#GSTCase-83-Valuation of Supply and goods/services provided Free of Cost by Recipient to Supplier -Imperative how agreement is drafted about who between the two does what
CA Arpit Haldia
Shri Navodit Agarwal  104 taxmann.com 420 (AAR – CHHATTISGARH)
Whether supply of diesel by the recipient is to be added to the freight amount charged by the applicant or not.
Applicant is a transporter in few cement companies and is engaged in transporting Cement/Clinkers of Shree Raipur Cement, Baloda Bazaar. Pursuant to the oral agreement between the aforesaid parties, Shree Raipur Cement proposed that while transporting their cement/ clinkers, diesel required would be provided by Shree Raipur Cement.
- Contention by the Applicant
Applicant went through certain valuation rules of GST Act, wherein it was mentioned that if the service recipient provides any input goods to service providers while rendering the service, the cost of that goods will be included in taxable value of services provided by the service provider and that the service receiver needs to raise separate bill to service provider for that input goods. The applicant has expressed their view that they need to charge GST to Shree Raipur Cement, C.G on total amount including diesel cost and Shree Raipur Cement will raise separate invoice for diesel upon them.
- Observation by AAR
Section 15(2)(b) does not covers free inputs or services supplied by recipient, as only ‘amount’ paid by recipient on behalf of supplier is includible. This would be so only where there was contractual liability on supplier to make those supplies.
Service recipient i.e. Mis Shree Raipur Cement, C.G is providing diesel to the vehicles used by the applicant to transport cement/clinker in the course of business of cement by the cement company. Diesel so provided by the service recipient to the applicant for use in trucks/ vehicles of the applicant forms an important and integral component of this business process, without which the process of supply of cement can never get materialized.
Thus, from the above legal provisions discussed above, it gets amply clear that any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both is includible in value.
Applicant is required to charge GST upon M/s Shree Raipur Cement, C.G on the total amount including the cost of diesel i.e. on the total freight amount inclusive of the cost of diesel so provided by the service recipient i.e. M/s Shree Raipur Cement.
Does the Judgement throws something new. Not really. It is the same thing that if any exclusion has to be made from valuation of a supply, it should be clear and express and there is a very thin line between the inclusion and the exclusion. Its all in the writing as they say. There are two very important aspects to be observed in the judgement:
a) Pursuant to the oral agreement between the aforesaid parties, recipient proposed that while transporting their cement/ clinkers, diesel required would be provided by Shree Raipur Cement
b) Section 15(2)(b) does not covers free inputs or services supplied by recipient, as only ‘amount’ paid by recipient on behalf of supplier is includible. This would be so only where there was contractual liability on supplier to make those supplies.
Subsequent to the agreement between supplier and recipient, supplier has the option to procure the goods from any third party and out of the options available, if the supplier agrees and recipient provides the goods, then valuation of supply has to be adjusted accordingly and such value of goods has to be included in value of supply.
On the basis of the two, following scenario can be culled out:
Scenario 1:-No Written agreement executed:
Only source of any evidence would be invoice raised and all things which form an integral part of completion of supply indicated in the invoice, would be forming value of supply.
Scenario 2:-Written Agreement executed
If an agreement has been once entered for supply of end to end services and subsequent to that and otherwise than by an amendment to agreement, recipient proposes to do some work which is responsibility of the supplier and supplier reduces the contract price, then provisions Section 15(2)(b) are applicable.
Therefore, in any case original and the revise agreement if any, should clearly stipulate responsibility of supplier and recipient respectively. Once the consideration has been agreed upon and without substituting/revising the agreement; part of the obligation is completed by the recipient, then it would be included in the value of supply.
Therefore, it is imperative and entire thing depends upon how contract is drafted upon.
c) Does the Judgement of AAR provides something new:
Judgement of AAR in the present case, supports the contention that not all and every free supply by the recipient would fall in the clutches of Section 15(2)(b) but only those supplies which are agreed upon to be provided by the supplier and are provided by the recipient, would be included in the value of supply. This contention is also fortified vide CBEC Circular No. 47/21/2018-GST Dated 8th June 2018 which further elaborates when moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer are leviable to tax?
It was clarified:
1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).
1.3 However, 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. In such cases, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business.
The decision on similar lines have been given in the matter of Lear Automotive India (P.) Ltd.,  100 taxmann.com 311 (AAR – MAHARASHTRA) and Nash Industries (I) (P.) Ltd.  103 taxmann.com 91 (AAAR-KARNATAKA).