Analysis
This section applies to both goods and services supplied for purposes of valuation of the taxable supply.
Although contained in the CGST Act, the valuation method provided in this section applies to UTGST, SGST, CGST and IGST. Valuation must be as provided exclusively in this section. Transaction value should be taken for the purpose of valuation under GST. “Transaction value” has been explained in the section as the price actually paid or payable for the supply of goods and/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. From this, it can be gathered that there should be a clear nexus between the supply of goods or services and the amount received by the supplier of goods or services. If no linkage can be established between the price paid or payable and the supply of goods/services, the inclusion of the price within the valuation may be called into question. For this, the contractual terms and obligations of the supplier and the recipient should be examined to evaluate whether nexus between the supply and the price paid/payable against it can be established. For instance, in a contract of job work, value of material given by the manufacturer to the job worker will not be considered for the purpose of GST. This is because the contract involved the supply of services by job worker only against which the price is paid by the manufacturer. There is no supply of material involved which can be attributable to the price paid/payable, Price is consideration in money terms. Value, as stated earlier, is price that would be prevalent under controlled conditions. These conditions being:
Transaction having a price
Between persons not related
And that price being the sole consideration
In other words, the exercise of valuation is aimed to recreate the above conditions and take any given transaction through to see the result – price – that would emerge.
As discussed above, for assuming price as the valuation mechanism, two important aspects should be considered – supplier and recipient are not related and the fact that price is the sole consideration.
Situations when the supplier and recipient will be considered as related have been enumerated in Explanation to Section 15(5) of the CGST Act 2017. They are deemed to be related persons if:
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
Further, it has been stated that the word ‘person’ will also be including legal persons as per the comprehensive definition given under Section 2(84) of the CGST Act 2017. Also, it has been stated that the persons who are associated with business of one another as sole agent or sole distributor or sole concessionaire will also be deemed to be related persons. It is pertinent here that the term price is the sole consideration should be understood. If there is any consideration in non-monetary form, only the price actually paid cannot be taken as the basis of valuation. In this situation, price cannot be called as the sole consideration. In fact any additional consideration received apart from the monetary consideration should also be considered to arrive at the proper value. The fact that the consideration can be both monetary and non-monetary can very well be inferred from the definition of consideration given as per Section 2(31) of the CGST Act 2017. Further, the payment against the supply made either by the recipient directly or by another person will both be covered within the ambit of consideration and considered as part of the price for the purpose of valuation. This can be elaborated by an example. Let’s say the supplier supplies goods worth ` 5,00,000 to the recipient. Against this supply, ` 3,00,000 is paid by the recipient directly and balance ` 2,00,000 is paid by the recipient’s debtor. Both the payments will be included in the price for the purpose of valuation under GST.
For determination of the taxable value, classification between deposits and advances should be interpreted diligently. Advances refers to payment as part of consideration of an agreement before the supplier performs his obligation under the said agreement. It is not provided with an intent of refunding unlike deposit. Advance is treated to be part of the consideration to the contract and thereby includible within the taxable value. A deposit can be described as an amount given to the supplier with an obligation entrusted upon the supplier to keep it safely.
The essence of the deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made upon fulfilment of certain conditions or to apply it as consideration at a future date depending on the terms of the contract. Till the deposit is classifiable as such, it does not form part of the taxable value. As and when this deposit is applied as consideration under the contract against the supply made or agreed to be made, it forms part of the taxable value. Retention money is a classic example of deposit. To elaborate, the recipient may withhold a certain part of the consideration payable to a supplier and keeps a part of that amount as deposit with himself. Only when the given obligations are discharged by the supplier as per the terms of the contract, this retention money is released. This retention money is not included in the value if returned as such to the supplier. However, if the supplier fails to fulfil the given obligations as per the contract, the recipient may charge the said retention money and apply it against the default. When applied, the said retention money becomes chargeable to tax. It may be pertinent to point out here that the money retained will not reduce the value of the original contract of supply. This means the principal supply will continue to be valued at the full amount without any deduction for the retention money. Another example that can be taken here is that of a rent agreement. Let us assume that a tenant is required to pay a three months deposit to the landlord in an eleven months contract. Upon default of the rent of any one month, the deposit is partly deducted as the rental for that month. Only to the extent of such deduction towards the rent of that month, it will be considered as part of the taxable value. Further, deposit is not chargeable to tax under normal circumstances unless applied as consideration. So, there may be a tendency towards classification of the taxable advance as deposit. However, any such classification should not be made based on the nomenclature of the payment only. Based on the nature of business, frequency, application and intent of such payments etc., it may be susceptible to challenge by the Governmental authorities. The subtlety involved in classification of payments between advance and deposit should be carefully analysed in terms of the contract and as per customary practises to determine the correct nature of the payment. In addition to the price, certain express checks to be carried out that can disqualify a price that is otherwise perfectly admissible are provided:
Taxes levied under any other law(s)- this clause provides for exclusion of GST from the value and therefore all other taxes charged must be included in the value before quantifying GST. Taxes other than GST will cause cascading and this is deliberate. For instance, on import of goods IGST is charged not only on the value of goods but the basic customs duty paid under the Customs law.
Any amounts paid by recipient that are obligation of supplier to pay – this clause removes any doubt about the need to include costs paid by the recipient to a third party in the value of supply by the supplier. The prescription in this clause is to identify any occasion where costs – in respect of which the supplier is the principal creditor / obligor
– are diverted away from the principal such that the recipient directly makes the payment resulting in lowering the rightful value of supply. At the same time, this clause does not authorize every payment where the recipient is the principal creditor / obligor and require these also to be included in the value of supply. This point may be illustrated by an example of – payment of commission to agent for facilitating the supply. If the payment is ‘buying commission’ which is paid by the recipient, then the obligation to pay the agent is always of the recipient and does not require to be included in the value of supply. But if the payment is ‘selling 
commission’ which happens to be paid by the recipient, then the obligation to pay the agent being that of the supplier is required to be included in the value of supply. In this case (of selling commission), the underlying obligation is that of the supplier because it is the supplier who engages the agent to identify customers to make a supply. And if, somehow, the supplier manages to pass this obligation to pay the agent (the amount towards selling commission) to the recipient, then the price paid to supplier is not the true value of supply. Had the recipient refused to pay this selling commission to the agent, then the supplier would have paid the agent and made a corresponding increase in the price of the supply. It is this objective that is being achieved by this clause.
Another example can be of a free on road contract wherein the payment of transportation charges is directly made by the recipient and the value to be paid to th e supplier by the recipient is reduced to that extent. In this case, the transportation charges which was reduced from the price payable will be added back to the taxable value. There are several other examples that can be considered, please also refer to the discussion on value of supply for further illustration on this point.
Incidental expenses charged by the supplier- this clause addresses a completely different aspect compared to the previous clause. Here, costs that the supplier incurs ‘at’ or ‘before’ supply is liable to be included in the value of supply. For example, cost of packing and transportation has been debated under the VAT laws whether they are incurred before or after the ‘transfer of property’. In GST, the point when title passes is irrelevant. To address the issues that had been so vigorously debated under VAT laws, this clause lays down that any cost that the supplier incurs including commission and packing which is charged to the recipient will be included in the value of supply. With this clause there is no opportunity to claim that certain charges recovered by the supplier ‘after supply’ are not to be included in the value of supply. Also incidental expenses like home delivery charges are includible in the value of supply when food is delivered by a restaurant to a customer’s home. Another example can be the extra bed charges included by a hotel in the value in case of accommodation services provided by a hotel to a customer. Yet another example can be installation of new modular furniture at office wherein the installation expenses are recovered separately by the supplier. Special packing charges by a gift shop while selling a show piece can also be a pertinent illustration here. If it is a charge recovered from the recipient, then the same is includible in the value of supply provided it is not incurred ‘after’ the completion of supply. An example of cost incurred after date of supply yet not liable to be included in the value of supply could be amount of input tax credit, considered as eligible in pricing of supply, but denied to the supplier by (say) section 16(4). And an example of a cost incurred by the supplier after the date of supply but still includible could be cost of inwarranty parts (actual r scientifically estimated provision) supplied after the date of supply.
Interest, late fee or penalty for delayed payment- this would also have been a charge recovered by the supplier ‘after’ the supply that would not be includible in the value of supply but due to the express words of this clause will be included. Please refer detailed discussion regarding this clause under time of supply as ‘special charges’ under section 12(6) / 13(6) where characterization of these charges as well as their rate of tax (supply-dependent or independent) are addressed. For example, Mr. X enters into a contract for supply of goods worth ` 2,00,000 on 15th March 2018. As per the said contract, a payment of the said amount was required to be made within 2 months of the sale. If the complete payment is not made within this time period, a late penalty of ` 10,000 will be chargeable. Let us assume that the payment is not made within the said period. In this situation, ` 10,000 will be includible in the taxable value.
Subsidy realized by supplier on the supply- this clause expressly provides for the limited exclusion of subsidy from value of supply, that is, subsidy given by the Government alone is excluded from value of supply. This clause makes an interesting requirement that any transaction where there is any form of price-intervention that behaves like a ‘subsidy’ is liable to be included in the value of supply. In today’s economy, there are many transactions that ‘behave like subsidy’. For example, contribution of consideration by third party to contract, incentive to supplier given by brand holder linked to each supply, etc. Please note, extended credit terms to one customer and upfront payment terms to another customer cannot be interfered with by relying on this clause. There appears to be no room to include ‘notional additions’ by this clause because unlike Central Excise which relies upon ‘assessable value’ for quantifying the duty, GST relies upon ‘transaction value’ for quantification. Also, please note ‘no cost EMI’ and ‘cash back’ are a form of price-intervention by third party but not included in this clause because these forms of price-intervention is reaching the recipient of supply and not the supplier. The condition for inclusion is also that the subsidy should be directly linked to the price. If the subsidy is provided in a manner which cannot be directly linked to the price of the product in question, then that amount cannot be included for the determination of taxable value. For instance, subsidy against a capital asset does not affect the value of the product directly and hence not includible in the price. However, all subsidies directly linked to price will be added if the said subsidy is not provided by the Government. For example, a cafeteria in X Ltd (a corporate office) provides lunch at ` 120 per plate to the employees of the company. However, the vendor in the cafeteria receives an amount of ` 70 per plate in the form of subsidy from X Ltd for providing the food at a lower rate. Here, value of ` 70 will be added to the taxable value of ` 120 for the purpose of charging GST. Had this subsidy been provided by the Government to the company against mid day meals, such amount of ` 70 would not have been includible in the taxable value.
Discount is another area that needs special mention. The emphasis to tax treatment of discounts is visible in the repeated mention of discounts in section 15(3) where t he value of supply will not include discount, provided:
It is allowed before supply.
It is allowed after supply, provided that it is established in agreement linked to specific supplies and corresponding credit is reversed by recipient.
It would be helpful to discuss the various kinds of discounts and the GST act implication of each, namely:
‘In-bill’ discounts – are those that are allowed exactly at the point of supply so as to reduce the published product price as a result of negotiations. Generally, ‘in-bill’ discounts are admissible as the reduction in arriving at the transaction value. However, abnormal discounts cost a shadow of doubt as regards price being the ‘sole consideration’. To reiterate some of the points mentioned earlier, firstly, no one gives anything in exchange for nothing, secondly, one cannot give more than what they would get, thirdly, sale under distress circumstances does not mean sale is under duress and lastly, discount must always be related to the present supply and no others. When discount on an invoice is abnormal, inquiry is necessary regarding the circumstances for such an abnormal discount. Abnormality of discount refers to discount greater than available margins. A supplier may be willing to give away all of his margin perhaps to clear away stocks and make room for new inventory. But, when the discount exceeds the margins and there are no distress circumstances, it appears highly suspect that the supplier is receiving something in non-monetary form from the customer. Although it seems strange that the ‘in-bill’ discount needs to be dissected and evaluated to such an extent but the need for that arises by the remarkable words used in the definition of consideration in section 2(31), particularly clause (b). On a quick perusal, it will now become palatable that the dissection and evaluation discussed about is very much warranted. It is so because hardly anything can escape this sweeping language ‘in relation to, in response to or for the inducement of’. The supplier may be induced to offer more than his margins to conclude a supply and choose to designate it as ‘discount’. The direction of the flow of supply is in the opposite direction of the flow of consideration, more on this a little later.
‘Off-bill’ discounts – are those that are allowed after supply through a credit note. Credit notes in the context of GST have been discussed in detail under section 34 which may be referred to identify whether in all cases of ‘off-bill’ discount, is credit note allowed to be issued. For such ‘off-bill’ discounts to qualify as the reduction from the transaction value adherence to the conditions specified in section 15(3) are sufficient. These conditions are very explicit and simple in their application. This simplicity is not to be equated with ease because these conditions specified are such that can cause great unease and result in many transactions where ‘off-bill’ discounts fail to satisfy these conditions. But when the conditions are satisfied, ‘off bill’ discounts can be reduced from the transaction value.
Cash discounts – are those that are allowed to incentivize the customer for prompt payment. Merely because the policy of allowing cash discount is in existence before supply does not always make cash discounts eligible under section 15(3). In other words, the price at which a transaction of supply was negotiated and concluded is what is liable to GST and not the contingency linked to payment of the dues in respect of such supply. GST is not a tax on recovery of dues to word supplies but a tax on supply itself. Cash discounts therefore, are unlikely to satisfy the requirements of section 15(3) in most cases. As remarkable as this implication appears to be, cash discounts, when looked at very dispassionately, are more akin to bad debts than a proper reduction in the value of supply. Any resistance to accept this view needs to be supported with nothing less than the high standards laid down in section 15(3). Bad debts is not always failure to recover the value of supply. Bad debts can also be abstinence from enforcing recovery of the full value of supply. Bad debts is not the state of helplessness but the decision of prudence in the interest of continued relationship with customers, cost of pursuing recovery measures and the quantum of dues lying unrecovered. It is not suggested that all cases of cash discounts are not available to be reduced from the transaction value. But the circumstances under which cash discounts have been allowed requires inquiry into the circumstances leading to this cash discount.
Quantity discounts – are those that are aimed at reducing the price of each supply on the condition that a certain quantity of stocks need to be exhausted within a specified duration of time. Here again, inquiry is required into the terms and conditions applicable to this quantity discount. Where the stock supplied by a manufacturer to a dealer are at a specified ‘dealer price’, which is applied in respect of supplies to all dealers along with additional discount linked to conditions – quantity and time – that is contingent at the time of supply by the manufacturer, this would be an eligible discount under section 15(3). But discounts allowed in an invoice in respect of supplies made earlier are not discounts because transaction value can be reduced by discount allowed in respect of the present supply and not in respect of any other supplies. This is because one of the conditions for allowance of the reduction in value is that the discount should bespecifically linked to the original invoices against which the discount is to be given. Since, quantity discount is linked to time and volume and not against any specific invoice, the establishment of linking to the original invoices may be questionable.
Special discounts – are those that are allowed by a supplier to incentivize aggressive marketing of inward supplies on special occasions or in special market conditions. In most cases, such incentives designated as special discounts are really acknowledgment of services of aggressive marketing and product promotion. The direction of flow of consideration is an indicator of the direction of receipt of supplies. In other words, the incentives flow from the manufacturer to the dealer, that are not related to the present supplies. In fact, it indicates an acknowledgment by the manufacturers of the services received from the dealer. The services so identified are from the dealer back to the manufacturers and this is a supply on its own. In fact the rate of tax of the services supplied by the dealer to the manufacturer needs to be classified independently of the classification applicable to the supplies by the manufacturer to the dealer. Although it is true that between a manufacturer and a dealer all transactions are closely related by the common thread of the dealership agreement, GST travels deeper into this relationship and picks out individual transactions of supply to apply the right rate of tax on each of them. Special discounts by their very nature appeared to be outside the scope of section 15(3).
Discounts ‘in-kind’ – are those that are allowed in the form of holiday packages, gold coin, motor vehicle and other objects of high perceived incentive value. To begin with, these articles are rarely stocks in which the parties are dealing with. Further, these articles are incentives to the proprietor, director, marketing executive and other individuals and not the recipient of supplies in the normal course. Accordingly discounts in kind are not discounts satisfying the requirements of section 15(3). When a manufacturer pays money to a travel agency for a holiday package and issues the same to the individual-dealer identified, it is important to examine whether the payment by the manufacturer to the travel agent is a payment to discharge the obligation of the dealer (eligible for this incentive) or is it a direct inward supply from the travel agent to the manufacturer. If the travel agent issues the invoice in the name of the manufacturer, it is an inward supply by the manufacturer. Where the said travel package is issued to the dealer, it is an outward supply under the paragraph 4(a), schedule II and accordingly liable to tax (at the respective rate of tax the along with restrictions on input tax credit, if any). If however, the invoice is issued by the travel agency in the name of the dealer but the payment alone moves from the manufacturer to the travel agency then, there is a supply of some services received by the manufacturer which is being paid by settling the bills of the travel agency. It is sufficient for the present if the issues involved in special discounts are appreciated. Reference may be had to a detailed discussion on supply to come back and identify existence of such invisible supplies lying embedded in seemingly ordinary transactions that are called discounts.
Free stocks – are those that are similar to discounts ‘in-kind’ except that the articles given away are the items of inventory date with by the parties. In such a case, the stocks given away are taxable outward supply in exchange of non-monetary consideration flowing from the manufacturers to the dealer entitled to such free stocks. When the manufacturers gives away stocks for free to a dealer, it is clear that this is not the case of charity by the manufacturer towards the dealer but a prudent business decision by the manufacturer to allow the dealer to realize the following proceeds from sale of such free stocks and retain them as his incentive without having to make any payment to the manufacturer towards the cost of such free stocks. It is important to note that cost of such free stocks in the hands of the manufacturer would be far lower than the value of the incentive realized and retained by the dealer which is the selling price of these stocks. Here is a case where a manufacturer incurs a small cost and delivers a far greater perceived value to the dealer. A further implication of giving away free stocks is that, in the hands of the manufacturer it is a taxable outward supply without the benefit of input tax credit to the dealer as no payment is made in respect of the supply. Having paid tax once on the outward supply by the manufacturer, there is a further taxable outward supply in the hands of the dealer when the free stocks are sold to customers. The tax inefficiency in transactions of issue of free stocks is evidently clear so that appropriate decisions may be made to revisit this entire policy.
‘Buy one-take two’ – are transactions where two units of stocks are supplied against payment of the price designated against only one of them. Under the method ofransaction value-based assessment of tax under the GST law, each unit of stock isiable to determination of transaction value on its own merit. ‘buy one-take two’ is nothe case where the two units of stocks are bundled together with a single pricessigned to them but are individually priced with no differentiation in the quality of eachf the units except that the present offer allows the customer to pay the published pricef one and collect two units of the stock. The stock collected without making any payment could very well have been the one that was paid for and purchased or viceersa. It merits to mention here that multiple units of a product may be bundled together with a single price published for them such as 4-bars of soap or pack-of-5 socks.herefore, unless bundled together with preselected units of stock and a single price affixed, all other transactions of ‘buy one-take two’ are individually taxable – the paid unit at the price paid and the free unit at the price determined by the valuation rules.
nominal value supplies – is another form of discount or incentive where items ofnventory are admitted to be a taxable outward supply but a nominal value is charged for such supply. Relying on the second proviso to rule 28, there appears to be a lot of onfidence in continuing such nominal value supplies as a form of discount or incentive.he discussion under rule 28 may be referred to the implications of charging nominal value but for the present, it helps to recollect the discussions about regarding the requirement for every transaction to pass the test of ‘sole consideration’. Charging a nominal value is an admission that the price is not the sole consideration and when price is not the sole consideration the transaction is dispatched into rule 27 for determination of the appropriate transaction value. As such, nominal value supplies are admittedly liable to tax but not at the nominal value. The value determinable as per Rule 27 should be taken for calculation of the liability of tax.
Liquidated damages – Most of the contracts requires the performance by the suppliers within a given time limit. A delay beyond this time period may result in a loss being incurred to the recipient. To mitigate such losses and to ensure the performance of the contract within the time limit, liquidated damages may be collected. For instance, in a construction contract, the contractor undertakes to perform his service within 3 years and the delay beyond such period will result in deduction of the liquidated damages to the tune of 1% per month by the recipient. In such cases, it may prima facie seem that against the principal supply of construction services, a lower than agreed upon consideration is being received due to the delay in performance and such lower value should be offered for taxation. However, upon analysing the definition of supply under the GST law, it will result in a conclusion that there are actually two supplies which are taking place here. First is the principal supply of the construction service by the contractor for which the value was fixed as per the contract terms. Second supply is that which is provided by the recipient of the principal supply to the contractor in form of agreeing to the obligation to tolerate an act in terms of 5(e) of Schedule II against on ideration in the form of deduction from total value of consideration. So, essentially there are two forms of supply for which the consideration are partially set off against each other through book entry usually and the balance monetary consideration only exchanges hands. This only provides one of the common models for settlement of liquidated damages. However, to determine the correct treatment of such charges, a threadbare analysis of the contractual rights and obligations along with the intent behind such contracts becomes an issue of utmost importance. If and only if the transaction value cannot be determined as above, reference to CGST Rules related to valuation is permitted. Hence, recourse to the Valuation Rules is permitted only in the following circumstances:
