How Valuation is done in case of related parties under GST as per Valuation rules
by Paras Mehra 4.25K
1.0 Introduction
Section 15 of CGST act governs the provision of valuation under the GST law. As per section 15, transaction value shall be accepted as the value for valuation purpose subject to the following conditions i.e.
- Price is not a sole consideration
- Buyer and supplier are related
Further, this category is further divided into two parts, i.e. related party (without agent), rules for related part (agent). Let us discuss it in detail.
2.0 Who is said to be a related person under GST?
The definition of related party/person is explained under section 15(5). Persons shall be deemed to be “related persons” if––
(i) Such persons are officers or directors of one another’s businesses.
(ii) Such persons are legally recognized 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;
Important Points
1. The term “person” also includes legal persons;
2. Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
3.0 Value of goods or services or both supplier and recipient are related (but not agent)
The value of the supply of goods or services where the supplier and recipient are related shall –
- Be the open market value of such supply.
- If open market value is not available, the value shall be the value of supply of goods or services of like kind and quality.
- If value is not determinable under aforesaid clauses, then the value shall be the value as determined by application of rule 4 or rule 5 of GST Valuation rules, in that order.
Important points:
1. Where goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.
2. Further, 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 goods or services
3.1 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 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 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 price charged to wholesale dealers [Kirloskar Cummins Ltd v. UOI 1991 (51) E.L.T 325 (Bom)].
6. Important Case Law: Price to buyer will not be normal price for the purpose of valuation, if the buyer is a related person and price is not 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 buyer can be considered for valuation only when both the conditions - (a) buyer is not a related person and (b) price is the sole consideration - are satisfied] [Calcutta Chromotype Ltd. v. CCE 1998 AIR SCW 1379]
7. Often, some companies get the goods manufactured under their brand name from some other Companies. However, such brand name owner cannot be termed as relative of the actual manufacturer, only for this reason. In such cases, duty payable will be on the basis of price charged by the actual manufacturer to the brand name owner [Voltas Ltd. v. CCE 2005 (188) ELT 421 (CESTAT)].
8. Mere fact that goods manufactured bear trade mark of the customer who purchases entire production and incurs all advertisement expenses would not lead to the conclusion that dealings between the two are not at arms length [Chetan B thandani v. UOI 1987(30) ELT 287 (Bom)].
9. Dealer undertaking sale promotion expenses are not related persons, as sale promotion is for mutual benefit of both buyer and seller. Allegation of mutual interest between assessee and dealer merely on ground of sales promotion is not sustainable [Indian Oxygen Ltd. v. CCE 1997(95) ELT 223 (CEGAT)].
10. Mere giving interest free advance as a matter of commercial expediency and as a trade practice is not sufficient to say that the buyer and seller are 'related persons [CCE v. Kwality Ice Cream (2010) 29 STT 453 = 8 taxmann.com 93 = 260 ELT 327 (SC)].
4.0 Value of supply of goods (NOT SERVICES) made or received through an agent
1. The value of supply of goods between the principal and his agent shall be the open market value of the goods being supplied.
However, the value shall, at the option of the supplier, be ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient.
2. Where the value of a supply is not determinable under above clause, the same shall be determined by application of rule 4 or rule 5 in that order
Illustration: Where a principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of Rs.5000 per quintal on the day of supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of Rs.4550 per quintal. The value of the supply made by the principal shall be Rs.4550 per quintal or where he exercises the option the value shall be 90% of the Rs.5000 i.e. is Rs.4500 per quintal.
5.0 Value of supply of goods or services or both based on cost – Rule 4
Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.
Important point
In case of supply of services, the supplier may opt for this rule, disregarding rule 4.
6.0 Residual method for determination of value of supply of goods or services or both
Where the value of supply of goods or services or both cannot be determined under any rule, then the same shall be determined using reasonable means consistent with the principles and general provisions of section 15 and these rules.
However, in case of supply of services, the supplier may opt for this rule, disregarding rule 4.
7.0 Conclusion
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