How valuation is done when Price is not a Sole consideration for goods/services under GST Valuation rules

1.0 Introduction

Under GST, the valuation is done based on the transaction value only if price is a sole consideration and supplier and the recipient are not related. In other words, the valuation shall be done in accordance with the rules, if the following two conditions are not satisfied:

• Price is a sole consideration
• Buyer and seller are related

In this article, we shall discuss how valuation is done when price is not a sole consideration. Let us understand it in detail.

2.0 Meaning of Price is not a 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 price is not the sole consideration for the supply, then the valuation shall be done in accordance with the rule 1 of the Valuation rules.

3. As per rule 1 of the valuation rules, where the supply of goods and services is for a consideration not wholly in money, the value of the supply shall:

• Be the open market value of such supply.

• If open market value is not available, 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;

• However, if the value of supply is not determinable under above two clauses, be the value of supply of goods or services or both of like kind and quality.

• Further, if value is not determinable under any of the aforesaid clause, then the value shall 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 application of rule 4 or rule 5 in that order. (Rule 4 states that value shall be 110% of the cost and the rule 5 is the residual rule.)

Let us have some illustrations:

a) Where a new phone is supplied for Rs.20,000 along with the exchange of an old phone and if the price of the new phone without exchange is Rs.24,000, the open market value of the new phone is Rs 24,000.

b) Where a laptop is supplied for Rs.40,000 along with a barter of printer that is manufactured by the recipient and the value of the printer known at the time of supply is Rs.4,000 but the open market value of the laptop is not known, the value of the supply of laptop is Rs.44,000.

3.0 Case studies where price is not a sole consideration

The case laws are related to excise law valuation chapter where the similar concept was discussed and hence, these case laws still hold good and maybe referred.

1. 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

2. One buyer was given higher discount than others on condition that he will promote sale and marketing of assessee's products. The extra discount was to compensate advertisement and promotion activity undertaken by L&T. It was held that the additional discount cannot be allowed as deduction. [CCE v. Rishabh Instruments (2008) 226 ELT 230 (CESTAT)].

3. The assessee was manufacturing wagons for Railways. Railways had supplied wheels and axles which were used by company while manufacturing Railway wagons. In this case as well, price is not the sole consideration. [Texmaco Ltd. v. CCE 77 ELT 501].

4. Seller of audio tape/video has to pay lumpsum charges to artiste/producer to acquire copyright. He then gets the CD/audio tape manufactured from job worker, by supplying the raw material. Assessable Value of CD/audio tape should be calculated on basis of raw materials supplied by buyer plus job charges of job worker plus cost of royalty paid to artiste.

5. If patterns/dies/masters/moulds are supplied by buyer, it is obvious that price charged for goods is not the 'sole consideration'. In such cases, valuation rules shall apply.

6. Foundries require 'pattern' (made of Aluminum or wood) for making a casting. Such pattern is used repeatedly for number of castings. The pattern is either supplied by buyer or made by the foundry and charged to buyer. Apportioning of pattern cost may be made

depending on the expected life and capability of pattern and the quantity of castings that can be manufactured from it and thus working the cost to be proportioned per unit. For this purpose, a certificate from a Cost Accountant may be accepted. CBE& C Circular No. 170/4/96CX dated 23-1-96.

In this case also, valuation shall be done in accordance with the rules.

7. In case where technical knowhow supplied free of cost by customer to the supplier, then also price is not the sole consideration and valuation shall be done in accordance with the rules. [CCE v. Wintac (2011) 263 ELT 273 (CESTAT)].

4.0 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 movdel cars. The assessees have filed several price declarations, declaring wholesale price of their cars for sale through whole sale 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 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. 1172014.

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 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, transaction shall not be accepted and valuation shall be made in accordance with the rules.

5.0 Conclusion

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