GST VALUATION RULES, WHERE PRICE IS NOT THE SOLE CONSIDERATION OR TRANSACTION IS BETWEEN RELATED PERSONS

According to section 15 of CGST Act 2017, the value of supply of goods or services or both shall be the transaction value, subject to adjustments of subsection (2) and (3) of section 15. An elaborate article on this topic has already been published on TAXLOK, and through this article lets dive deep into the cases where price can not be accepted as transaction value.

 Price will not be accepted if:

• Price is not the sole consideration, or,

• Buyer and seller are related parties.

In both of the above cases, value of supply shall be determined as per Rule 27 to Rule 31. Methods prescribed under the rules as above are to be followed in sequence. However, in case of supply of service Rule 30 can be skipped and directly Rule 31 can be applied.

Rule 27: Value of Supply when consideration is not wholly in money.

When Price is not the sole consideration or where consideration is not wholly in money, value of supply shall be:

• Open Market value of such supply;

• If open Market value is not available, sum total of consideration in money and any such further amount as is equivalent to consideration not in money (value of non-money consideration), if known at the time of supply;

• If value of supply is not determinable as per above clauses, value of supply of like kind and quality;

• If not determinable from above methods, value of supply shall be determined according to rule 30 or rule 31 in that order.

Analysis of the rule

1. This rule is used to determine value of supply when consideration involves non-monetary consideration.

2. Open Market value excludes taxes GST law.

3. Supply of like kind and quality means supply which substantially resembles in respect to characteristics, functionality, quality and quantity to the supply being valued.

4. Following is an example to understand this rule better:

When a new mobile phone is bought in an exchange offers, wherein we provide an old mobile for a new one, we have to pay lesser amount. For instance, ABC mobiles sells a new mobile for Rs. 50,000 whereas in exchange of an old phone it is sold for Rs. 35,000. Here the consideration is not wholly in money and the open Market value of new phone is known, which is Rs.50,000, and therefore such amount of Rs.50,000 is to be taken as Value of Supply.

However, if this phone is available only in exchange offers, then open Market value of such new phone is not available. In that case, fair Market value of such old phone plus monetary consideration charged will be considered as Value of Supply.

Further, if the FMV of such old phone is not available, then value of supply of like kind and quality shall be taken as value of supply i.e., value of another mobile which have similar functions, screen size, brand image etc will be taken as Value of Supply of mobile being valued.

Rule 30 and 31 are discussed in detail at a later stage in this article.

Rule 28: Value of Supply of goods or services or both between Distinct or Related Person, other than through an agent-

The second condition where transaction value is not considered as Value of Supply is where buyer and seller are related. Therefore, where buyer and seller are related (other than principal-agent relationship), value of supply will be determined according to this rule.

Related persons has been defined through explanation to the section 15 itself, which is as under-

Explanation.—For the purposes of this Act,—

(a) 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 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;

(b) the term “person” also includes legal persons;

(c) 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.“

So, where buyer and seller are distinct persons as specified in section 25(4) and 25(5) of the CGST Act, 2017 or where both the parties are related as per section 15 of the CGST Act, 2017 (other than principal-agent relationship), value of supply shall be:

• Open Market value of such supply;

• If open Market value is not available, be the value of supply of like kind and quality;

• If not determinable from above methods, value of supply shall be determined according to rule 30 or rule 31 in that order.

Provided that where the goods are intended for further supply as such by recipient, the value shall be at the option of the supplier, be an amount equivalent to 90% of the price charged for such supply by recipient to a customer not being a related party.

Provide further that where the recipient is eligible for full Input tax credit, the value declared in the invoice shall be considered as open Market value of goods or services.

Analysis of this rule:

1. Where the buyer and seller are distinct persons or where both parties are related (other than the principal-agent relationship), the value of supply shall be determined under this rule. In the case of the principal-agent relationship, the value shall be determined according to Rule 29.
   Some examples of such supplies are Stock transfer between two registered branches of same Taxable person, Import of services from associate enterprises etc.

2. Distinct person is defined u/s 25 as a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act. Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

3. If the goods supplied between distinct or related persons are intended for further supply by the recipient, the value can be set at 90% of the price charged for similar goods by the recipient to their non-related customers. This option is at the discretion of the supplier.
   For example, X, supplies smartphones to its related party, B, who further resale it to non-related customers. B sells the smartphones to non-related customers for Rs.5000 each. Therefore, the value of the supply of smartphones supplied by X to B can be taken as Rs.4500.

4. According to 2nd proviso mentioned above, if the recipient is a related person to the supplier and he can avail full Input tax credit on such supply, the invoice value can be considered as open Market value.
   For example, Mr. A and Mr. B are related persons as per GST laws. Mr. A supplies some goods to Mr. B at a price of Rs 1,00,000 plus IGST 18,000. If Mr B is eligible to take full ITC of Rs.18,000, then invoice value i.e., Rs.1,00,000 will be considered as the open Market value of such goods.

Rule 29: Value of Supply of goods or services or both between Principle-Agent relation-

The value of supply of goods between the principal and his agent shall-

• be the open Market value of the goods being supplied or

• 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.

• Where the value of supply is not determinable under any of the above methods, the same shall be determined by application of Rule 30 or Rule 31, in that order.

Analysis of this Rule:

1. Supplier may choose either of the first two methods. No sequence is required to be followed in the first two methods. However, if not determinable under the first two method, Rule 30 and Rule 31 is to be applied in sequence. (Service suppliers have the option to skip rule 30 and directly use rule 31)

Rule 30. Value of supply of goods or services or both based on cost -

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Analysis of this Rule:

1. For example, Mr. A produces shirts and the value of supply of such shirts is not determinable in Rules 27 to 29, the value of supply shall be 110% of the cost of production of shirts, i.e., at a markup of 10% on the cost of production.

2. This Rule can be at the option of the supplier skipped to determine the value of supply of services.

Rule 31. Residual method of 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 rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:

Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.