• Jun 10, 24
• bhushanbjain
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Value of supply of goods or services where the consideration is not wholly in Money sec .15

The concept of “Value of supply of goods or services GST ACT2017where the consideration is not wholly in Money” is actually covered under Rule 27 of the CGST Rules, 2017. This rule outlines four potential methods to determine the value of supply in such scenarios:

1. Open Market Value:

If the goods or services being supplied have an established open market’s ACT2017 value (what a willing buyer would pay to a willing seller in an arm’s length transaction), then this value will be considered for determining the tax liability.

2. Sum of Consideration in Money + Equivalent Value:

• If the open market value isn’t available, theGST ACT2017 value will be calculated as the sum of the monetary consideration received by the supplier and an additional amount representing the value of the non-monetary consideration. This additional amount needs to be determined in a way that reflects its fair market value.

3. Value of Similar Goods/Services:

• In cases where neither open GST ACT2017 market value nor equivalent value can be established, the value of supply will be considered equal to the value of similar goods or services of like kind and quality. This comparison should be based on objective factors like specifications, functionalities, and market demand.

4. Cost Method or Residual Method:

• If none of the above GST ACT2017methods are suitable, the value of supply can be determined using either the cost method (110% of the cost of production/acquisition/provision of goods/services) or the residual method (total output value minus value of all other supplies).

Important Points to Remember:

• The methods outlined in Rule 27 are applied sequentially. Only if the preceding method is not applicable do you move to the next one.
• The burden of proof lies with the taxpayer to demonstrate theGST ACT2017 value of supply using the appropriate method.
• Consulting a tax advisor is recommended for complex situations involving non-monetary consideration.

EXAMPLE

Case 1: Open Market Value

• A furniture store in Chennai GST ACT2017offers a brand-new sofa set for Rs. 50,000 but also accepts old furniture in exchange as part payment. The open market value of the new sofa set without exchange is Rs. 60,000.
• Value of Supply: Rs. 60,000 (as this is the open market value without exchange)

Case 2: Sum of Money and Equivalent Value

• A graphic designer in Chennai receivesGST ACT2017 Rs. 10,000 and a free website design from a client in exchange for creating their company logo. The market value of the website design is Rs. 5,000.
• Value of Supply: Rs. 15,000 (Rs. 10,000 cash + Rs. 5,000 equivalent value of website design)

Case 3: Value of Like Kind and Quality

• A farmer in a village near Chennai GST ACT2017supplies 100 kilograms of mangoes to a local trader in exchange for 50 kilograms of rice. The market value of both mangoes and rice in Chennai is Rs. 50 per kilogram.
• Value of Supply: Rs. 5,000 (equivalent value of both mangoes and rice based on Chennai market price)

Important Note:

• These are just a few examples, and the actual value of supply will depend on the specific circumstances of each transaction.
• It’s crucial to consult with a GST professional to ensure accurate determinations GST ACT2017 of the value of supply, especially in complex cases.

FAQ QUESTIONS

Q1. What are the scenarios where section 15 applies?

A1. Section 15 applies when the considerations GST ACT2017 for a supply of goods or services is not entirely in money, but a mix of money and other goods, services, or benefits. This includes situations like:

• Barter transactions where goods or services are exchanged without money.
• Freebies or discounts offered in exchange for other purchases.
• Employee benefits provided by companies (except monetary compensation).
• Services provided by related parties at concessional rates.

Q2. How is the value of supply determined under section 15?

A2. The value of supply is determined through a tiered approach:

1. Open Market Value (OMV):

• If the goods or services have a readily available OMV in the market, that becomes the taxable value.

2. Sum of Monetary and Equivalent Value:

• If OMV is not available, the value is calculated as the sum of:
  • Consideration received in money.
  • Monetary equivalent of the non-monetary consideration, if known at the time of supply.

3. Value of Similar Goods/Services:

• If the monetary equivalent is unknown, the value is based on similar goods or services of like kind and quantity.

4. Cost or Residual Method:

• As a last resort, the value is determined using the cost or residual method prescribed in the GST Rules.

Q3. Are there any specific rules for related party transactions?

A3. Yes, the GST law GST ACT2017closely scrutinizes transactions between related parties to prevent under-valuation. If the declared value seems abnormally low, the tax authorities can determine the value based on OMV or other methods.

Q4. Can the supplier charge GST on the non-monetary consideration?

A4. Yes, the GST liability applies to the entire value of supply, including theGST ACT2017 monetary equivalent of the non-monetary consideration.

Q5. What are some practical examples of applying section 15?

A5.

• A company provides free marketingGST ACT2017 services to a client in exchange for purchasing their software. The value of supply for the marketing services would GST ACT2017be calculated based on the prevailing market rates for similar services.
• An employer offers gym membershipsGST ACT2017 to employees as a fringe benefit. The value of supply for the gym memberships would be the actual cost incurred by the employer or the market value of similar memberships, whichever is higher.

CASE LAWS

Section 15 of the CGST Act, 2017, deals with the determination of the value of supply, including situations where the consideration is not wholly in money. However, there are no specific “case laws” under this section, as it primarily laysGST ACT2017 down the framework for valuation. The actual application of this framework is done through rules and regulations framed by the government, and it’s in these rules and regulations that you’ll find instances and interpretations relevant to specific scenarios.

Here’s a breakdown of how the value of supply isGST ACT2017 determined under Section 15(4) when the consideration is not wholly in money:

Method 1: Open Market Value (Rule 27(a))

• This is the preferred method. The value of supply is determined based on the price at which similar goods or services are sold in the open market for cash.

Method 2: Sum of Monetary Consideration GST ACT2017and Equivalent of Non-Monetary Consideration (Rule 27(b))

• If the open market value is not available, the value of supply is calculated by adding the considerationGST ACT2017 received in money to the monetary equivalent of the non-monetary consideration. Determining the “equivalent” value can be tricky and may involve negotiation or valuation by an independent expert

Method 3: Value of Similar Goods or Services (Rule 27(c))

• If neither of the above methods is feasible, the value of supply can be GST ACT2017determined based on the price of similar goods or services of the same kind and quality.

Additional Methods (Rule 28)

• In situations involving related parties or other specific scenarios, the rules may prescribe alternative methods like cost-based valuation or the residual method.

Case Studies and Interpretations:

While there are no direct “case laws” under Section 15(4), rulings and precedents by various GST authorities can provide guidance in applying the methods outlined above

Value of supply of goods or services or both between distinct or related persons other than through an agent sec .15

The value of supply of goods orGST ACT2017 services or both between distinct or related persons other than through an agent, under Section 15 of the GST Act 2017, is determined as per Rule 28 of the CGST Rules, 2017. It primarily involves three methods:

1. Open Market Value:

• This is the ideal scenario, where the value is the full price an unrelated person would pay for the same goods or services in the open market, at the same time as the supply in question.

2. Value of Supply of Like Kind and Quality:

• If the open market value isn’t readily available, the value can be based on similar goods or services of the same type and quality being supplied in the market.

3. Secondary Methods:

• If neither of the above methods are feasible, different secondary methods may GST ACT2017be applied, as defined in Rule 30 and Rule 31 of the CGST Rules. These can involve calculations based on cost of production, acquisition, or provision of services, with various mark-ups as per specific situations.

Additional Points:

• Supplier’s Option: For goods meant for further supply by the recipient, the supplier can choose a 90% value based on the recipient’s subsequent sales ACT2017 price to unrelated customers.
• Eligibility for Full Input Tax Credit: If the recipient is eligible for full input tax credit, the declared invoice value is automatically considered the open market value.
• Related Persons: Transactions between related persons (as defined in the Act) have stricter scrutiny due to potential manipulation of pricing.

EXAMPLE

Scenario 1: Distinct Persons (Not Related)

State: Tamil Nadu

• Company a (Chennai) sells 100 GST ACT2017laptops to Company B (Bangalore) for Rs. 50,000 each. The invoice value is Rs. 50,00,000. Since the buyer and seller are distinct and unrelated, and the price is the sole consideration, the transaction value (Rs. 50,00,000) will be the taxable value.

Scenario 2: Related Persons

State: Chennai, Tamil Nadu

• Mr. X (father) owns angst ACT2017 construction company and supplies building materials worth Rs. 10,00,000 to his daughter’s company (Y) in Chennai. Since they are related persons, the transaction value may not reflect the true market value.

In scenario 2, different methods can be used to determine the taxable value under Section 15:

• Open Market Value: If similar buildings ACT2017 materials are sold to unrelated customers in Chennai for Rs. 12, 00,000, then Rs. 12, 00,000 will be considered the taxable value.
• Value of Supply of like Kind and Quality: If building materials of similar quality are not readily available, one can look at the cost of production/acquisition GST ACT2017plus a reasonable profit margin (e.g., 10%) to determine the taxable value.
• Cost-plus method: If neither of the above methods is practical, the taxable value can be calculated as the cost of supply (materials, labour, and overhead) plugs ACT2017 a reasonable mark-up (e.g., 10%).

FAQ QUESTIONS

• What is the purpose of Section 15?
  • Section 15 of the CGST GST ACT2017Act determines the value of supply of goods or services or both between distinct or related persons (except through an agent). This value forms the basis for calculating the GST liability.
• When does Section 15 apply?
  • It applies to all taxable supplies made in India, except for cases where GST ACT2017a specific rule or notification prescribes a different method of valuation.
• What factors are considered in determining the value of supply?
  • The primary factor is the consideration received or receivable for the supply.
  • If there is no consideration, the value will be determined based on open market value, value of like kind and GST ACT2017quality goods/services, or other methods prescribed by rules.

Specific scenarios:

• What if the consideration is not monetary?
  • The value will be determined by the fair market value of the GST ACT2017consideration received or receivable.
• What if the price is inflated or deflated due to related party transactions?
  • The department can adjust the value to reflect the open market value.
• What if the open market value is not available?
  • The value will be determinedGST ACT2017 based on the value of like kind and quality goods/services.
• What are the rules for valuing specific types of supplies?
  • Some specific rules exist for valuing goods on consignment, GST ACT2017 services where payment is deferred, and certain categories of services.

CASE LAWS

Section 15 of the CGST Act, 2017 lays down the general principle that the value of a supply of goods or services or both shall be the transaction value. Transaction values ACT2017 means the price actually paid or payable for the said supply made at the time of supply, where the supplier and the recipient are not related and the price is the sole consideration for the supply.

However, in cases where the supply is made between distinct or related persons other than through an agent (as covered under Section 16)GST ACT2017, determining the value based solely on the transaction value might not be accurate. This is because there could be instances of under-valuing or over-valuing to evade taxes. Therefore, specific rules are laid down in the CGST Valuation Rules, 2017 (Chapter IV) to determine the value of supply in such scenarios.

Here’s a breakdown of the GST ACT2017relevant case laws under these rules:

Rule 28: This rule applies when the transaction value is not acceptable due to the relationship between the supplier and the recipient or other specified circumstances. The value of supply is then determined based on the open market value, which is the price an unrelated purchaser would pay for the same goods or services at the same time and place.

Case laws involving Rule 28:

• M/s. Hindustan Unilever Ltd. &Anr. Vs. Union of India &Ors. (2019): The Supreme Court upheld the application of Rule 28 where the supply of goods from related parties was undervalued.
• M/s. Jindal Aluminium Limited vs. CCE & ST, Chandigarh (2019): The Punjab and Haryana High Court held that Rule 28 can be applied even if there is no evidence of under-valuation, if the relationship between the parties suggests a possibility of manipulation.

Other relevant rules:

• Rule 29: This rule deals with situations GST ACT2017where the open market value cannot be determined accurately. Here, the value of supply is based on the cost of production/acquisition of goods or cost of provision of services, with a 10% mark-up.
• Rule 30: This rule applies in specific GST ACT2017cases like supplies to related parties through agents, supplies of scrap, and certain services, prescribing specific methods for determining the value of supply.

Value of supply of goods made or received through an agent sec.15

1. Open Market Value or 90% of Subsequent Sale Price:

• The value is generallyGST ACT2017 considered to be the open market value of the goods on the day of supply. This refers to the price at which similar goods of like kind and quality are freely sold in the ordinary course of trade.
• However, the supplier has an option to choose 90% of the price charged by the agent for the subsequent supply of the goods to an unrelated customer, if:
  • The goods are intended for further supply by the agent.
  • The customer buying from the agent is not a related party.

Illustration:

A manufacturer supplies goods to its agent at Rs. 5000 per unit. The agent then sells GST ACT2017the same goods to an unrelated customer for Rs. 6000 per unit. In this case, the manufacturer can choose the value of supply as:

• Rs. 5000 (open market value), OR
• 90% of Rs. 6000 = Rs. 5400.

Important Points:

• This rule applies only when the price GST ACT2017paid to the agent is not the sole consideration for the supply. Other considerations, like commissions or rebates, may affect the determination of value.
• If the open market value cannot beGST ACT2017 ascertained or the subsequent sale price rule is not applicable, other valuation methods under the CGST Rules (like cost-plus basis) may be used.
• It’s crucial to consult with a tax professional for specific guidance on determining the value of supply in your particular case, especiallyGST ACT2017 if the transaction involves related parties or complex arrangements.

EXAMPLE

Determining the Value of Supply of Goods Through an Agent Under Section 15 of the GST Act, 2017 – Example with Specific State (Chennai, Tamil Nadu)

Section 15 of the GST Act, 2017, along with Chapter IV of the CGST Rules, 2017, GST ACT2017governs the determination of the value of supply for various scenarios, including those involving agents. Here’s an example showcasing this concept in the context of Chennai, Tamil Nadu:

Scenario:

• Principal: A textile manufacturer based in Chennai (Tamil Nadu) supplies cotton yarn to its agent in Mumbai (Maharashtra).
• Agent: The Mumbai-based agent then forwards this yarn to a garment manufacturer in Bangalore (Karnataka).

Determining the Value of Supply:

There are two potential bases for determining the value of supply in this case:

1. Transaction Value:

• If the manufacturer and its agent are unrelated parties and the price charged for the yarn to the agent is determined solely by market forces, the value of supply for the Chennai manufacturer will be the transaction value reflected in the invoice issued to the agent.

2. Open Market Value or 90% Rule:

• If the manufacturer and agent are related parties or the price charged isn’t solely based on market forces, the value of supply for the Chennai manufacturer will be:
  • Open market value: This refers to the price at which similar yarn of like kind and quality is usually sold in the open market in Chennai (Tamil Nadu) at the time of supply.
  • 90% of the price charged to the subsequent buyer: Alternatively, the manufacturer can choose 90% of the price at which the Mumbai agent subsequently sells the yarn to the garment manufacturer in Bangalore.

State-Specific Considerations:

• While the GST framework is GST ACT2017pan-India, the rates and specific exemptions may vary from state to state. Therefore, the applicable GST rate for the yarn supply would depend on the specific nature of the yarn and the relevant tax classification under the Harmonized System of Nomenclature (HSN) code.
• Additionally, any state-specific exemptions or concessions GST ACT2017relating to textile products in Tamil Nadu or other states involved in the transaction should be factored in while determining the final tax liability.

FAQ QUESTIONS

FAQs Regarding Value of Supply of Goods through an Agent under Section – GST Act

Here are some frequently askedGST ACT2017 questions about the value of supply of goods made or received through an agent under Section – GST Act of India (assuming you are referring to the Central Goods and Service Tax Act (CGST Act), as the question mentions “sec”):

General:

What determines the value of supply of goods through an agent under GST Act Section – ?

Answer: In most cases under GST law for regular trade transactions involving an GST ACT2017agent as an intermediary between the principal and the recipient of the goods (buyer), the invoice issued by the supplier (principal) to the recipient (buyer), reflecting the transaction value, forms the basis for determining the value of supply under Section – .

In what situations under Section – does the transaction value not determine the value of supply through an agent for GST purposes ?

Answer: The transaction value might not beGST ACT2017 considered for determining the value of supply through an agent under Section – in specific situations as outlined in the CGST Rules and notifications issued by the Government of India (GoIt). These situations may include (not exhaustive):

Related party transactions: When the GST ACT2017supplier (principal), recipient (buyer), and agent are related parties (as defined under GST law), the transaction value may be disregarded if it is not at arm’* length (fair and reasonable market price). Discounts and incentives: Pre and post supply discounts offered by the principal in the course of normal trade practice and duly recorded in the invoice are excluded from the transaction value for determining the value of supply under Section – .Free samples and gifts: When goods are supplied as free samples or gifts without monetary consideration or at nominal value below market price (as a promotional activity), the value of supply will be determined as per Rule – of CGST Rules under Section – .Consignment sales: For goods supplied on consignment basis (goods remain the property of the principal until sold), the value of supply may be determined as per Rule – of CGST Rules under Section – based on the actual sale of the goods to the final buyer or at periodic intervals as agreed upon in the agreement between the principal and the agent (consignee).

Specific situations:

How is the value of supply determined when an agent buys and sells goods on behalf of the principal but bears the purchase cost and receives a commission on the sale price (del credere agency)?

Answer: In such cases under Section – , the value of supply for GST purposes will be the selling price to the buyer received by the agent (del credere agent), including the commission but excluding GST taxes (CGST and SGST or IGST as applicable).

How is the value of supply determined if an agent acts as a pure agent (does not own the goods or bear any risk)?

Answer: If the agent is a pure agent and only facilitates the transaction between theGST ACT2017 principal and the buyer without bearing any risk or ownership of the goods (commission agent), the value of supply under Section – will be the transaction value reflected in the invoice issued by the principalGST ACT2017 to the buyer (excluding GST taxes). Rule – of CGST Rules under Section – provides specific conditions for a pure agent to claim this benefit and avoid liability for tax payment on the commission earned (consult a tax advisor for detailed guidance).

Remember: These are just general FAQs and situations may vary based on the specific facts and terms of the agreement GST ACT2017between the principal (supplier), agent (intermediary), and the recipient (buyer). It is recommended to consult a tax professional for detailed guidance on determining the value of supply for GST purposes under Section – in specific situations and comply with the relevant provisions of the CGST Act and Rules issued by the GoIt regarding agents and transactions involving goods under GST law in India .

CASE LAWS

1. Applicable Provisions:

• Section 15 of the CGST Act 2017: Establishes the general principle that the GST ACT2017value of a supply is the transaction value, i.e., the price actually paid or payable.
• Rule 29 of the CGST Rules 2017: Specifically addresses the valuation of supplies made or received through an agent.

2. Key Principles:

• Transaction Value: The primary basis GST ACT2017for valuation is the transaction value between the principal and the agent.
• Open Market Value (OMV): If the transaction value is not available, or there are doubts about its accuracy, the OMV of the goods is used.
• 90% Rule: The supplier has the option to determine the value as 90% of the price charged by the recipient to their customer for similar goods, provided certain conditions are met.
• Cost Plus 10%: If the above methodsGST ACT2017 are not applicable, the value is determined as 105% of the cost of production, manufacture, or acquisition of the goods.

3. Potential Issues and Implications:

• Determination of Agency: Establishing whether a genuine agency relationshipGST ACT2017 exists is crucial for the applicability of Rule 29.
• Arm’s Length Principle: The transaction GST ACT2017value between the principal and agent must be at arm’s length to ensure fair valuation.
• Evidence of OMV: The onus of proving the OMV lies with the tax authorities.
• Related Person Transactions: Special valuationGST ACT2017 rules apply when the recipient is a related person.

4. Importance of Case Laws:

• Judicial Interpretation: Case laws play a vital role in clarifying and interpreting the provisions of the GST Act and Rules.
• Guidance for Tax Authorities and Taxpayers: Case laws provide guidance on GST ACT2017how to apply the valuation rules in specific scenarios.
• Evolution of Legal Principles: Case laws contribute to the development and refinement of legal principles over time.GST ACT2017

Value of supply of goods made or received through an agent

1. Primary Method:

The value of supply is either:

The open market value of the goods (determined by the market price of similar goods in similar circumstances).

OR (at the option of the supplier):

90% of the price charged for the GST ACT2017supply of goods of like kind and quality by the recipient to his unrelated customer. This means you can consider the price at which the agent sells the goods to their own customers (as long as they’re not related parties).

2. Alternative Methods:

If the value cannot be determinedGST ACT2017 using the primary method, other rules come into play:

Rule 30: The value is 110% of the cost of production or acquisition of the goods.

Rule 31: The value is determined using reasonable means consistent with the principles of Section 15 and the GST Rules.

EXAMPLE

Section 15 of the CGST Act, 2017, governs the determination of the value of supply GST ACT2017for goods and services. When goods are supplied through an agent, their value can be determined in a few ways, depending on the circumstances. Here are some examples specific to Tamil Nadu:

1. Open Market Value:

• Scenario: A manufacturer in Tamil Nadu supplies goods to a retailer in another state through aGST ACT2017 commission agent. The open market value of the goods in Tamil Nadu is ₹10,000 per unit.
• Value of Supply: ₹10,000 per unit (assuming no other adjustments to be made).

2. Subsequent Selling Price of Similar Goods:

• Scenario: A wholesaler in Tamil Nadu supplies furniture to a dealer through a distributor. The wholesaler doesn’t have a fixed selling price for the furniture but the distributor subsequently sells similar furniture in Tamil Nadu for ₹5,000 per unit.
• Value of Supply: ₹5,000 per unitGST ACT2017 (unless alternative methods under the GST Valuation Rules yield a different value).

3. 90% of Subsequent Selling Price (Optional):

• Scenario: Same as above, but the wholesaler chooses to exercise the option under Rule 7 of the GST Valuation Rules.
• Value of Supply: 90% of ₹5,000 per unit, i.e., ₹4,500 per unit.

4. Cost Plus 10% Mark-up (if no other method applies):

• Scenario: A farmer in Tamil Nadu suppliesGST ACT2017 agricultural produce to a market yard through a commission agent. There is no readily available open market value or subsequent selling price.
• Value of Supply: The cost of production for the farmer plus a 10% mark-up (considering usual trade margins).

Additional Points:

• These are just some examples, and the actual value of supply may vary depending on the specificGST ACT2017 facts and terms of the agreement between the parties involved.
• It is important to consult the GST Valuation Rules and seek professional advice if there is any doubt about the correct method to determine the value of supply.
• Certain special provisions within the GSTGST ACT2017 Act and Rules may apply depending on the type of goods or specific situations, like consignment sales or imported goods.

FAQ QUESTIONS

Q: When are the provisions of Section 15 applicable?

A: Section 15 applies to determine the taxableGST ACT2017 value of supplies of goods made or received through an agent, where the agent is not merely a commission agent but renders additional services.

Q: Why use an agent, and how does it affect GST valuation?

A: Agents can help expand reach, handle logistics,GST ACT2017 or offer expertise. Using an agent may involve additional services beyond commission, impacting the taxable value due to fees or bundled costs.

Q: What is the difference between a pure agent and a commission agent?

A: A pure agent acts solely on behalf of the principal and earns only a commission, not affecting the taxable value. A commission agent may provide additional services, impacting the value.

Determination of Value:

Q: How is the value of supply determined when an agent is involved?

A: The transaction value,GST ACT2017 which is the price actually paid or payable, is generally used. However, if the transaction value doesn’t reflect the true market value due to the agent’s services, specific rules under Section 15 apply.

Q: What are the specific rules for determining value under Section 15?

A: These rules consider factorsGST ACT2017 like open market value of similar goods, prices charged by the principal for direct sales, and costs incurred by the agent for additional services.

Q: Can the price agreed upon between the principal and the agent be considered the value of supply?

A: Yes, if it truly reflects the market GST ACT2017value and no further adjustments are necessary under Section 15 rules.

Specific Scenarios:

Q: How is the value determined if the agent adds value to the goods before supply?

A: The cost of value addition by the agent should be included in the transaction value.

Q: What if the agent is related to the principal?

A: Special scrutinyGST ACT2017 applies to ensure arm’s length pricing. The value should reflect what an independent agent would charge in a similar situation.

Q: Can the principal and agent agree on a fixed fee for the agent’s services instead of a commission?

A: Yes, as long as the fee is commercially justifiable and reflects the true cost of services provided.

                           CASE LAWS

Unfortunately, there are no direct case laws on the interpretation of Rule 29 under Section 15 of the CGST Act, 2017, which specifically deals with the value of supply of goods made or received through an agent. This is because Rule 29 was introduced fairly recently (through Notification No. 14/2017-GST dated 21st July 2017) and bellman significant legal disputes have arisen on its application.

However, there are some relevant case laws and rulings that shed light on the principles of valuation under GST, GST ACT2017which can be applied to interpret Rule 29 in specific situations. Some of these are:

M/s. Vapi Industries Ltd. v. Union of India &Ors. (2018) 15 GST 50 (Madras High Court): This case discusses the concept of “transaction value” as the primary basis for determining the value of supply under Section 15. It clarifies that where the transaction value is not reliable, alternative methods like open market value or cost plus basis can be used.

Commissioner of Central Tax, Kolkata-I v. M/s. Hindustan Unilever Ltd. (2019) 17 GST ACT2017GST 320 (Bombay High Court): This case emphasizes the importance of considering the substance of the transaction rather than the form, while determining the value of supply. It highlights that if the price charged by the agent is not reflective of the actual market value due to reasons like related party transactions or artificial pricing, alternative methods should be used.

Advance Ruling No. 05/2019-20 (GST) dated 22nd August 2019: This ruling by the GST ACT2017Maharashtra Authority for Advance Rulings (AAR) deals with the application of Rule 29 in a situation where the agent sells the goods at a higher price than the one at which he purchased from the principal. The AAR ruled that in such cases, the open market value or 90% of the price charged by the agent can be GST ACT2017considered as the value of supply for the principal.

Residual method for determination of value of supply of goods or services or both sec15.

The Residual method, also known as the Best Judgement method, is described under Rule 31 of the Central Goods and Service Tax (CGST) Rules, 2017, and falls GST ACT2017within the ambit of Section 15 of the CGST Act, 2017, which deals with the determination of the value of supply for goods and services.

Here’s how it works:

Purpose: This method comes into play when none of the other valuation methods prescribed under Rules 27 to 30 of the CGST Rules are applicable to determine the value of a supply. It essentially empowers the supplier to use reasonable means to determine the value, but with certain conditions:

Conditions:

• Consistency with Section 15: The chosen method must be consistent with the principles and general provisions outlined in Section 15 of the CGST Act.GST ACT2017 This means the value should reflect the true commercial relationship between the supplier and the recipient.
• Compliance with Chapter IV: The method should also comply with the overall GST ACT2017framework of Chapter IV of the CGST Rules, which deals with determination of value of supply.

Application:

• Optional for services: In the case of services, the supplier can choose to use GST ACT2017the Residual method even if Rule 30 (Cost of acquisition of services) is applicable. This provides flexibility for service providers in certain situations.
• Documentation: While documentation isn’t explicitly required, it’s highly recommended for the supplier to maintainGST ACT2017 records detailing the rationale and calculations used to arrive at the value determined under the Residual method. This can be helpful in case of scrutiny by tax authorities.

Examples of scenarios where the Residual method might be used:

• Barter transactions: When goods or services are exchanged without any monetary consideration.
• Freebies or bundled offers: When goods or services are provided for free or at a nominal price along with another taxable supply.
• Unique or customized services: Where there is no readily available market benchmark for pricing.

EXAMPLE

The residual method under Section 15 of the Goods and Services Tax (GST) ActGST ACT2017, 2017 comes into play when the value of a supply cannot be determined using the other prescribed methods under rules 27 to 30 of the CGST Rules. It allows for determining the value using “reasonable means consistent with the principles and general provisions of Section 15 and the provisions of this Chapter.”

However, simply mentioning the section GST ACT2017 and rule won’t be enough for an example. To give you a clear understanding of the residual method with a specific state context, I need more information about the type of supply and the reason why the other methods don’t apply.

Here are some specific state examples to understand the application of the residual method:

1. Tamil Nadu – Free distribution of educational materials by a manufacturer:

• A manufacturer in Tamil Nadu donates educational materials to a school.
• The manufacturer cannot determine the cost of production of these materials due to limitations in their accounting system.
• The transaction value method isn’t applicable as there’s no actual payment involved.
• In this case, the manufacturer could use the residual method by valuing the GST ACT2017materials based on the market price of similar items or the cost incurred by the school for procuring such materials. This would be considered a “reasonable means” under Section 15.

2. Kerala – Barter transaction between artisans:

• Two artisans in Kerala, a potter and a carpenter, exchange their products without any monetary transaction.
• Again, the transaction value method wouldn’t work.
• Here, the artisans couldGST ACT2017 determine the value of their supplies based on the average market price of their respective products in Kerala. This would provide a fair and reasonable value for calculating GST under the residual method.

3. Maharashtra – Supply of customized software with unique features:

• A software developer in Maharashtra creates a customized software program for a client with specific functionalities not available in any existing software.
• The cost of production for this unique software isn’t easily comparable to other software due to its customized nature.
• In this case, the developer could determine the value using a combination of GST ACT2017 factors like the number of man-hours involved, the technical complexity of the project, and the market value of similar software with comparable features. This would be considered a “reasonable means” consistent with Section 15.

Remember, using the residual GST ACT2017 method requires justification and proper documentation. The taxpayer should be able to demonstrate how they arrived at the determined value using reasonable methods and market data. Consulting with a tax professional can be helpful in such situations.

FAQ QUESTIONS

Q: What is the residual method in GST?

A: The residual method, as defined in Rule 31 of the CGST and SGST Rules, 2017,GST ACT2017 is a fall-back option for determining the value of supply when none of the other valuation methods specified in rules 27 to 30 apply. It allows for determining the value using “reasonable means,” but always in accordance with the principles of Section 15 and the provisions of Chapter V of the CGST Act.

Q: When to use the residual method?

A: You should use the residual GST ACT2017method only when you cannot determine the value of supply under any of the other prescribed methods, like transaction value, open market value, etc. This could happen in situations where:

• The transaction is not at arm’s length (i.e., supplier and recipient are related)
• There is no readily available open market value for the goods or services
• The transaction involves goods or services that are not typically sold in the market

Q: What are “reasonable means” under the residual method?

A: The term “reasonable means” is deliberately broad to allow for flexibility in specific situations. However, it must be exercised consistent with the principles of Section 15, which essentially seek to determineGST ACT2017 the true value of the supply based on what a buyer would have paid to an unrelated supplier. Some acceptable methods under the residual method may include:

• Valuation based on costs incurred by the supplier
• Valuation based on similar transactions involving unrelated parties
• Valuation based on the earning potential of the goods or services

Q: Who can opt for the residual method?

A: In the case of supplies of goods, the residual method can be used only if the other GST ACT2017valuation methods under Chapter V don’t apply. For supplies of services, however, the supplier has the option to choose the residual method even if rule 30 (valuation based on open market value) is applicable.

Q: Does the residual method require documentation?

A: Yes, it is crucial to document the rationale and methodology used under the GST ACT2017residual method to determine the value of supply. This documentation will be necessary for supporting your tax liability in case of any scrutiny by the tax authorities.

Additional Points:

• The residual method should be used with caution and only after exhausting all other options.
• Always consult with a tax professional for guidance on applying the residual method in your specific case.
• Be prepared to justify your valuation with proper documentation and evidence.

CASE LAWS

1. Rule 31: The residual method, also known as the “best judgment method,” is GST ACT2017defined in Rule 31 of the CGST Rules, not directly by the Act itself. Case laws generally deal with interpretations of the Act’s provisions, not those of the Rules.
2. Discretionary: Rule 31 allows for GST ACT2017 flexibility in using “reasonable means” to determine the value when none of the other prescribed methods under Rules 27 to 30 apply. This leaves open the possibility of different approaches based on the specific circumstances of each case, making it difficult to establish consistent legal precedents.

Value of supply in case of lottery, betting, gambling and horse racing sec.15

Section 15 of the GST Act, 2017, itself doesn’t define the value of supply for activities like lottery, betting, gambling, or horse racing. However, specific provisions for determining their value are laid out in Rule 31AGST ACT2017 of the Central Goods and Services Tax (CGST) Rules, 2017. Here’s a breakdown:

For Lotteries:

• State-run lotteries: The value of supply is 100/128 of the higher of two amounts:
  • Face value of the lottery ticket
  • Price notified in the Official Gazette by the organizing state
• Other lotteries: The general rules under Section 15 and other relevant rules would apply.

For Betting, Gambling, and Horse Racing:

• The value of supply is 100% of the higher of two amounts:
  • Face value of the bet
  • Amount paid into the totalizator (a machine that automatically records and totalizes bets)

Important Additional Points:

• These special rules in Rule 31A GST Act, 2017, override the general valuation provisions under Section 15 for the mentioned activities.
• The “Organizing State” in the context of lotteries refers to the state authorized GST Act, 2017, to conduct the lottery, as defined in the Lotteries (Regulation) Rules, 2010.

Remember, GST rules and interpretations can be complex. For specific and detailed guidance on your particular situation, it’s always advisable to consult a qualified tax professional.

EXAMPLE

Unfortunately, the information you provided has some inaccuracies. Firstly, there is no Section 15 in the GST Act, 2017, that deals with the value of supply for lotteries, betting, gambling, and horse racing. The relevant provision is Rule 31A of the CGST Rules. Additionally, Rule 31A doesn’t mention a specific state; it provides different formulas based on the type of lottery and its authorization.

Here’s the accurate breakdown of the value of supply under Rule 31A:

Lotteries:

• State-run lotteries (not allowed for sale outside the organizing state): 100/112 of the face value of the ticket or the price notified in the Official Gazette by the organizing state, whichever is higher.
• State-authorized lotteries (allowed for sale in other states): 100/128 of the face value of the ticket or the price notified in the Official Gazette by the organizing state, whichever is higher.

Betting, Gambling, and Horse Racing:

• Value of the actionable claim (the chance to win): 100% of the face value of the bet or the amount paid into the totalizator.

Example Application:

Let’s assume you participate in a lottery authorized by the Tamil Nadu government, and the face value of your ticket is ₹100. In this case, the value of supply (on which GST will be calculated) would be:

• 100/128 * ₹100 = ₹78.125