The tug of war of the revenue to include every cost incurred by the supplier in the value of goods and services and the efforts of tax payers seeking out deduction from the taxable values has been there in sales tax, central excise, service tax and now in GST. In this article we examine what exactly was the dispute in service tax (which were eventually decided in favour of the service provider) and whether the similar position can be taken in GST for various types of transaction.
Service Tax Experience
The service tax valuation rules had under rule 5 (1) set out that the expenses or costs incurred in the course of providing a service (could be in relation to or incidental) are ot be included in the gross value of service. This was objected as Section 67 was only on the amount charged for such services. Amounts charged other than for the services was disputed as not liable. This view was also taken for fuel/ explosives provided by the Customer to the service provider without which the service could not have been rendered. Also in case of builders/ contractors who were supplied steel and cement which was used in the construction of the factory/ building.
The Larger bench in Bayana builders case (confirmed by SC in 2018) had held that tax could only be on the gross amount charged and therefore the Free of Cost supplies could not be included. Subsequent to 2015 section 67 valuation section was enlarged to include reimbursements and therefore the defence of "gross amount charged" may not be relied on unless further decisions come.
Recently in March 2018 the Supreme Court has upheld the 2013 Delhi High Court decision in Intercontinental Technocrats & Consultants Vs UOI that Rule 5 (1) of the Service Tax Valuation Rules was ultra vires of Section 67 of the Finance Act. Therefore under service tax there is no liability for separately charged amounts which were not part of the service.
This defect in the provision was made good in may 2015 where reimbursements were bought into the definition. Post 2015 the above argument of rule not in online with the Act would not stand good.
However there was also a rule 5(2) which allowed for not including the value subject to one being a pure agent (4 conditions) and complying with further conditions ( 8). Many of the conditions were not possible to be complied as impracticable and therefore the challenge to rule 5 (1).
GST Value
In GST the transaction value (invoiced) would be the price payable/ paid for supply as long as it is between unrelated parties and price is the sole consideration. [ sec15(1)]
Where one supplies goods or services then he needs to ensure that value includes all amounts the supplier is to pay in relation to such supply before or at the time of supply. [ sec15(2)(b)] The interpretation of in relation to in the cenvat credit rules has been that it is to be read widely and liberally.
Further any incidental expenses for anything done by the supplier in respect of the supply is to be included. [sec 15(2)©]
In GST there has been an attempt to overcome this by way of section 15 talking of price should be the sole consideration. Therefore the obligation of the receiver being taken by the supplier could still enjoy the exclusion. The coverage under rule 33 may ensure that one is derisked.
We examine which are the common expenses which can fall within the above inclusion and which MAY not be covered in our view at present as under:
|
Description of Expenses in Specific Supply |
Remarks |
Ref. |
|
Salaries paid to Consultants engaged by Management Consultant |
Directly in relation to. Was obligation of the supplier. Liable |
Sec 2(b) |
|
Telephone Expenses of Employees of supplier |
Directly in relation to. Was obligation of the supplier Liable |
2(b) |
|
Conveyance Reimbursement to above 2 cases. |
Incidental for service |
2( C) |
|
Technical Consulting agreement with Travel and Stay to be borne by receiver- incurred by supplier |
Travel not part of technical service not in relation to or incidental to advise. |
Rule 33. |
|
Publication cost of Trade Union recovered from members separately |
Neither direct or incidental + exempted |
Ex Not. |
|
Security/ Manpower/ Lift Maintenance provided by 3rd parties in Residential Welfare recovered separately |
RWA not competent or expected to provide these. Neither direct or incidental + exempted. |
Ex. Not. |
|
Buying garment samples at exhibition by buying agent on request of manufacturer. |
Not relating to buying agency business- Neither direct or incidental + exempted |
Rule 33 |
|
Customs House Agent paying for port, transhipment, storage, customs duty, transportation on actual basis |
On CHA liable on rest not liable as pure agent. |
Rule 33 |
|
Explosive/ Fuel provided by customer for quarrying of coal/ stones |
Certainly in relation to or incidental to supply. Liable to be included. |
Sec 15(1) |
|
Cement & Steel provided FOC to contractor |
Could be considered as a supply from the contractor as construction service provided. Liable |
15(1) |
|
Mould & Dies supplier by principal to suppliers of parts. |
While the provision of the mould by customer is not a supply- the part which is sent back using the Free mould could be said to impact the sole consideration. Liable |
15(1) |
|
Ocean freight claimed as a reimbursement and freight and forwarding charges separated and tax paid. |
Contract to be clear. No margin on the Ocean freight by way of discount/ credit note later. Since service by another can be examined to be excluded if all conditions met. |
Rule 33 |
|
Same as above |
If margin there. Liable |
Sec 15(1) |
Practically however the tax optimization in such transactions may be done in the following manner to optimize tax net of credits and also avoid disputes and consequent cost of resolution:
The receiver who is registered under GST who is eligible for the GST credit (on activities in furtherance of business) may like to avoid any break up and go for a composite contract for supply of goods and services. This would also enable the supplier to avail the credit of the GST paid on all the taxable supplies involved and ensure that benefit passed on to the customer.
FOC supplies credit can be availed and GST paid on gross value. Moulds can be rented out and GST charged and value thereof added to the parts or amortized value of the moulds added to the parts and supplied. Dispute can be avoided by this at no cost as credit would be taken.
In case of dispute- credit could be denied which would be a major issue and additional cost at a later point of time along with interest and penalty.
The receiver who is unable to avail the credit or unwilling to avail the credit and go for a lengthy refund procedure ( at present manual and taking time - expected to be fast in due course of time- when not known) could however follow Rule 33 where applicable. This rule has been rationalized as to the definition of pure agent ( 3 conditions) as well as further ( only 4 compared to 8 earlier)
Those who do not follow Rule 33 may face disputes which may again involve writ in the high court and subsequent resolution EITHER WAY by Supreme Court which could take a few years.
Conclusion
Suppliers who are looking at excluding the value of goods or services which are not in relation to the supply or not incidental to the supply may seek the clarity from the GST Council, go for advance ruling if amounts are significant. It could also be a good idea to seek the confirmation of the jurisdictional revenue officer by sending a letter enclosing the contract and reason for exclusion. This would at least provide a defence for demands for longer period. The comparative table of ST Vs GST has been provided at the end of this article.
The author can also be reached at madhukar@hiregange.com.
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Reimbursements under Service tax |
Reimbursements under GST |
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Rule 5 of Service tax (Determination of value) rules, 2006: Inclusion in or exclusion from value of certain expenditure or costs. - Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. Explanation - For the removal of doubts, it is hereby clarified that for the value of the telecommunication service shall be the gross amount paid by the person to whom telecommunication service is actually provided. Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-
Explanation 1–For the purposes of sub- rule (2), “pure agent” means a person who– (a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; (b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; (c) does not use such goods or services so procured; and (d) receives only the actual amount incurred to procure such goods or services. Explanation 2– For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice. |
Rule 33 of CGST Rules, 2017: Value of supply of services in case of pure agent.-Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-
Explanation.- For the purposes of this rule, the expression “pure agent” means a person who-
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