September following the financial year in which the tax invoice was issued. This would be for the reason that the interest amount is received after the given time frame. Can the recipient in question avail the ITC based on the debit note given the provisions u/s 16(4) of the CGST Act, 2017 wherein the time limit to take the ITC is based on the invoice date (the amendment to link it with the debit note date is not yet effective). It can be contended in such situations that the ITC cannot be denied when the debit note itself is issued in accordance with the provisions of law.
19. Sec. 15(2)(e) provides for the inclusion of subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments. Therefore only the subsidies directly linked to the price will be included. Also subsidies, though linked to the price, shall not be included if the same have been provided by the Central Government and State Governments. An issue may arise in situations wherein the subsidy is provided to the customer but directly paid to the supplier. In such situations, the supplier will charge full price to the customer but receive part consideration from the customer and part in the form of subsidy on behalf of the customer. An Explanation to Sec. 15(2)(e) provides that the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy. Will it imply that the supplier in question will have to also include the subsidy amount to determine the value of supply over and above the full price which he as such charges to the customer? The word “receives” in the explanation is required to be read in the context of the beneficiary of the subsidy in question and hence if the supplier is not the beneficiary of the subsidy, the same cannot be included in the value of supply. Said view also finds support in the decision of MEGHA AGROTECH PVT. LTD. 2020 (36) G.S.T.L. 450 (A.A.R. – GST – Kar.).
20. After considering the inclusions, we must also consider issues related to the exclusion from the transaction value in terms of discount u/s 15(3). Said provision allows for the exclusion of the discounts reflected on the invoice itself. It also allows for the exclusion of the post supply discounts provided 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 based on the document issued by the supplier has been reversed by the recipient of the supply. Post-supply discounts can be effected by issuing the credit notes u/s 34(1) of the CGST Act, 2017.
21. An issue may arise in the context of post-supply discounts with respect to the twin conditions which are to be satisfied. Firstly the same must be established in terms of agreement before the time of supply. Therefore the post–supply discounts must be a pre-supply concurrence affected post-supply on meeting the necessary conditions. Hence the agreement (advisable to be in writing) must provide for the discount policy. The said agreement need not quantify the post-supply discounts as the same shall be contingent on the conditions listed in the discount policy. Said view also find support from the decision of Hon’ble Supreme Court in the case of Southern Motors vs State of Karnataka 2017 (358) E.L.T. 3 (S.C.) wherein the Hon’ble Court in the context of KVAT Act, 2003 appreciated that the post-supply discounts shall be a pre-sale concurrence but can be based on a host of factors in respect of which the quantification can take place post the sale. The second condition requires that the ITC reflected in the credit note must have been reversed by the recipient. The uploading of the tax credit notes in the GSTR 1 shall act as an evidence that the supplier has discharged its onus by intimating the same to the recipient. In absence of GSTR 2, the confirmation of the reversal of ITC by the recipient cannot be known by the supplier.
22. An issue may also arise as to whether it is compulsory to effect the discounts which pass the test of pre-supply concurrence only way of tax credit notes u/s 34(1). Perusal of Sec. 15(3) read with Sec. 34(1) entails that the issuance of the tax credit notes is at the discretion of the supplier. Hence the supplier may also affect the discounts by way of commercial credit notes without seeking the tax adjustments. Also the ITC of the recipient will not be denied to the extent of the credit note value on the ground that the payment has not been done within 180 days for the reason that the adjustment of the balance with a credit note will also be considered as payment and hence there shall be no failure in making the payment.
23. Now with the above discussion on the inclusions and exclusion in the transaction value, we must discuss the situations where the transaction value is required to be departed.
SUPPLIER AND THE RECIPIENT ARE RELATED
24. In situations where the supply in question is between related parties, the transaction value cannot be applied straight away because of specific provision u/s 15(1). Explanation to Sec. 15 provides situations where the persons in question shall be deemed to be “related persons”. Now the criteria to determine whether persons are related or not is objective as well as subjective. Issues will arise in situations where the said criteria is subjective. As an example, the persons shall be deemed to be related under clause (a)(v) of the Explanation if one of them directly or indirectly controls the other. The word “controls” has not been defined in the Act. It is submitted that the said word needs to be interpreted considering the nature of influence the person has over the other while fixing the transaction value in question. Lack of influence over the fixing of the price shall signify lack of control over the other. Also as stated earlier the onus to dislodge the transaction value is on the department and the same cannot be dislodged merely based on uncorroborated suspicion. If it is established that the parties in question are related parties, the value of supply shall have to be determined based on the methods provided in the rules.
PRICE IS NOT THE SOLE CONSIDERATION
25. Second exception where the transaction value can be dislodged is the situation where the price is not the sole consideration. The term “consideration” has been defined u/s 2(31) of the CGST Act, 2017 to include any payment made or to be made whether in money or otherwise. However, in the context of Sec. 15(1), the said term must be construed in relation to the agreed price in monetary terms. Hence if the agreed price is not the sole consideration, the value of supply shall have to be determined based on the methods provided in the rules. Situation (illustrative) such as where the supplier receives the consideration in kind will get covered and the rules will have to be applied to determine the value of supply. One must also appreciate that the consideration in kind may also entail a reciprocal supply from the recipient to the supplier.
DETERMINATION OF VALUE AS PER THE RULES
26. 15(4) provides that where the value cannot be determined based on Sec. 15(1) i.e. where the transaction value is not accepted for the reasons discussed above, the value of supply shall have to be determined in the manner prescribed by way of rules. Sec. 15(5) grants power to the Government notwithstanding anything contained in sub-section (1) or sub-section (4) to notify the supplies on the recommendations of the Council in respect of which the value of supply shall be determined in such manner as may be prescribed. Let us consider the issues involved with the given provisions.
WHERE THE CONSIDERATION IS NOT WHOLLY IN MONEY
27. Rule 27 of the CGST Rules, 2017 provides for the determination of value where the consideration is not wholly in money (i.e. where the price is not the sole consideration). Rule provides for proceeding in a hierarchy till the taxpayer reaches the rule where the value can be determined. First base shall be the open market value. If open market value is not available the value of supply shall 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 open market value as well as money equivalent of consideration is not available, the value of supply shall be the value of like kind and quality of supply. In absence of all the three not available, the value of supply shall be based on the cost + 10% (Rule 31) or residual method (Rule 32) in that order.
28. Open market value has been defined to mean full value in money excluding GST and cess payable in situation where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made. The issue would arise in respect to the determination of the open market value for the reason that one has to consider the same in respect to an independent supply which is being made at the same time when the supply in question is being made. It will therefore pose a practical challenge as finding the two simultaneous supplies at the same time will be difficult.
29. Supply of goods or services or both of like kind and quality has been defined to mean 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 the 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. Issue would arise while applying the said definition when the supply of services are in question. This is for the reason that the entire definition of like kind and quality is framed considering the goods in question for the reason that the attributes such as quality, functional components and materials are associated with goods. One would also find similar provisions under the Customs Law which is again made qua the goods. Another issue to appreciate relates to the rigidity of finding the goods or services of like kind having the same quantity (same commercial level). Hence one cannot adopt the value of like kind albeit of a different commercial level and then allow for the adjustment of the price to the commercial level of supply in question.
30. Another issue to consider is that the rules provide for proceeding through the various valuation methods in a hierarchy. One is expected to stop at the method which results in an answer. It is quite possible that all the methods may not result in an accurate answer. As an example, one may determine the open market value but the independent supply in question may not have happened at the same time as the supply for which value is determined. One may also face challenges in determining the accurate value of the non-monetary consideration. In the same situation, one may even obtain several different values of supply of like kind and quality without any provision for averaging. In the absence of an accurate answer can it be said that one can move to the cost + 10% and determine that as an accurate value of supply?
31. The last issue to consider is that the said rule, unlike the Customs Law, does not provide for applying the valuation methods considering identical goods (subject to the adjustment for commercial level) or similar goods which are better aligned with the real world.
WHERE THE TRANSACTION IS BETWEEN DISTINCT OR RELATED PERSONS
32. Rule 28 contains provisions for the determination of the value of supply when the transaction is between distinct or related persons. It may be noted that the Sec. 15(1) provides for not accepting the transaction value where the price is not the sole consideration or where the supplier and the recipient are related. The case of the supply between distinct persons (separate registrations by the same legal entity) is expressly not covered by the exceptions u/s 15(1) for the reason that it is not a transaction between related persons and also the price (whether it is a sole consideration or not) is immaterial as the transaction is within the same legal entity. Hence one may say that in absence of Sec. 15(1) expressly excluding the situation of transaction between the distinct persons, the provision of Rule 28 cannot be applied. Said view will not be tenable for the reason that Sec. 15(4) provides for applying the rules prescribed when the value cannot be determined u/s 15(1) and not just in the exceptions mentioned therein. Therefore since the supplies between the distinct persons cannot have a transaction value i.e. the price paid or payable, the validity of Rule 28 cannot be questioned.
33. Rule 28 similar to Rule 27 provides for first determining the open market value. In absence of the same one then has to consider the value of like kind and quality. In absence of the same one has to then consider the application of cost + 10 or residual method. Issues discussed in the context of Rule 27 as it relates to open market value and the value of like kind and quality shall equally apply also under Rule 28.
34. Additional issues will however arise in the context of Rule 28. The second proviso to Rule 28 provides that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. In other words, if the recipient is eligible to avail full ITC, the invoice value shall be accepted as the value of supply. The term “full input tax credit” has not been defined. As per Sec. 16(1) of the CGST Act, 2017 the recipient is eligible to take the ITC in respect of all the supplies used or intended to be used in the course or furtherance of business. However Sec. 17 provides for restrictions as well as blocking of the ITC. Hence while considering whether full ITC is available or not, is one required to only consider Sec. 16 or one needs to also consider Sec. 17? A literal reading of the second proviso provides for determining whether the recipient is eligible for full ITC or not. The word “eligible” can also be found in Sec. 16(1) and the restrictions u/s 17(1)/(2) are applied post the availment of the eligible ITC. Hence it can be contended that the second proviso under Rule 28 can be applied if it is found that the ITC in question is eligible u/s 16 read with the block ITC u/s 17(5).
35. Another issue to consider is when the transaction with the related parties entails a consideration not wholly in money. In such situation whether Rule 27 will be applied or Rule 28 ? The difference between the two rules is that Rule 27 provides for the method wherein the value of the consideration received in kind can be considered as part of the value of supply whereas similar method is not provided under Rule 28. Given specific rule for transactions with related parties, it can be contended that only Rule 28 can be applied.
36. Last issue to consider with respect to the related party transactions is that the rule forces the application of the various valuation methods even if it can be established otherwise that the relationship did not influence the transaction value. Customs Law provides for the acceptance of the transaction value in such situations and do not compel the application of the valuation methods. In absence of similar provisions under Rule 28, one will have to necessarily apply the valuation methods for all the transactions with the related parties to justify the value of supply.
WHERE THE TRANSACTION IS WITH THE AGENTS
37. Rule 29 provides for the determination of the value of supply where the supply of goods is between principal and his agent. It may be noted that principal and agent (except sole agent) are by default not considered as related persons. However, the nature of supply between principal and agent connotes that there will not be price paid or payable in absence of a contract of sale. Hence the transaction value u/s 15(1) cannot be determined and thus by virtue of Sec. 15(4), Rule 29 will come into play. It may be noted that the benefit similar to the second proviso to Rule 28 is not available in case of the transaction with the agents.
WHERE THE VALUE IS TO BE DETERMINED BASED ON COST
38. On failure of determining the open market value or the value of like kind and quality, the valuation method based on cost under Rule 30 will have to be applied. Said method provides for considering the 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. An issue will arise with respect to the determination of the cost itself. Without any guidance as to the manner of said determination, it would be open to the taxpayer to determine the cost based on the method found appropriate.
39. Rule 31 provides for applying a method using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of Chapter IV. This shall be the method of last resort on failure to determine the value under any of the methods discussed above. Hence it can be contended that it can be applied in rare cases where even the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services cannot be determined.
VALUATION IN CASE OF SPECIAL SUPPLIES
40. Rule 31A provides for the manner for determining the value of supply in case lottery, betting, gambling and horse racing. It is mandatory to determine the value of the concerned supplies by following the method prescribed in the said rule. However, it may be noted that Hon’ble Supreme Court in the case of Skill Lotto Solutions Pvt. Ltd v. UOI (WP (Civil) No. 961 of 2018) (SC) has granted the liberty to the petitioner to contest the valuation method. Hence the development in this regard shall determine the validity of the said rule. We shall explore this concept in the context of real estate sector later.
41. Rule 32 provides an optional mechanism for determining the value of supply in case of supplies with respect to money changing services, air ticket booking by agents, life insurance business, person dealing with second-hand goods and value of token, voucher, coupon or stamp (other than postage stamp).
42. An interesting issue arises in the context of voucher or coupons. Consider a situation wherein a customer purchases goods worth Rs. 5,000/- and he is granted vouchers worth Rs. 1,000/- as a reward for the given purchase. Said voucher can be redeemed only at the stores of the given vendor. Now the said customer makes another purchase of Rs. 4,000/- and redeems the voucher for Rs. 1,000/- and hence is required to make the payment of Rs. 3,000/-. In the said context the issue is whether the issuance of the voucher for Rs. 1,000/- is liable to tax? Also whether GST on the second purchase shall be leviable on Rs. 4,000/- or Rs. 3,000/-? Adverse view on the issues will surely lead to triple taxation. Voucher has been defined u/s 2(118) as an instrument which is accepted as consideration. It can be contended that the vouchers in question (considered as close-ended Pre-paid Payment Instruments) are merely payment instruments and hence there should not be any liability when the same is granted to the customer. On redemption however if the same is considered as payment instrument, the tax shall be leviable on the gross amount i.e. Rs. 4,000/-. It can be contended that the vouchers in such situations are merely discounts granted as part of marketing tactic to incentivize buying and do not partake the character of a payment instrument at all and hence the same should not suffer from tax neither at the stage of granting nor at the stage of redemption. The supplier in question for making the supplies has only received Rs. 8,000/- as the transaction value i.e. the price paid or payable and hence the tax can be levied only on the said value. Said view finds support from the fact that the application of Rule 32 is optional.
43. Rule 33 contains the provisions in relation to pure agent. It provides for exclusion of reimbursements subject to the stipulated conditions. One issue to be considered is whether the said provisions can be applied when the value of supply is determined u/s 15(1) i.e. the transaction value? It is so because the reference to the valuation rules u/s 15(4) can be made only if the value of supply cannot be determined u/s 15(1). In case of reimbursements, it can be contended that as the transaction value (including the reimbursements) is not solely for the supplies in question, the said value cannot be determined u/s 15(1) and hence recourse can be made to Sec. 15(4) and Rule 33 to exclude the reimbursements subject the conditions stipulated.
44. It may also be noted that the conditions for claiming the reimbursements as not forming part of the value of supply entails that the supplier neither intends to hold nor holds any title to the goods or services or both so procured or supplied as a pure agent of the recipient of the supply. Said condition necessitates that the contract for the value sought to be covered in the ambit of pure agent must be entered between the vendors and the recipients and the supplier in question merely makes the payment under authorization and recovers the same over and above the services he supplies on his own account. Said arrangement will pose certain challenges for claiming ITC by the recipients in situations where the invoice of the vendors are in the name of the supplier which also cannot avail the ITC. Hence in cases where ITC is involved, it would be better for the supplier to avail the ITC by undertaking the expense on his own account and including the same in the transaction value u/s 15(2) as incidental charges.
RATE OF EXCHANGE
45. Rule 34 mandates that in case of supply of goods, the rate of exchange as notified by CBIC u/s 14 of the Customs Act, 1962 has to be applied. This is mainly for determining the taxable value on which IGST shall be applied if the refund is claimed under the rebate route. In case of supply of services, exchange rate as per generally accepted accounting principles can be applied.
VALUE INCLUSIVE OF TAX
46. Rule 35 provides that where the value of supply is inclusive of tax, the tax amount shall be determined based on the reverse calculation. This follows the common principle that when the tax amount is not charged separately, the total amount should be considered as inclusive of tax and the tax element needs to be determined based on reverse working.
REAL ESTATE SECTOR
47. Typical issues will arise in the real estate sector as far as the determination of the value of supply is concerned for the reason that the transactions in the said sector includes transactions in immovable property. 15(1) provides that the transaction value must be the price paid or payable for the supply of goods or services in question. An issue may therefore arise when the price paid or payable contains elements which are not in relation to the supply of goods or services. In respect of construction services an explanation 2 to Notification No. 11/2017 – CT (R) provides that the value of supply of services in question, involving the transfer of land or undivided share of land, shall be the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply. The Explanation to the said explanation further provides that the total amount shall mean the sum total of (a) consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sublease. It may also be noted that the given notification also refers to Sec. 15(5) which grants power to the Government to notify the supplies for which the value shall be prescribed. Hence can one challenge the notional deduction of 1/3rd towards the land cost when it can be demonstrated that the actual value is much higher ? It may be noted that power u/s 15(5) can be exercised only by way of prescribing the value of supply by way of rules. Hence the same cannot be exercised by way of a notification. Further reference can be made to the decision in the case of Wipro Ltd v. Assistant Collector of Customs 2015 (319) E.L.T. 177 (S.C.) wherein it has been held that the duty can be levied only on the actual transaction value if that can be ascertained. Further reference can also be made to the decision in the case of Union of India vs. Century Manufacturing Company Limited 1992 (60) E.L.T. 3 (S.C.) wherein it has been held that the deemed tariff values can be challenged if the same are fixed based on a whim without any base.
48. In the present paper, we have endeavored to appraise the readers of certain important issues on the topic of valuation. Certainly many more issues will come to light as department initiates their audits. Certainly, the determination of value is not that full of certainties.
INTRICACIES IN TIME OF SUPPLY
49. The provisions concerning the time of supply enable the taxpayer to determine the time at which the liability to pay the tax shall arise. Sec. 12 of the CGST Act, 2017 contains provisions related to the determination of the time of supply of goods and Sec. 13 contains provisions related to the determination of the time of supply of services. Let us consider some intricacies involved with the said provisions.
CONFLICT WITH REVENUE RECOGNITION
50. Issues will arise in situations where the revenue recognition is not aligned with the provisions related to the time of supply. Classic example can be concerning unbilled services. As per the applicable Accounting Standards, the taxpayer may recognize the revenue based on the activity already completed by the cut-off date but may issue the invoice subsequently. Can the recognition of revenue in the books of account imply the occurrence of the time of supply under GST?
51. 13(2) of the CGST Act, 2017 provides that the time of supply of services shall be the earliest of the following dates (a) the date of issue of invoice by the supplier if the invoice is issued within the period prescribed u/s 31 or date of receipt of payment, whichever is earlier; or (b) the date of provision of service, if the invoice is not issued within the period prescribed; or (c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply. Now as per Sec. 31(2) of the CGST Act, 2017 read with Rule 47 the supplier is required to issue the invoice before or after the provision of service but within a period of 30 days from the date of supply of service. Hence one will have to understand as to when can it be considered that the services have been provided? CBEC vide Circular No. 144/13/2011-S.T., dated 18-7-2011 in the erstwhile regime had clarified that the completion of service shall not only entail the completion of the physical part of the service but shall also include completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing etc. which may be essential pre-requisites for identification of completion of service. The test for the determination of whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue an invoice. However such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice. We submit that the similar test can also be applied even under the GST regime and if it can be demonstrated that the auxiliary activities that enable the supplier to be in a position to issue the invoice are not yet complete, mere revenue recognition in the books to comply with the accounting standards cannot be construed to be the occurrence of the time of supply.
SUPPLY BETWEEN DISTINCT PERSONS
52. Another issue to consider pertains to supplies between distinct persons. As far as goods are concerned, the time of supply shall occur on the removal. However, the determination of the time of supply of services between distinct persons is not clear. As stated before, the time of supply of services is linked with the completion of service. In case of supply of services between distinct persons, the event of completion is difficult to ascertain in absence of contract as well as consideration. Hence it can be contended that the mutually agreed time of supply between the distinct persons will have to be considered as the time of supply for discharge of tax.
53. An interesting issue shall arise in cases where the tax is payable under RCM on the supply of development rights or Floor Space Index (FSI) (including additional FSI) on or after 01.04.2019 by the promoter in case of the commercial project where such development rights or FSI are granted against the construction services to be provided by the promoter to the landowner. It may be noted that the aspects of whether GST is leviable on the development rights or not is not considered for the present paper as the paper deals with only the issue related to the time of supply.
54. Now the given issue is interesting for the reason that the supply of construction services in a commercial project is taxed at the regular rates (after considering the land cost deduction) and hence even the ITC on the inward supplies (including the tax paid on the development rights or FSI) involved in the said project is available subject to the reversal to the extent of unsold units at the time of completion of the project. As per Notification No. 06/2019-Central Tax (Rate) dt. 29.03.2019 the tax under the RCM on the supply of development rights or FSI against the construction services is to be paid at the time of completion of the project. Therefore practically if the tax under RCM on the development rights or FSI is paid at the time of completion, the ITC of the same may not be completely utilized for the reason that the time of supply in case of units booked before the completion (including the construction service to the landowner) will have occasioned before the completion. Hence can one consider to avail the ITC in advance of the date of completion to manage the cash flows allowing the utilization of the ITC? Now Notification No. 06/2019-Central Tax (Rate) dt. 29.03.2019 has been issued by the exercise of powers granted by Sec. 148 of the CGST Act, 2017. Sec. 148 permits the Government to notify certain classes of registered persons who are required to follow the special procedure notified in this regard. Hence strict reading will suggest that the liability to pay the tax under RCM on the development rights or FSI in the context of the issue being discussed will arise only as per the procedure notified in Notification No. 06/2019-Central Tax (Rate). However the said notification fails to provide the procedure for the issuance of the invoicing for discharging the tax under RCM and the availment of the ITC thereof. Hence recourse can be made to Sec. 31(3)(f) of the CGST Act, 2017 which provides for the issuance to the invoice in case of the tax to be paid under RCM based on the date of the receipt of the goods or services. Therefore it can be contended that the promoter can issue the invoice as per Sec. 31(3)(f) on the date of the transfer of the development rights or FSI and can avail the ITC thereof based on the said document.
55. 12(3) and Sec. 13(3) of the CGST Act, 2017 contains provisions related to the determination of the time of supply of goods and services respectively in cases where the tax is to be paid under RCM. An issue will arise in situations where the recipient in question has failed to make the payment of tax with the due dates as per the given provisions and the same is detected at the time of the finalization of the annual return. Can the recipient in such situation discharge the tax by issuing the invoice of the current date? This is so because if the invoice issued now is considered to be of the date when the time of supply actually happened, then the availment of the ITC can be put to question given the restrictions u/s 16(4). In such situation it can be contended that although the law requires the preparation of the invoice based on the date of receipt of goods or services for which the tax is to be paid under RCM, the law does not prevent the issuance of the invoice belatedly. Hence it can be contended that the invoice for such supplies under RCM can be prepared even of the current date and the ITC thereof can be availed. One may also read the detailed discussion on the said issue in the first section wherein intricacies of ITC have been covered. One must however note that the belated issuance of invoice may invite general penalty. However the same can be contested on the ground of the absence of any intent to evade as the situation is revenue neutral.
CONTINUOUS SUPPLY OF SERVICES
56. Last issue to discuss deals with the continuous supply of services. Continuous supply of services has been defined u/s 2(33) of the CGST Act, 2017 to mean a supply of services which is provided, or agreed to be provided, continuously or on a recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes the supply of such services as the Government may, subject to such conditions, as it may, by notification, specify. Sec. 31(5) provides for the mechanism of issuing the invoice in case of continuous supply of services. As per the said provision, the invoice shall be issued (a) where the due date of payment is ascertainable from the contract, on or before the due date of payment; (b) where the due date of payment is not ascertainable from the contract, before or at the time when the supplier of service receives the payment; (c) where the payment is linked to the completion of an event, on or before the date of completion of that event. Hence the provision seeks to link the time of supply with the due date of payment, actual receipt of payment and completion of event. Issue shall arise when all the given three dates are different. It is possible in the real estate sector that the promoter in question may allow the recipient more time to pay the instalment and hence shifts the due date of payment on mutual agreement. However as the said payment is also linked with the completion of the event, the concerned event might have already happened. In such situation whether clause (a) shall apply or clause (c) shall apply? Sec. 31(5) do not provide for any order of the application of the three clauses. It can be contended that the three clauses must be read in terms of a hierarchy similar to the valuation rules and hence if the date of issuing the invoice is ascertainable under clause (a), the reference to clause (c) may not be warranted.
INTRICACIES IN PLACE OF SUPPLY
57. Determination of the place of supply is vital for not only determining the correct head of tax which is to be paid (viz. CGST + SGST or IGST) but also for determining whether the transaction in question qualifies as zero-rated supply or not. IGST Act, 2017 contains the provisions related to place of supply. It is so because Article 269A of the Constitution of India as inserted by the Constitution (One Hundred and First Amendment) Act, 2016 mandates that Parliament by law formulate the principles for determining the place of supply, and when a supply of goods, or services, or both takes place in the course of inter-State trade or commerce. With the said background let us consider some of the intricacies on the topic.
58. An issue will arise when let us say a supplier based in Gujarat receives an order from the recipient based in Punjab. As per the terms of the said order, the sale shall be ex-works and the recipient shall arrange for the transportation of the goods from Gujarat to Punjab. Hence the question shall be as to whether the said supply will be regarded as an intra-state supply or an inter-state supply?
59. 7(1) and Sec. 8(1) of the IGST Act, 2017 provides for the determination of the nature of supply in the case of supply of goods. Essentially if the location of the supplier and the place of supply is in the same State, it shall be an intra-state supply and if the location of the supplier and the place of supply are in different State’s, it shall be an inter-state supply. Determination of the location of the supplier (in the present case Gujarat) is not much of an issue. Sec. 10 of the IGST Act, 2017 provides for the determination of the place of supply in case of supply of goods other than goods imported into or exported from India. Sec. 10(1)(a) provides that where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient. Sec. 10(1)(c) on the other hand provides that where the supply does not involve the movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. Hence first issue to address is whether Sec. 10(1)(a) or 10(1)(c) shall apply? It can be contended that as the recipient is based in Punjab and intends to move the goods to Punjab, the supply in question involves movement and hence the transaction shall be covered under Sec. 10(1)(a). This is more so as Sec. 10(1)(c) only covers transactions which do not involve any movement whether by the supplier or by the recipient. Now the place of supply u/s 10(1)(a) is the location of the goods at the time at which the movement of goods terminates for delivery to the recipient. As Sec. 10(1)(a) uses the words “where the supply involves movement of goods, whether by the supplier or the recipient or by any other person”, it envisages situations where the movement can be even by the recipient. Hence in the said context it can be contended that as the movement by the recipient terminates in Punjab, the place of supply shall be Punjab and hence the supply in question shall be an inter-state supply. Said view shall also be in line with the provisions related to ITC to enable the availment of the same and avoid the cascading effect.
60. An issue will arise in situations where the trader importer based in India (let us say Delhi) imports the goods at the port situation in the State where he is not based (let us say Maharashtra) and desires to supply the goods to the customer (also based in Maharashtra) directly from the port after filing the bill of entry for home consumption. Where shall the place of supply be?
61. As per Sec. 11 of the IGST Act, 2017 the place of supply for the imported goods shall be the location of the importer. Hence the importer based in Delhi shall be able to claim the ITC of the IGST paid on imports. The sale of goods from the port to the customer based in the same state shall not alter the location of the supplier (which shall continue to be in Delhi in absence of any place of business in Maharashtra as far as the transaction is in question). The place of supply as per Sec. 10(1)(a), as the supply involves movement, shall be the location where the movement terminates and hence the same shall be in Maharashtra. Therefore the supplier in question shall be required to charge IGST.
62. An issue will arise in situations where the legal entity has multiples registrations as distinct persons. It could be possible that the order for the procurement of goods is given by a distinct person based in Gujarat (Head office which also seeks the invoicing at the same location) whereas the delivery of the same can be sought at the location of another distinct person (branch) based in Karnataka. In such situation for the vendor in question, what shall be the place of supply?
63. 10(1)(b) of the IGST Act, 2017 provides that where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person. Can it therefore be said that the movement by the vendor to the distinct person based in Karnataka was on the direction of the third person (viz. the distinct person based on Gujarat) and hence the place of supply shall be Gujarat and not Karnataka? It can be contended based on Sec. 25(4)/(5) of the CGST Act, 2017 that the deeming fiction of distinct person shall apply to all the provisions of the Act including the IGST Act, 2017 which borrows the concerned provisions from CGST Act, 2017. Hence the third person u/s 10(1)(b) can the distinct person and hence the transaction in question can be included under the said provisions. It must also be noted that the transaction between two distinct persons which is in the nature of supply shall also attract tax. However, the stated proposition can aid in situations where the ITC otherwise can be lost.
ORDER OF APPLYING THE DIFFERENT RULES
64. 10(1) of the IGST Act, 2017 provides for five different rules for the determination of the place of supply. The issue may arise in situations wherein the transaction in question fall into two or more rules. Consider a situation described in the bill-to/ship-to topic wherein the supply also entails the assembly or installation of the goods at the site in Karnataka (assuming that the same does not result into the immovable property as the same will then be construed as works contract service and Sec. 10 altogether may not apply). In such situation whether priority should be given to Sec. 10(1)(b) – bill-to/ship-to or Sec. 10(1)(d) – assembly at site? It can be contended that the more specific rule should prevail over the general rule. Hence in such situation Sec. 10(1)(d) may become applicable. To ensure that the ITC is not lost, the recipient may opt to get the invoicing at Karnataka itself.
EVENT RELATED SERVICES
65. An issue shall arise in situations where the conference is planned to be hosted by the business entity in the State other than where it is registered. Let us say a business entity based on Gujarat intends to plan an event in Goa. It may either procure the services such as lodging, catering, photography, etc. directly from the concerned vendors such as hotel or photographers or it may engage an event manager and procure the services from the said event manager. The choice of the mode of procuring the supplies will have an impact on the determination of the place of supply and consequent claim of ITC. Sec. 12(3) of the IGST Act, 2017 deals with supply directly in relation to immovable property, lodging accommodation in hotel & any ancillary service. Sec. 12(4) deals with the supply of restaurant & catering service. Sec. 12(7) deals with the supply of service by way of organising an event in relation to a conference. Sec. 12(2) which is a default rule deals with all supplies not specifically covered from Sec. 12(3) to Sec. 12(14). Individual procurement of services by the business entity in question may therefore entail the application of Sec. 12(3) and 12(4) whereas the procurement from the event organizer may entail the application of Sec. 12(7). The benefit of Sec. 12(7) is that the place of supply shall be the location of the registered recipient. Hence the route leading to the availment of ITC is suggested.
SHIPPING LINE SERVICES
66. An issue will arise in determining the place of supply of services if an exporter based in India engages the services of an Indian shipping line for procuring the services for transportation of the goods to the customers based outside India. Sec. 12(8) of the IGST Act, 2017 provides that the place of supply of services by way of transportation of goods to a registered person, shall be the location of such person. Proviso inserted u/s 12(8) w.e.f. 01.02.2019 provides that where the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such goods. Therefore w.e.f. 01.02.2019 the place of supply of the services provided by the Indian shipping line where the transportation of goods is to a place outside India shall be the place of destination (which is outside India in the present issue). As the place of supply is outside India, the supply in question shall be an inter-state supply (shall not be construed as export of services in absence of the recipient based outside India and the consideration not received in foreign currency). Said inter-state services however has been exempted from tax w.e.f. 25.01.2018 by virtue of Sr. No. 20B of Notification No. 9/2017 – IGST (Rate). Said exemption is available till 30.09.2021. If in the given situation, the Indian exporter had engaged the services of foreign shipping line, the tax of the procurement of the said services will not be payable under RCM for the reason that the place of supply u/s 13(9) of the IGST Act, 2017 shall be outside India (tax under RCM as import of services is attracted only if the place of supply is in India in addition to other conditions).
67. Issue will also arise in case of multi-modal transportation of goods (transportation using two or more modes of transport) in connection with exports. An exporter based in India may contract with the supplier of services based in India to provide multi-model transportation services in terms of (a) domestic road transportation of goods from the factory to the port (b) requisite clearance formalities at the Indian port (c) transportation of goods in a vessel to the destination (d) requisite clearance formalities at the foreign port and (e) domestic road transportation of goods from the foreign port to the location of the customer. Transporters registered as multimodal transport operators issue a multimodal transport document in respect of such movement which makes them contractually liable for the entirety of the transportation of the goods over several modes. The supplier of services may charge a lump-sum consideration for providing the given services. The issue is whether the exemption at Sr. No. 20B of Notification No. 9/2017 – IGST (Rate) can be claimed by contending that the principal supply is of transportation of goods by a vessel from customs station of clearance in India to a place outside India and hence the place of supply shall be the place of destination?
68. It may be noted that the 12% rate entry for the Multimodal transportation of goods at Sr. No. 9(iv) of Notification No. 8/2017 – IGST (Rate) by virtue of Explanation inserted in the said entry will not apply to situations where the transportation of goods is from a place in India to a place outside India. Hence it can be contended that the services by way of multi-modal transportation of goods shall be considered as a composite supply and principal supply being of the transportation of goods by a vessel from customs station of clearance in India to a place outside India, the exemption at Sr. No. 20B of Notification No. 9/2017 – IGST (Rate) shall be available. However, till the said issue is resolved, the industry has largely adopted the conservative practice of assigning separate values to the different services in question and determining the tax implications independently.
69. An issue will arise in situations wherein a supplier of services based in India provides job-work services to the recipients based outside India. Sec. 13(3)(a) of the IGST Act, 2017 provides that the place of supply for the services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services shall be the location where the services are actually performed. However second proviso to Sec. 13(3)(a) provides that the said clause shall not apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or process and are exported after such repairs or treatment or process without being put to any use in India, other than that which is required for such repairs or treatment or process. The words “any other treatment or process” in the proviso has been inserted from 01.02.2019. Hence it can be contended that as the word “job-work” as defined u/s 2(68) of the CGST Act, 2017 means any treatment or process, the job-work undertaken by the Indian supplier for foreign customer shall be covered by the proviso and hence shall come out from the purview of Sec. 13(3). Therefore the place of supply shall have to be determined based on the default rule u/s 13(2) and as the location of the recipient is outside India, the supply of job-work services will qualify as export of services subject to the receipt of the consideration in foreign currency or in INR where RBI permits.
70. Often an issue will arise with respect to intermediary services when the recipient of the services is located outside India. This is so because as per Sec. 13(8)(b) of the IGST Act, 2017 the place of supply of the intermediary services shall be the location of the intermediary and not the location of the recipient. Hence the intermediary services provided by the supplier located in India shall be leviable to tax. Recently Hon’ble Gujarat High Court in the case of Material Recycling Association of India Versus Union of India (SCA No. 13238/13243 of 2018) has upheld the said levy.
71. First issue to arise would be concerning the definition of “intermediary” as provided u/s 2(13) of the IGST Act, 2017. Intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account. Therefore the suppliers who “arranges or facilitates the supply” shall be considered as intermediaries. It shall however exclude the suppliers who provide the services on their own account. Hence as an illustration suppliers providing back-office services on their own account shall not be considered as intermediaries. It is therefore important to carefully peruse the terms of the contract before determining whether the supplier in question is an intermediary or not.
72. Second issue to arise would be the determination of the type of tax to be paid if it is found that the services in question are intermediary services and hence liable to tax. It can be contended that the provisions contained u/s 8(2) to determine whether the supply is an intra-state supply or not applies only to the situations covered u/s 12 on account of use of the words “Subject to the provisions of section 12”. Further, the exemption from tax on the intermediary services when the location of both supplier and recipient of goods is outside the taxable territory is only available at Sr. No. 12AA of the IGST exemption notification (no. 9/2017) and not under the CGST or SGST notifications which also indicates the intent to consider intermediary services as inter-state supply. Hence it can be said that the intermediary services to foreign customer shall be an inter-state supply u/s 7(5)(c) of the IGST Act, 2017.
73. Above discussions attempts to bring to light numerous intricacies associated with the given topics. There will definitely be many more intricacies not covered in the present paper. It is hoped that the present paper has been able to share some insights on the topics and further the thinking on the issues discussed.
(Views are strictly personal)