1. Value of the goods / services is to be determined in accordance with Section 15 of the CGST Act, 2017 read with CGST Rules, 2017.
2. Section 15(1) of CGST Act, 2017 stipulates, 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.
3. We need to determine whether price is the sole consideration in situations where moulds, dies, tools etc. are supplied to the supplier.
3.1 Section 15(1) specifically states that the transaction value is to be accepted only when recipient and seller are not related and price is the sole consideration. To understand whether the supply of moulds, dies, tools etc. is to be included or not as part of consideration, we need to determine whether the same would qualify as consideration. Consideration is defined in section 2(31)
“consideration” in relation to the supply of goods or services or both includes-
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
Inducement means advantage, benefit, or consideration that causes a party to enter into a binding agreement, or motivates it to perform more efficiently and cost effectively. Act of providing moulds, dies, tools, etc by the recipient is no doubt for the inducement of the supply of goods by the supplier.
The words “in respect of” are wide enough to permit charges being made as terminals so long as any of these things viz. stations, sidings, wharves, depots, warehouses, cranes and other similar matters have been proved and are being maintained. The Words “in respect of” used in S.3(14) mean “for the provision of “ and not “for the use of “. Sahadasa Saharanpur Light Railway Co Ltd. V Upper Doab Sugar Mills Ltd. , AIR 1960 SC 695 , 701, 702 (Indian Railways Act (9 of 1890) S 3 (14)
The words “in respect of” admit of a wide connotation. In the context of Section 23 (IB), the expression means, “being connected with”, Union of India V Vijay Chand Jain, “AIR 1977 SC 1302[FERA(46 of 1973), S 23(IB)]
In Respect of and In : The phrase “in respect of” has a wider connotation than the word in and so long as the speakers action is relatable to any of the provisions dealing with his powers for regulating the procedure and conduct of business in the Legislature the courts jurisdiction would be ousted. An authority who is conferred Jurisdiction to decide a question, has jurisdiction to decide it either rightly or wrongly and so long as he is acting within his Jurisdiction., he is immune from interference by a Court of Justice. Godavaris Misra V Nandakishore AIR 1953 Orissa 111, 116.
Definition of response :
1: an act of responding
2: something constituting a reply or a reaction: such asa : a verse, phrase, or word sung or said by the people or choir after or in reply to the officiant in a liturgical serviceb : the activity or inhibition of previous activity of an organism or any of its parts resulting from stimulationc : the output of a transducer or detecting device resulting from a given input
The Phrases used in the definition of in respect of, in response to, or for the inducement of, has been made wider and further paid by recipient or any other person w.r.t supply and goods & services has been included in the definition of the consideration. It means value of supply will include all the amount which the supplier was liable to pay but which is incurred by the recipient or any other person.
Payment signifies the partial or complete discharge of an obligation by its settlement in the form of the transfer of funds, assets, or services equal to the monetary value of part or all of the debtor’s obligation.
Definition of consideration itself includes payment in money or other form. In this case had the recipient not supplied the moulds, dies, tools, etc, then the recipient would have had to either buy the same or then obtain the same on lease / rent etc. for fulfillment of the order of supply to the recipient. The recipient supplied the moulds, dies, tools, etc which will be considered as payment in other than money form to the recipient for fulfillment of the order.
3.2 Even if we go through the legislative history, we will notice that price is not considered the sole consideration whenever there is supply of moulds, dies, tools etc. Transaction value can be adopted subject to the buyer and seller are not related and price is the sole consideration. In case of supply of moulds, tools, dies etc by the buyer, the condition of price being the sole consideration is not satisfied. Hence one is required to go to Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 to determine the valuation. The authority to charge amortization under the erstwhile Central Excise provisions flows from Section 4 of Central Excise Act, 1944 because price is not the sole.
Section 4. Valuation of excisable goods for purposes of charging of duty of excise. –
(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
(a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
(b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
As per Rule 3 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, the value of any excisable goods shall, for the purposes of clause (b) of sub-section (1) of section 4 of the Act, be determined in accordance with these rules. Accordingly, amortisation is considered in accordance with Rule 6 of the said Rules which states:
“Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.”
Provided that where price is not the sole consideration for sale of such excisable goods and they are sold by the assessee at a price less than manufacturing cost and profit, and no additional consideration is flowing directly or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction value.
Explanation 1. – For removal of doubts, it is hereby clarified that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely:-
(i) value of materials, components, parts and similar items relatable to such goods;
(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in production of such goods;
(iii) value of material consumed, including packaging materials, in the production of such goods;
(iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.
4. Considering the above background, it becomes necessary to apply a reasonable value to the supply of moulds, dies, tools, etc by the recipient and include the same in valuation of the goods by the supplier.
5. If the recipient supplies moulds, dies, tools, etc in addition to the consideration in money, one will have to refer to Rule 27 of CGST Rules, 2017.
Value of supply of goods or services where the consideration is not wholly in money – Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-
(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), 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;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.
We need to follow the sequence below to determine the value:
> Open market value of such supply
> Sum total of consideration in money + money equivalent of consideration in other form if such amount is known at the time of supply
> Value of supply of goods or services or both of like kind and quality
> Sum total of consideration in money + money equivalent as determined by application of rule 4 or rule 5 in that order
6. Reasonable value of such moulds, dies, tools is to be included for valuation of goods and value of the supply needs to be determined in accordance with Rule 27. The manner of inclusion of reasonable value can be by way of amortization provided the same results in a value which is determined in accordance with Rule 27 of CGST Rules, 2017.
7. One of the views against amortization is that Section 15(2) of the CGST Act, 2017 covers only the amount which the supplier was liable to pay but which is incurred by the recipient. It is argued that the supplier is not liable to pay any amount on the moulds, dies, tools, etc and hence not covered by Section 15(2). However, it is important to note that Section 15(2) will come into picture only if Section 15(1) is satisfied.
8. Tax-ability is on supply of goods or services and therefore value has to be determined of such supply. In the present case, moulds / tools has been supplied by the recipient to the supplier and after using the same, supplier is supplying the goods and therefore value has to be determined in terms of Sec 15(2) of CGST Act 2017 read with Rule 27 of CGST Rules 2017 and therefore, in our opinion, value of amortization of tools / moulds supplied to be added while determining taxable value of such supply. Same principal will apply when any free goods are supplied by the recipient to the supplier and supplier uses the same for supplying the goods to the recipient. Therefore, value of goods / services supplied freely by recipient should be added while determining the taxable value of supply.
CMA Ashok Nawal
Founder of Bizsolindia Services Pvt. Ltd.
Central Council Member of Institute of Cost Accountants of India
Email : firstname.lastname@example.org