Valuation under GST – When price is not the sole consideration for a supply?

24 一月 2022

by Satya Sai Satish Gandla

Business dynamics requires a company to adopt various models of transactions. The nature and manner of executing such transactions is decided by them considering many business factors.

For example, a principal provides inputs to the job worker for carrying out any process on such inputs. In this transaction, the waste and scrap resulted during such process may not be taken back by such principal considering the costs to be incurred for transporting and clearing of such waste and scrap rather than the benefits i.e., realizable value of such sale and scrap. A company launching a new product might launch it at a lesser price to penetrate the market.

In case of such business transactions, a bigger question which can arise is valuation of such supplies for payment of Goods and Services Tax (GST). To elaborate, though a price is quoted for a supply under a contract, the business factors involved in provision of such supply could have an impact on value of such supply. Hereby in this article, the authors would like to highlight certain inherent issues involved in valuation of a supply from the above perspective.

The Arthashastra by Kautilya recognized that tax must be paid on the basis of the actual price at which the articles are sold. It appears that the same principle is adopted under Section 15 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) which deals with determination of value of taxable supply. In terms of above section, GST is payable on transaction value. The specific inclusions (such as incidental expenses, interest, etc.) in value of supply as mentioned in Section 15(2) are merely break up of price payable for a supply and does not mean that only those inclusions alone can be part of value of a supply.

Considering the possibility of non-monetary considerations apart from price agreed for a supply under a contract, Rule 27 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) was framed to determine the value where price is in non-monetary terms. It is needless to point out here that determination of value of non-monetary considerations in terms of Rule 27 of the CGST Rules is an inherent and challenging issue in itself. Thus, the value of supply could include any monetary consideration or non-monetary consideration (i.e., monetary value of such non-monetary consideration) agreed for a supply apart from price agreed in contract.

As per Section 15(1), ‘Transaction Value’ is understood as the ‘price actually paid or payable’ for a supply when such price is the sole consideration. On a conjoint reading of meanings of the terms ‘sole’ (dictionary meaning) and ‘consideration’ (definition under GST and common parlance meaning), it can be understood that the phrase ‘sole consideration’, qualified by the term ‘price’ which is money agreed to be paid for supply, intention of the Legislature is that there should be no other consideration other than the price. The phrase ‘sole consideration’ has been interpreted in various judgements[1] also where it was observed that the usage of above phrase is indicative of the detail that the price ascertained for a good should not be influenced by any factors/ other forms of considerations. If said price is influenced in any manner, it cannot be said that price is the sole consideration.

In this backdrop, it is always important to look whether monetary price agreed under a contract is sole consideration for a supply or the same is influenced by any other factors and whether any other payments, whether monetary or non-monetary, exists in relation to such supply. Thus, the taxpayers are required to understand what are the possible forms of monetary/ non-monetary considerations and when they form part of value of a supply. Here, the authors would like to highlight certain business scenarios by which the taxpayers can understand the above intricacies involved in valuation of supply.

First scenario is in respect of includability of donations (voluntary contribution) paid by the purchaser of goods in value of goods for payment of excise duty. The Supreme Court has decided this issue in the case of D.J.Malpani v. Commr. of C. Ex., Nashik[2] after considering the valuation provisions under the central excise law as per which value of goods include money value of any considerations following directly or indirectly from buyer to supplier. It was held that dharmada is not a consideration for sale of goods based on following observations:

  • Duty is chargeable on the ‘price actually paid for the goods’, in other words, the price paid as consideration for transfer of property in the goods.
  • The test for determining whether, in a transaction of sale, any amount has been paid as price so that it can be treated as transaction value is only whether, the money was paid for the goods as consideration or the money value on any additional consideration paid in connection with the sale of goods. No amount which is not paid as consideration for the goods can go to make transaction value.
  • If an amount is paid at the time of the sale transaction for a purpose other than the price of the goods, it cannot form part of the transaction value; also, for the reason that such payment is not for the transaction of sale i.e. for the transfer of possession of goods. Any payment made alongside such a transaction cannot be treated as consideration.

Another scenario is in respect of value of services provided to the customers in respect of crushing operations carried out on iron ore lumps received from the customers. A monetary consideration i.e., crushing charges is agreed for such services. Here, issue is regarding inclusion of value of iron ore fines emerged from crushing operations (within the agreed percent of loss generated) and retained by the service provider, in the value of services provided to customers. This issue has been examined by Delhi Tribunal in the case of Godawari Power & Ispat Ltd. v. Commr. of C. Ex., Raipur[3] which was affirmed by the Supreme Court. It was noted that the contingency of emergence of iron ore fines having some value, is not determinable at the time of fixing of crushing charges and entering into work order and that similar crushing charges were agreed in other work orders which did not provide for conditions relating to emergence of iron ore fines. It was held that the crushing charges are not influenced by the possible emergence of iron ore fines and their additional value. Therefore, it was held that value of iron ore fines is not a non-monetary consideration towards crushing services.

Another scenario is in respect of ruling given by West Bengal Authority for Advance Ruling (‘AAR’) in the case of Kanahiya Realty Private Limited[4]. The Applicant was supplying goods such as gold coins, refrigerator etc. (i.e., promotional items) at nominal price to retailers against purchase of specified units of hosiery goods pursuant to a promotional scheme. It was held that such supplies do qualify as individual supplies and not as composite/ mixed supplies as separate considerations are charged by applicant. It was opined that promotional items would be supplied at nominal price only if retailers fulfil the criteria mentioned in the promotional scheme and thus, nominal price charged for supply of such items is not a sole consideration. It was held that that value of the said goods shall be required to be determined as per Section 15 read with Rule 27.

Next scenario could be when a specific customer provides large amounts as interest free advances to the supplier and lifts majority percentage of the goods produced by the supplier. In such case, the price charged may not be treated as sole consideration as interest-free-advances and major lifting of goods may be treated as non-monetary considerations. Consequently, the monetary value of such non-monetary consideration i.e., the notional interest earned may be considered to be an additional consideration for supply of goods.

Another scenario could be where the job worker retains the waste and scrap generated while carrying out certain process or treatment on the inputs provided by the principal. Though job work charges agreed under contract is consideration for services supplied by job worker to the principal, a doubt can arise regarding inclusion of monetary value of waste and scrap in the value of supply of service by treating waste and scrap as non-monetary consideration. In such case, one can argue that the job work charges were not decided based on the generation of waste and scrap and therefore, such waste and scrap is not a consideration for job work services and thus, would not form part of value of supply of such service.

In authors view, there is no straight jacket formula to decide as to what factors would form part of value of a supply apart from the price agreed in contract. Therefore, it is pertinent to examine the entire transaction structure, factors considered while pricing a supply, payments made by any person in relation to supplies under contract, terms and conditions agreed in contract for supply etc. to determine whether they can qualify as consideration and form part of value of the supply.

Non-consideration of above points could lead to possible undervaluation of a supply and consequently, short payment of GST by supplier resulting in demand, interest and penal costs to such supplier. Further, wrong inclusion in value of supply could lead to excess payment of GST which will have an impact on the finance costs of company. The above issues could also impact the recipients of supplies where such recipients are not eligible to avail Input Tax Credit of GST charged by suppliers hence such GST would be a cost to the recipient.

Thus, there arises a need for the suppliers and recipients to conduct an in-depth scrutiny of transactions agreed by them under the contracts and correctly determine the value of supplies and structure their transactions accordingly in compliance with the GST provisions.


[The authors are Joint Partner and Principal Associate, respectively, in the GST Advisory team in Lakshmikumaran & Sridharan Attorneys, Hyderabad]


[1] Union of India and others v. Bombay Tyre International Ltd & Ors. (1984) 1 SCC

[2] 2019 (366) E.L.T. 385 (S.C.)

[3] 2019 (6) G.S.T.L. 48 (Tri. – Del.)

[4] 2021-TIOL-230-AAR-GST

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