#TaxmannPPT | Valuation under GST – Specific Issues and Challenges

Valuation under GST Specific issues and challenges 1. Post-supply discounts

2. Pure agent 3. Related party transactions 4. Damages / compensation

29th

July, 2022

Dr. G. Gokul Kishore Advocate PREPARED BY DR. G. GOKUL KISHORE

Valuation - Discounts Section 15: Value of taxable supply Section 15(1) - Value of taxable supply of goods or services shall be transaction value which is the  Price actually paid or payable for the said supply.  Supplier and recipient are not related

 Price is the sole consideration for the supply.

PREPARED BY DR. G. GOKUL KISHORE

Valuation – Exclusion - Section 15(3) Value of supply does not include any discount which is given: a. Before or at the time of supply – if duly recorded in invoice of such supply – [Not for discussion in today’s webinar]. b. After the supply has been effected, if: i. Discount is established in agreement entered into at or before the time of such supply [Pre-supply agreement is a condition – Agreement may not have exact quantum but percentages can be mentioned – Discounts related to achieving sales target, year-end discount, turnover discount]

ii. Specifically linked to the relevant invoices [System-based – Difficult at tertiary stage in distribution chain of distributor to retailer]. iii. Attributable ITC has been reversed by the recipient.

PREPARED BY DR. G. GOKUL KISHORE

Post supply discount offered to dealers Ultratech Cement Limited - [2018] 95 taxmann.com 289 [Maha AAR]  Various discounts provided to authorized dealers/stockists at the rates decided by the applicant alone under an agreement.  Whether amount paid to authorised dealers towards "rate difference" post supply can be excluded?

AAR observations:

 Wordings of Section 15 [(3)(b)(i)] states that quantum of discount is given after supply of goods has taken place has to be there in the terms of agreement - Supplier has to clearly mention the quantum of discount or percentage of discount.  The bare word 'discount' mentioned in an agreement without there being any parameters or criteria mentioned with it would not fulfil the requirement of Section 15 (3) (b)(i).  Abnormal discounts without any criteria or basis can in no way be considered as fair and at arm's length business transactions.

PREPARED BY DR. G. GOKUL KISHORE

Post-supply discounts Questions  Is it always required to mention exact percentage to get the benefit of exclusion?  Can the quantum be a band – minimum and maximum discounts?  Parameters can be specified but is there any scope for revision at the time of extending such post-supply discount?  Is it prudent to have marketing arrangement to treat discounts as consideration for marketing services provided by distributors and others in the chain?

PREPARED BY DR. G. GOKUL KISHORE

MEK Peripherals India Pvt Ltd, Maharashtra AAR Ruling dated 27-4-2022 - [2022] 138 taxmann.com 54  Agreement with Intel US LLC (IIUL) under Intel Authorized Components Supplier

Program (IACSP) under which applicant will earn certain incentives directly from IIU.  Applicant purchases the goods from distributors but receiving discounts from IIUL and not from such distributors  No supply of goods or services from IIUL to applicant - Incentives received from IIUL will not be covered under Section 15 (3) of CGST Act, 2017.  Incentives cannot be treated as Trade Discount given by IIUL to the applicant because the supply of goods in respect of which the incentives are purported to be given are rendered by the distributors and not by IIUL PREPARED BY DR. G. GOKUL KISHORE

Incentives are consideration for marketing service (Contd.) 

IIUL is paying consideration (in the form of incentives) for receiving marketing services which would augment the sale of Intel products in India.

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Applicant (marketing service provider) located in India, IIUL (service recipient) located outside, consideration (incentive) is in convertible foreign exchange and applicant and IIUL are not distinct person. Clauses (i), (ii), (iv)and (v) of Section 2(6) of IGST Act, 2017 which deals with export of service are satisfied

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Marketing services are provided in respect of goods which are made physically available by the recipient of services (i.e., IIUL, through its distributors) to the supplier of marketing services (i.e., the applicant), in order to provide the services.

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Place of provision of services is the location of the supplier of services (applicant) i.e., India as per Section 13 (3) (a) of IGST Act, 2017.

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Clause (iii) of Section 2(6) of IGST Act, 2017 is not satisfied and therefore, it is not export of service.

PREPARED BY DR. G. GOKUL KISHORE

Santhosh Distributors [2021] 132 taxmann.com 15 [Kerala AAAR]  Additional discount to customers/dealers post the sale made - Additional discount so given is reimbursed by company to appellant by way of issuing commercial credit notes.

AAAR Ruling:  Bare minimum mention of discount in the agreement without any criteria will not fulfil the conditions prescribed  Appellant has no control on the quantum of scheme discounts to be offered  Additional discount is given to augment sales volume - Such discount being a consideration to offer reduced price is liable to GST  Amount is part of the consideration payable by customers (dealers) to the appellant (distributor) [though paid by the parent company] and is liable to be included in taxable value adopted by appellant to his customers.

PREPARED BY DR. G. GOKUL KISHORE

Pure Agent – Definition 

Explanation to Rule 33 of CGST Rules, 2017 defines the term ‘pure agent’

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Pure agent means a person who • enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both [Contract / agreement is necessary; He is the agent of recipient; Purpose is to incur expenditure or costs].

• neither intends to hold nor holds any title to the goods or services or both [Reaffirming the fact of agency – can procure goods or services for the recipient] • does not use for his own interest such goods or services so procured [Only for use by recipient and not by the agent] • receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account [Reimbursement is on actuals – it is reimbursement since he first incurs and then receives; Reimbursement is in addition to amount received for supply on own account] PREPARED BY DR. G. GOKUL KISHORE

Pure Agent – Conditions Costs or expenditure incurred by a supplier as a pure agent on behalf of the recipient shall be excluded from the value of supply if all the following conditions are satisfied – i.

The supplier acts as a pure agent of the recipient of supply and on authorisation by such recipient makes payment to the third party [Authorisation by recipient to make payment to third party]

ii.

The pure agent who made payment on behalf of the recipient of supply separately indicates in the invoice issued by him to the recipient such payments [Agent to mention separately payment for supplies procured from third party]

iii. The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account [Two supplies are contemplated – Own supply + Supply procured from third party]

PREPARED BY DR. G. GOKUL KISHORE

Exclusion of salary / wages 

Salary/wages paid by the supplier

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Applicant is the employer as per employment agreement - His only service is manpower supply – Salary payable by applicant and not on behalf of service recipient

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No two services involved

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The person should be providing certain service on his own besides procuring other service from third party in order to be pure agent

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Payment of salary/wages cannot be excluded from the value of supply since the applicant is not covered by pure agent provision

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Prodip Nandi – [2022] 134 taxmann.com 119 [West Bengal AAR]

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Manpower supply contracts / labour contracts – Making contractor as pure agent is a challenge as amount received towards wages may include mark-up

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Placing reliance on Intercontinental Consultants & Technocrats judgment PREPARED BY DR. G. GOKUL KISHORE

EPF & ESI – Whether can be excluded 

Wages and service charge paid by supplier to contractor and payment towards EPF, ESI reimbursed after payment by the contractor to government a/c

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Ruling sought on GST liability on reimbursement of EPF and ESI

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Consideration would include the entire payment received by the contractor (manpower supplier) from the applicant

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Intention of Section 15 is to include all taxes, duties, cesses, fees and all charges in the value of supply and there can be no exception for ESI and EPF amount

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Labour contractor cannot be treated as pure agent as the contractor is not procuring any additional services from the third party

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No contractual agreement with the recipient of supply to act as his pure agent

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Lucknow Producers Cooperative Milk Union Ltd. – [2021] 136 taxmann.com 270 [UP AAR] PREPARED BY DR. G. GOKUL KISHORE

Cost of fuel reimbursed – Whether excludible 

Cost of Aviation Turbine Fuel whether includible in value of supply of rental service of aircraft

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Fuel procured on behalf of the customer and subsequently cost of the fuel reimbursed at actual

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Appellant is primarily responsible for arranging for fuel for flying of helicopters – Service provision not possible without fuel being filled

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Where recipient provides free fuel, liable to included in taxable value - Reimbursement of cost of fuel includible in value

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Pure agent conditions not satisfied – No evidence produced on authorization

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Debit note raised for fuel and not invoice - Global Vectra Helicorp Ltd. – [2021] 133 taxmann.com 382 [AAAR GUJARAT]

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Reliance on Bhayana Builders judgment? Latest ruling of Rajasthan AAR holding GTA need not include cost of diesel as the same is within the scope of service recipient as per contract – Unambiguous terms PREPARED BY DR. G. GOKUL KISHORE

Electricity & water charges - whether excludible 

Electricity and water charges collected at actuals and paid on behalf of licensees and reimbursed by way of raising debit notes on licensees

 Ruling sought on whether the amount reimbursed is excludable from the value of supply and whether the applicant is acting as a pure agent

 Supply of electricity and water comes under the purview of essential services and is mandatory on the landlord (applicant) to provide along with the property  Electricity and water charges reimbursed are in the nature of incidental expenses in relation to renting of immovable property 

Value of supply includes incidental expenses incurred - Section 15(1)(c) of CGST Act

 Electricity is not acquired from the main supplier of electricity by applicant on instructions from tenant and the meters are in the name of applicant – Not acting as pure agent 

Absence of authorization obtained from licensee to make payments on their behalf

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Indiana Engineering Works (Bombay) Pvt Ltd – [2022] 137 taxmann.com 389 [Maha AAR]

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Lease agreement should contain express authorisation – invoice should be raised mentioning both payments made to authorities for such services and for leasing of property PREPARED BY DR. G. GOKUL KISHORE

Exclusion of electricity charges 

Electricity charges along with rent inclusive of GST paid by the lessee (GST Dept) to applicant

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Whether electricity charges collected and paid by applicant at actuals on behalf of recipient of supply be treated as pure agent service when the liability of payment is that of the applicant

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Amount agreed to be paid as per the agreement - excludes electricity charges

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Language of agreement – obligation on the recipient to pay the electricity charges directly to the supplier and not applicant

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Separate meter absent but based on sub-meter, applicant collects it on behalf and pays the supplier

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Electrical charges are reimbursable in nature and applicant is acting as a pure agent

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Gujarat Narmada Valley Fertilizers & Chemicals Ltd – [2021] 123 taxmann.com 380 [Guj AAR]

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Agreement terms – Installation of sub-meter PREPARED BY DR. G. GOKUL KISHORE

Collection of Exam fees – excludible? 

Coaching, training and learning services for students – Principal service

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Collection and remittance of exam fees to respective universities without any extra charges based on authorization from students – Ancillary service

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Ruling sought on GST liability on the collection and remittance of exam fees

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Exam fees and fee collected for coaching classes separately indicated in the invoice – No profit element involved – Payment facilitation in addition to principal service

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All conditions of pure agent satisfied

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Exam fees collected and remitted excludible from value of supply

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Arivu Educational Consultants Pvt Ltd – [2019] 110 taxmann.com 426 [Kar AAR]

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Lessons on how to comply with pure agent from educational service provider PREPARED BY DR. G. GOKUL KISHORE

Related party transactions Complimentary tickets to related parties 

Cricket team as part of Indian Premier League (IPL) under the title of 'Punjab Kings’ – Distribution of match tickets to various parties free of cost.

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Whether the complimentary tickets are subject to levy of GST?

AAAR Ruling: 

Complimentary tickets are provided to non-related parties is not supply and ITC is not admissible

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Complimentary tickets provided to related persons like employees / staff members within the ambit of supply even without consideration

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ITC available as GST is payable on tickets given to related persons

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K.P.H. Dream Cricket Private Limited, Ruling dated: 1-6-2022

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Transactions with related persons – ITC benefit comes at a cost

PREPARED BY DR. G. GOKUL KISHORE

Renting of property by partner to firm  Property of partner used by partnership firm free of cost (FOC)  Whether GST is payable on the property of partner used FOC by the partnership firm  Partner and partnership firm are two separate persons and are related parties  Rent-free accommodation provided accrues indirectly as profit to the partnership firm  Renting of property is done in course or furtherance of business for commercial use by the firm  Property of partner rented to partnership firm FOC is supply under GST.  Supply between related parties does not mandate consideration in terms of Schedule 1 to CGST Act

 GST is payable on the value of supply determined in terms of Rule 28 of CGST Act  Shanmuga Durai – [2022] 136 taxmann.com 167 [Tamil Nadu AAR]  Open Market Value may not be an issue in leasing / renting – Resort to residuary rule may not be necessary

PREPARED BY DR. G. GOKUL KISHORE

Rule 28 or Rule 31?  Managerial / leadership services provided to group companies (also branch offices)  Applicant was charging GST on certain lumpsum amount – Rule 28 followed

 AAR agreed with such practice  AAR did not answer whether Rule 31 is applicable if Rule 28 method is not permitted  B.G. Shirke Construction Technology P. Ltd. - [2021] 132 taxmann.com 124 [Maha AAR]  Lumpsum charged is acceptable if recipient is entitled to ITC – If recipient is not eligible for ITC or when the services are customised, Rule 31 will be the option

PREPARED BY DR. G. GOKUL KISHORE

Damages and compensation Scope of Schedule-II entry on toleration 

Agreeing to the obligation

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Can it be said that by receiving damages or compensation, the act is tolerated?

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Desire of the other party to tolerate absent

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Intention of the parties important

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Schedule-II merely categorizes certain activities as either supply of goods or supply of services – it cannot fasten any liability if it is otherwise absent PREPARED BY DR. G. GOKUL KISHORE

Condition of contract v. consideration 

Conditions provided in contract specify the obligations of the parties

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Consideration is the amount payable for performance of such obligation

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Consideration clause is one of the terms in the contract which becomes payable on satisfaction of conditions

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Failure to fulfill conditions triggers right to claim damages as agreed

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Mode of pressing the condition into service may be through adjustment of consideration

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Adjustment does not change character of receipt

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Damages paid for failure to provide service as agreed PREPARED BY DR. G. GOKUL KISHORE

Is it a supply? 

Section 7 provides inclusive definition of supply but reference to Schedule-II was omitted (legislative intention?)

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Interpretation of “such as”

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No deeming provision on toleration so as to treat it as supply

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Enforcement of right under contract cannot be supply unless stated so expressly in the statute

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Exercise of contractual right for restitution is not a supply – Absence of consideration

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Amount paid for loss suffered and not for any supply

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Liability precedes exemption – Exemption to liquidated damages received by government not determinative of liability

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Definition of business does not support levy of GST on damages PREPARED BY DR. G. GOKUL KISHORE

Bombay HC judgment in Bai Mamubai Trust – [2019] 109 taxmann.com 200 (Bombay HC) 

Court receiver is a department of High Court and fees charged by such office not liable to GST

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Basis of payment of royalty (in the interim) is alleged illegal occupation or trespass by defendant

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Such payment lacks reciprocity to make it supply under GST

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“Where no reciprocal relationship exists, and the plaintiff alleges violation of a legal right and seeks damages or compensation from a Court to make good the said violation (in closest possible monetary terms) it cannot be said that a 'supply' has taken place.”

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Supply requires enforceable reciprocal obligations – Does not cover unilateral act or those resulting in payment of damages

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Seeking money decree versus suit against illegal occupation / trespass (claim will be one of damages)

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Quantification does not determine character of payment as consideration PREPARED BY DR. G. GOKUL KISHORE

Advance rulings 

GST – Applicant’s contention is that no reciprocity involved – Termination puts an end to business and not in the course or furtherance

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HELD: Nomenclature may be different but it will not change nature of consideration – Covered under Sh. II (Damages to be awarded by arbitral tribunal) – North American Coal Corporation – [2018] 98 taxmann.com 331 (Maha AAR)

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Act of delayed supply tolerated by recovering LD – Sh. II applicable – Rashtriya Ispat Nigam Ltd. – [2019] 112 taxmann.com 5 (Andhra AAR)

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Agreement having clause on LD indicates recipient has agreed to tolerate – Appellant could have chosen to terminate but agreed to tolerate by receiving LD - Sh. II relied on – Argument on supply should be a voluntary act countered by highlighting ‘agreed’ - Maharashtra State Power Generation Co. – [2018] 93 taxmann.com 266 (Maha AAR) – Affirmed by AAAR – [2018] 97 taxmann.com 408

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Same position reiterated in Singareni Collieries – LD recovered for delay, breach etc – LD is consideration received for forbearance – [2022] 140 taxmann.com 388 [Telangana AAR] PREPARED BY DR. G. GOKUL KISHORE

Thank you

Gokul & Subha Advocates New No. 4, Old No. 5 4th Cross Street, Seethammal Colony Alwarpet, Chennai – 600 018.

M: 98187 97367, 97175 86490 E: gokulkishore@gmail.com PREPARED BY DR. G. GOKUL KISHORE