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Introduction:

Valuation of the goods/service is one of the important aspects as to computation of GST for any assessee.  Many a times instead of supplier of goods procuring the materials, the customer would provide goods [or services] free to enable supply by manufacturer.  Similarly there have been instances where the free of cost/FOC material such as steel cement, RMC, Capital Goods [equipment/machines]are supplied to service provider by the service recipient. Similarly services in the form of supervision, manpower supply, security could be provided by the client/ customer on free of cost basis.

At times consumables like diesel, explosives, electricity, water, may also be supplied by customer.  All these are used by supplier for providing the end goods/service. However they may/ may not be the obligation of the customer. Such free supplies could be done for ease or control on costs or for ensuring quality or to speed up the delivery.

Within the valuation of taxable supplies, concept of free issue goods and services is one which is a matter of confusion and disputes under erstwhile laws of Central Excise/ Service tax and VAT laws. In this background, we look at an important issue in valuation under GST. The issue is on includability of value of FOC materials received by supplier and whether GST needs to be paid on same. 

In this article some relevant aspects as to valuation provisions and thereafter implication of free of cost supplies by customer and decisions/rulings which maybe relevant in context of GST are discussed.

Discussion on valuation of goods/services under GST

In terms of Section 15(1) of the CGST Act, value of taxable supply shall be the transaction value [which is the price paid or payable by the recipient) provided the supplier and recipient are unrelated parties and price is the sole consideration for the supply.

Section 15(2)(b) specifically states that where any amount which the supplier is liable to pay in relation to a supply but the same is incurred by the recipient on behalf of supplier, and not included in price paid/payable for goods/services, then such value is required to be included in the transaction value.

To determine whether value of taxable supply paid by recipient to the supplier is the 'sole consideration”, it is necessary to refer to the definition of the term 'consideration”.  The term 'consideration' has been defined under Section 2(31) of the CGST Act, to mean any payment (in money or otherwise) or monetary value of any act or forbearance which is made in respect of, in response to or for the inducement of supply of goods and/or services. Such consideration can flow from the recipient of supply or any other person and it could be either monetary or non-monetary consideration.

Reading of the above provisions indicates that the transaction value agreed between the parties is only relevant for valuation purposes under GST. However, in terms of Section 15(2)(b) of the Act, if any amount which the supplier is liable to pay but the same has been incurred by the receiver of the supply, then the said amount has to be added while determining the transaction value.

Whether the value of free issue materials is part of value of taxable supplies in GST?

It is a matter of commercial arrangement between the supplier and recipient of supply of goods/services, as to what is in the scope of each of the parties. Once it is clear that supplier has to only supply final goods/supply say construction services and free materials such as steel given is in the scope of receiver of the supply, then there is no question of adding the value of the free materials for determining the transaction value.

The question of addition would arise only in the cases where something was in the scope of the supplier and the same has been provided by the receiver then in such cases the amount so spent by the receiver would be added in the transaction value[if not already included].

Example is say when some raw materials for manufacture of components were the responsibility of supplier of final component, but such materials were given free by the customer, then value of such materials could be included to arrive at value of final product.

Similarly in the construction sector, though the contractor brings in materials like steel, etc., for executing of the construction contract, there is also a practice whereby the customer[such as builders/developers] are supplying FOC materials like cement to contractor. When the supply of such free materials is not the obligation of the contractor, then there may be no requirement to add the value of same to construction services.

Further, on going through sub-section 15(2)(b) it appears to exclude or not include the value of goods which have been supplied FOC by the recipient of the supply. Therefore, it maybe said that the intention of the legislature is to include such amounts which are to be borne or agreed to be borne by the supplier and form a part of the consideration to be received by the supplier. The intention is not to include the FOC supply of goods done by receiver in the value of the supply.

Similarly held in Commissioner of Service Tax v. Bhayana Builders (P) Ltd. reported at 2018 (10) G.S.T.L 118 (SC) wherein the issue before the Apex Court was whether the goods and/or services supplied free by a service recipient and used for providing the taxable service of construction would be included in the computation of the gross amount, for valuation of taxable service. It was held that the value of the goods and the materials supplied free of cost by a service recipient to the provider of the taxable construction service would be outside the taxable value or gross amount charged as such amounts did not accrue to the benefit of the service provider, being neither monetary or non-monetary consideration paid or flowing from the service recipient.

Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 0401 S.C.] held that the value of material supplied free of cost by service recipient cannot be treated as 'gross amount charged' as it is not consideration for rendering services and was not includible in value for assessment to Service Tax. The principles given in the above judgements have persuasive value under GST for treatment of free supplies given by recipient/customer.

Further when the free issue supplies have already suffered tax, the inclusion of the value of same in the subsequent supply done would amount to double taxation and the same maybe against the principles of the GST law.

Discussion on Circular no.47/2018-GST

The Circular No.47/21/2018- GST dated 08.06.2018 issued by the CBIC refers to the situation where the moulds, jigs etc are given by recipient,[Original Equipment supplier-OEM] on FOC basis to the supplier who uses such moulds, jigs etc. to manufacture and supply the finished goods to the recipient of supply. It clarifies that it does not constitute a supply under GST since no consideration is charged by the recipient for the moulds, jigs etc. This is only when supplier and recipient are not related persons such as group cos.

The Circular also clarifies that value of usage of moulds, jigs etc. (given on FOC basis) shall not be factored or amortized in the value of supply in a situation where the contract sets out that the recipient of supply shall supply moulds, jigs etc. which would be used by the supplier to manufacture the goods, since the said situation is not covered by Section 15(2)(b) of the CGST Act.

Therefore, value of goods supplied on FOC basis cannot be included in the value of the supply as per the existing provisions of CGST Act read in conjunction with the aforesaid circular. However, it made clear that the case is different where if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components.

Advance rulings on this matter:

In the advance ruling in Nash Industries (I) Pvt Ltd (2018-TIOL-260-AAR-GST) the applicant query was whether the amortised cost of the tool to be added to arrive at the value of the goods supplied for the purpose of GST under Section 15 of the CGST Act read with rule 27 of CGST Rules?

Ruling: The amortised cost of tools which are re-supplied back to the applicant FOC shall be added to the value of the components while calculating the value of the components supplied as per the Section 15 of the CGST / SGST / IGST Act 2017. Section 15(2)(b) of the CGST Act 2017. The ruling does not seem to have considered the circular no.47/2018.

The Advance Ruling in the case of Lear Automotive India Pvt. Ltd (2018 (12) TMI 766)  held that the goods owned by the OEM that are provided to a component manufacturer on FOC basis do not constitute supply as there is no consideration. The Board further clarified that the value of goods provided on FOC basis shall not be added to the value of supply of components. However, the case is different where the contractual obligation is cast upon the component manufacturer to provide moulds/ dies but the same have been supplied by OEM on FOC basis and in such cases, the amortised cost of such moulds and dies shall be added to the value of supply of component.

Once it is established that the obligation to provide tools on FOC basis is on the customer then the question of adding the amortised value of tools supplied by the customer does not arise. However, the situation is reverse where the obligation to use tools is on the applicant but provision for the same is made by the OEM on FOC basis.

Ruling:- The amortized value of the tool received on FOC basis from the customer is not required to be included in the value of finished goods manufactured and supplied by the applicant to the customer.

The Lear ruling supra was in light of the 8th June Circular 47/2018 of CBIC and has said the amortized value of the tool received on FOC basis from the customer is not required to be included in the value of finished goods manufactured and supplied by the applicant to the customer. This ruling seems to be in line with the GST provisions discussed above as well.

Note: The advance rulings are applicable to the assessee who has sought it and for his set of facts. It may have a limited persuasive value for others.

Conclusion

To summarise, under GST unless there exists a specific provision for inclusion of FOC supplies received from the buyer of the goods/services or to add the amortized value of the materials provided by the receiver on FOC basis, such an addition cannot be made to the value of the taxable supply. At present no such enabling provision is in place.

To that extent the current GST provisions are aligned with the VAT/ Sales Tax Regulations as existed in as much as the assessable value is a transaction value agreed between the parties except in the specified cases.

In this article the paper writer has examined the implications of free issue materials in GST.

The author can also be reached at roopa@hiregange.com

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