Everything about Valuation rules of Goods and Services (GST) under GST Law!

1.0 Introduction

Valuation is one of the most important and litigious concepts under the law. Under present indirect laws, whether it is VAT, service tax, excise or any other law, valuation is the core because it is linked with the revenue of the government directly, whatever is the valuation, and the tax rate will be applied upon it. It is that figure which government wants it to be at higher side and the assessee wants it to be on a lower side and that is where the dispute occurs.

Under GST regime, valuation is based on the transaction as in the previous laws. However, in case of transaction value is not accepted then we have to refer the rules for the correct valuation. Therefore, we need to read and evaluate every important word of the section and the law. Let us move quickly on the valuation part and analyze it in depth.

2.0 Value of taxable supply

1. The value of a supply of goods and/or services shall be the transaction value [in monetary terms], that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Further, where the supply consists of both taxable and non-taxable supply, the taxable supply shall be deemed to be for such part of the monetary consideration as is attributable thereto.

Important points

(a) The conditions that supplier and the recipient of the supply are not related and the price is the sole consideration for the supply must be satisfied together, because word ‘and’ has been used in the point no.1.

(b) From the plain reading of the section, we can observe that value of a supply of goods and/or services shall be the transaction value only where two assumptions are satisfied. The two assumptions are as under;

• Supplier and the recipient of the supply are not related;
• Price is the sole consideration.

Hence, we need to discuss two topics in depth to have understood the point no.1. However, before we move forward, we must understand how the whole flow under GST works.

3.0 Supplier and the recipient of the supply are not related;

1. If the supplier and the recipient of the supply are related, then the value of supply shall be calculated as per the rule 4, 5 and 6.

Important Points

(a) Rules should be applied in a sequence.
(b) Under rule 4, the value of comparatives is taken as the base for valuation.
(c) Under rule 5, computed value method is followed
(d) Rule 6 is the residual method.

2. The transaction value shall be accepted even where the supplier and the recipient of supply are related, provided that the relationship has not influenced the price.

Who are called “related persons”?

Persons shall be deemed to be “related persons’’ if only -

(a) They are officers or directors of one another's businesses
(b) They are legally recognised partners in business; [e.g. partnership, LLP, Joint Ventures].
(c) They are employer and employee;
(d) Any person directly or indirectly owns, controls or holds twenty-five percent or more of the outstanding voting stock or shares of both of them;
(e) One of them directly or indirectly controls the other;
(f) Both of them are directly or indirectly controlled by a third person;
(g) Together they directly or indirectly control a third person; or
(h) They are members of the same family;

Important Case studies in this matter

1. The definition of ‘related person’ requires mutuality of interest in the business to be proved [UOI v. Atic industries Ltd. 1984 (17) E.L.T 323 (SC].

2. If one of the directors of the buyer company is also chairman of the manufacturing company, it cannot be said that they have a mutual interest in the business [Jay Engg. Works. Ltd v. UOI 1981 (8) E.L.T 284 (Del)

3. A limit company cannot have indirect interests in the business carried by one of its shareholders [Collector v. T.I. Miller Ltd 1988 (35) E.L.T 8 (SC)].

4. Merely because goods are manufactured with customer’s brand name and entire production sold to the customer does not mean that sales are to related person [Ceam Electronics P. Ltd v. UOI 1991 (51) E.L.T 309 (Bom)].

5. When 90% of the goods are sold to the wholesaler and only 10% to the related person, the assessable value will be the price charged to wholesale dealers [Kirloskar Cummins Ltd v. UOI 1991 (51) E.L.T 325 (Bom)].

6. Important Case Law: Price to the buyer will not be the normal price for the purpose of valuation if the buyer is a related person and price is not the sole consideration for sale. Both the conditions must co-exist so that the price at which manufactured goods are sold by the assessee to the buyer is taken as the value for purpose of assessment of duty.
[In other words, price to the buyer can be considered for valuation only when both the conditions - (a) the buyer is not a related person and (b) price is the sole consideration - are satisfied] [Calcutta Chromotype Ltd. v. CCE 1998 AIR SCW 1379].

4.0 Price is the sole consideration

1. The transaction value shall be accepted if the price is the sole consideration. In other words, what is received or what is to be received should only be the price paid or payable to the supplier. No other consideration in any form should be payable for the supply.

2. If the price is not the sole consideration for the supply, then the valuation shall be done in accordance with the rules.

Some important case studies when price is not the sole consideration

If any buyer supply to the seller materials, components, parts and similar items or tools including dies, moulds, packing material etc directly or indirectly, free or at reduced cost, then price shall not be a sole consideration and hence valuation shall be made in accordance with the rules.

In HBL Aircraft Batteries v. CCE 2004 AIR SCW 3275 = 167 ELT 483 (SC), it was held that the cost of material supplied by buyer should be at the price at which he gets the material and not at market price

Important: the case of fiat India by Supreme Court of India

The details of CCE v. Fiat India (P) Ltd. [2012] 283 ELT 161 (SC) are here as under;

Brief Facts: Assessees are the manufacturer of motor cars, i.e. Fiat Uno model cars. The assessees have filed several price declarations, declaring wholesale price of their cars for sale through wholesale depots.

On investigation, the central excise authorities state that they had prima facie found that the wholesale price declared by the assessees is much less than the cost of production and, therefore, the price so declared by them could not be treated as a normal price for the purpose of quantification of assessable value under Section 4(1)(a) of the Act and for levy of excise duty as it would amount to short payment of duty.

The assessee said that the main reason behind selling the cars at the lower price was to penetrate the market, therefore, the price at which they were selling the Cars in the market should be considered to be a normal price as per Section 4 of the Act.

Judgment: Supreme Court held that where products are sold at considerable losses for an unduly long period of time for the purpose of market penetration, the transaction value cannot be accepted for the purpose of levy of excise duty and price could not be said to be a sole consideration.

Analysis: With all due respect to the Supreme Court of India, the judgment was not sound and was not delivered in consonance with the valuation rules under excise law. This was the reason for the amendment to make the judgment ineffective by adding proviso to rule 6 which states as under;

“If an assessee sale below manufacturing cost and profit but there is no additional consideration flowing directly or indirectly from buyer to assessee, the transaction value shall be the assessable value proviso to rule 6 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 w.e.f. 11/07/2014.

Thus, even if assessee sales below his manufacturing cost, the transaction value can be rejected as 'value' only if some additional consideration is flowing from buyer to assessee.

Impact of this judgment under GST Law

This judgment shall have the direct impact on the valuation until and unless the similar proviso is added under GST law. Because if any supplier supplies goods/services at a price below the manufacturing cost to penetrate the market, then as per the supreme court judgment, the price shall not remain the sole consideration and hence, the transaction shall not be accepted and valuation shall be made in accordance with the rules.

Conclusion

Valuation is one of the trickiest things under Goods and Services Tax (GST). Hence, queries, complexities are immense under this concept. Therefore, in case you have any direct query, you can post it to our CONTACT PAGE or email us at agam@hubco.in

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Goods and Service tax (GST) Registration