VALUATION UNDER

GST
- CA Madhukhar N Hiregange
 COVERAGE TODAY
General Challenges for Trade/ Industry

December 2017


 Role of Article Assistance in GST

Hiregange
 Section 15 – Definition

 Rules

 Old Case Laws as Relevant

 Q/A

2
 CHALLENGES FOR TRADE / INDUSTRY
Continuation of business over period

December 2017


 Safeguard their margins

Safeguard / enhance their business by being GST ready

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

 Not lose/ plan for advantages available

 C/f of credit & credit on stocks

 Comply with the complex electronic returns

 Limit exposure under the earlier laws

3
 MAJOR IMPACT OF VALUATION
 Value for 20 Lakhs Threshold or Composition – 2 Cr – would like

December 2017
to continue or extend.

 Grey Economy – brakes. Continuing old practices of reducing

billed amount - risk is high. Those who compete in same market

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are at times forced?

 B2C – Consumer does not want credit – Just a bit above the
material cost on which credit claimed.

 B2B – Unorganised Customer may also be undervaluing -

 Average Rate of Tax 18% - Impact Disastrous if lower value

4
 Role of Articles Assistant - GST

December 2017
 Pillars for the organisations in SMPs and Big 4.

 Knows GST law & Procedures

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 Know how to prepare Documents

 Knows how to maintenance of records

 Filing of Returns

 Knows how to verify using excel + other tools

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 CAPABILITY OF ASSISTANT
Professional Capability –being built

December 2017


 Experiential Capability – being gained client after ..

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 Support Staff – Juniors in audit/ office

 Supporting Management – Pro actively

 Supporting Colleagues

Basic Training, updation regularly, IT

savvy 6
 VALUATION - DISCUSSION

December 2017
 Introduction - Taxable event, Measure and rate
 Valuation of supply – Concept of Transaction
value

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 Transaction value – Inclusions and exclusions

 Resort to valuation rules – Related person

concept
 Valuation Rules – Discussion

 Notified method of valuation

 Schedule of supplies without consideration

attracting GST
7
THREE IMPORTANT FACETS OF ANY TAX
LEGISLATION

December 2017
Taxable event

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Measure of Tax

Rate of Tax.

8
TAXABLE EVENT

December 2017
Before GST – Levy was
After GST – Levy is on:
on:

Central excise duty was Supply of goods and/or

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• 
on manufacture of goods services – covers all
• Service tax was on earlier entries- maybe
service rendered more
• Customs duty was on
import
• VAT/sales tax was on
sale- transfer of goods
• Entry tax was on entry
to a state or a union 9
territory
MEASURE OF TAX

December 2017
Before GST After GST

Tax could be levied on Measure of tax is

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 •
advalorem basis or on value determined
the basis of quantity, under section 15 of
volume etc CGST Act. Applicable
for SGST, IGST,
UTGST and State
compensation cess
also.

10
RATE OF TAX

December 2017
Rate of tax will be as notified by
the Government on the

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recommendation of the GST
Council. Presently there are
seven rates viz. 0.25%, 3%,
5%,12%, 18% and 28% and zero
rate. In addition Compensation
Cess. 11
 Value of supply of goods and/or services or both
shall be the transaction value. Transaction value is
the price actually paid or payable for the supply of

December 2017
goods or services or both. It has three limbs:

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The supplier
The price and the
Price is the sole
actually paid or recipient are
consideration.
payable not related to
each other

12
Concept of transaction value
has been taken from Central

December 2017
Excise Act and Customs Act
but the two limbs of the
value, viz. time and place of
removal have been left out.

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GST law has separate
sections for determination of
time and place of supply.
13
COMMENTS

December 2017
When it can be said
that there is no supply

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of goods or services?

Can GST be levied if

goods are sold at a
price below the cost of
manufacture?
14
 Section 15(2) Specific Section 15(3) Specific
inclusions in TV exclusions in TV

December 2017
• All statutory levies other • Discount duly
than CGST,SGST and recorded in the
Compensation levy. invoice.
• Supplier’s liability borne • Post supply

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by recipient. discounts subject to
• Incidental expenses of conditions
supplier.
• Interest, late fee or
penalty for delayed
payment.
• Subsidies other than
government subsidies.

15
VALUATION RULES

December 2017
• When the value of supplies cannot be determined
because
the supplier and the recipient are related

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•

• Price is not the sole consideration

• Supply is without consideration but attracts GST

• It has to be determined applying the provisions of

Valuation Rules.

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RELATED PERSONS

December 2017
•Such persons are officers or directors of one another’s businesses;

•Such persons are legally recognised partners in business;

•Such persons are employer and employee;

•Any person directly or indirectly owns, controls or holds

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twenty-five percent or more of the outstanding voting stock or shares of both of them;

•One of them directly or indirectly controls the other;

•Both of them are directly or indirectly controlled by a third person;

•Together they directly or indirectly control a third person;

•They are members of the same family. Family means the spouse and children of the
person and wholly or mainly dependent parents, grandparents, brothers and sisters
of the person.

•Sole agent or sole distributor or sole concessionaire, however described, of a person

and the person with whom he is associated in such a position.

17
Significant
omission - The most important change from
Mutuality of the central excise law is omission of
interest
the words “mutuality of interest”.

December 2017
Department invariably could not
prove mutuality of interest and
.
consequently the cases failed. Now

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in any of the above nine situations, cases
the transaction has to be taken as
between the related persons. The
removal of the term ‘mutuality of
interest’ has reduced the areas of
dispute and at the same time has
increased the number of
transactions which can be said to be
between related persons.
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ALTERNATIVE METHODS OF VALUATION

December 2017
Section 15(5) empowers the government to notify
determination of the value by a different method in respect of notified
Supplies on the recommendation of GST Council.

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Such determination will be notwithstanding the provisions
relating to transaction value and the valuation rules in the section.

Comments: By incorporating this provision

government has kept the option of levying GST on the basis of MRP
and Tariff Values (term used in the
Customs Act and Central Excise Act).

19
1.VALUATION RULES

December 2017
Rule 28 - Value of
Rule 27- Value of
supply of goods or
supply of goods or
services or both
services where the
between distinct or

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consideration is not
related persons, other
wholly in money
than through an agent.

Rule 29- Value of

supply of goods made
or received through an
agent.

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2. VALUATION RULES

December 2017
 When value cannot be determined by applying
rules 27, 28 and 29,

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Proceed to rule 30 which provides for
determination of value of supply of goods or
services or both based on cost.

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 3. VALUATION RULES

December 2017
 Where the value of supply of goods or services or
both cannot be determined under rules 27 to 30,

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 Rule 31 which is residual method for
determination of value of supply of goods or
services or both has to be applied.

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 4. VALUATION RULES

December 2017
 Rules 32 deals with valuation in case of certain
specific services.

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 Rule 33 deals with value of supply of services in
case of pure agent.

 Rule 34 deals with situation when the

transactions are not in Indian currency.

23
 4.1 VALUATION RULES – RULE 27

December 2017
Rule applies when consideration is not wholly in
money. The value of the supply shall,

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a) be the open market value of such supply;
“open market value” of a supply of goods or
services or both means the full value in money,
excluding the integrated tax, central tax, State tax,
Union territory tax and the cess payable by a
person in a transaction, where the supplier and the
recipient of the supply are not related and price is
the sole consideration, to obtain such supply at the
same time when the supply being valued is made.
b) if open market value is not available, be the sum
total of consideration in money and monetary
equivalent to non-monetary consideration if known;
24
 4.1 VALUATION RULES – RULE 27

December 2017
c) if the value of supply is not determinable under
clause (a) or clause (b), be the value of supply of
goods or services or both of like kind and

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quality;
“supply of goods or services or both of like kind and
quality” means any other supply of goods or services or
both made under similar circumstances that, in respect
of the characteristics, quality, quantity, functional
components, materials, and reputation of the goods or
services or both first mentioned, is the same as, or closely
or substantially resembles, that supply of goods or
services or both.
d) If value is not determinable under clause (a) or clause (b)
or clause (c), be the sum total of consideration in money
and such further amount in money that is equivalent to 25
consideration not in money as determined by application
of rule 4 or rule 5 in that order.
 ILLUSTRATION - 1

December 2017
Old
Phone of
unknown

Hiregange
value
New Phone is
supplied. If price
of new phone is
Rs.24000, open
market value is
Rs.24000.

Rs.20000

26
 ILLUSTRATION 2

December 2017
Laptop of
unknown
market value
supplied with
printer for

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Rs.40000
Open market
value of
Laptop
supplied is
Rs.44000.
Market value
of printer is
Rs.4000

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 4.2 VALUATION RULES – RULE 28

December 2017
This rule is for determination of value of supply
of goods or services or both between distinct or
related persons, other than through an agent.

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a) open market value
b) if open market value is not available, be the value
of supply of goods or services of like kind and
quality.
c) When a) and b) are not applicable, be the value as
determined by application of rule 4 or rule 5, in
that order.
Provided where the recipient is eligible for full
input tax credit, the value declared in the
28
invoice shall be deemed to be the open market
value of goods or services.
 4.3 VALUATION RULES – RULE 29

December 2017
 Value of supply of goods made or received through an agent
shall -

be the open market value of the goods

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
 or at the option of the supplier, be ninety percent of the price charged
for the supply of goods of like kind and quality by the recipient to his
customer not being a related person;
 where the value of a supply is not determinable as above, the same
shall be determined by application of rule 4 or rule 5 in that order.

 Illustration: Where a principal supplies groundnut to his agent and

the agent is supplying groundnuts of like kind and quality in
subsequent supplies at a price of Rs.5000 per quintal on the day of
supply. Another independent supplier is supplying groundnuts of like
kind and quality to the said agent at the price of Rs.4550 per quintal.
The value of the supply made by the principal shall be Rs.4550 per
quintal or where he exercises the option the value shall be 90% of the
Rs.5000 i.e. is Rs.4500 per quintal.
29
4.4 VALUATION RULES – RULE 30

December 2017
Value of supply of goods or services or both
based on cost.
 Where the value of a supply of goods or services or

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both is not determinable by any of the preceding
rules, the value shall be one hundred and ten percent
of
a) the cost of production or manufacture
b) or cost of acquisition of such goods
c) or cost of provision of such services.
 Comments: In Central Excise law, provision was
there requiring that cost of production has to be
arrived at by following CAS 4. It would be safe to
follow the same procedure in respect of manufactured
goods or provision of services. In the case of sale, cost 30

of acquisition should not be difficult to arrive.

4.5 VALUATION RULES – RULE 31

December 2017
Residual method for determination of value
of supply of goods or services or both
 Where the value of supply of goods or services or

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both cannot be determined under rules 27 to 30,
the same shall be determined using reasonable
means consistent with the principles and general
provisions of section 15 and these rules.
 Provided that in case of supply of services, the
supplier may opt for this rule, disregarding rule
30.

31
 4.7 VALUATION RULES – RULE 33

December 2017
 For the purposes of this rule, “pure agent” means a person who –
 enters into a contractual agreement with the recipient of supply
to act as his pure agent to incur expenditure or costs in the course
of supply of goods or services or both;

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 neither intends to hold nor holds any title to the goods or services
or both so procured or provided as pure agent of the recipient of
supply;
 does not use for his own interest such goods or services so
procured; and
 receives only the actual amount incurred to procure such goods or
services.

 Illustration. Corporate services firm A is engaged to handle the legal

work pertaining to the incorporation of Company B. Other than its service
fees, A also recovers from B, registration fee and approval fee for the
name of the company paid to Registrar of the Companies. The fees
charged by the Registrar of the companies registration and approval of
the name are compulsorily levied on B. A is merely acting as a pure agent
in the payment of those fees. Therefore, A’s recovery of such expenses is a 32
disbursement and not part of the value of supply made by A to B.
 Rule 33 – Pure Agent

December 2017
 Pure agent= contractual agreement to be pure agent

 Does not hold title to goods or services

Does not use for his own interest &

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

 Receives on actual amount + amount for his services on own a/c.

 Conditions:

 Supplier authorised to make payment to 3rd party

 Separately indicated in Invoice

 Are in addition to own service.

Not Only a reimbursement 33

Transaction
4.7 VALUATION RULES – RULE 33

December 2017
Value of supply of services in case of pure agent
Notwithstanding anything contained in these rules, the
expenditure or costs incurred by the supplier as a
pure agent of the recipient of supply of services shall

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be excluded from the value of supply, if the following
eight conditions are satisfied, namely:-
 (i) the supplier acts as a pure agent of the recipient of
the supply, when he makes payment to the third
party for the services procured as the contract for
supply made by third party is between third party
and the recipient of supply;
 (ii) the recipient of supply uses the services so
procured by the supplier service provider in his
capacity as pure agent of the recipient of supply;
 (iii) the recipient of supply is liable to make payment
to the third party; 34
4.7 VALUATION RULES – RULE 33

December 2017
 (iv) the recipient of supply authorises the supplier to
make payment on his behalf;
 (v) the recipient of supply knows that the services for

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which payment has been made by the supplier shall
be provided by the third party;
 (vi) the payment made by the supplier on behalf of
the recipient of supply has been separately indicated
in the invoice issued by the supplier to the recipient of
service;
 (vii) the supplier recovers from the recipient of supply
only such amount as has been paid by him to the
third party; and
 (viii) the services procured by the supplier from the
third party as a pure agent of the recipient of supply 35
are in addition to the supply he provides on his own
account.
4.7 VALUATION RULES – RULE 34

December 2017
Rate of exchange of currency, other than
Indian rupees, for determination of value
The rate of exchange for determination of

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value of taxable goods or services or both shall be
the RBI reference rate for that currency on the
date of supply as per section 12 or, as the case
may be, section 13 of the Act.

36
SOME SUPPLIES WITHOUT CONSIDERATION
BUT LIABLE TO GST

December 2017
Schedule I to the CGST Act lists activities which are
to be treated as supply even if made without
consideration.
1. Permanent transfer or disposal of business assets

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where input tax credit has been availed on such
assets.
2.Supply of goods or services or both between related
persons or between distinct persons as specified in
section 25, when made in the course or furtherance of
business:
Provided that gifts not exceeding fifty thousand
rupees in value in a financial year by an employer to
an employee shall not be treated as supply of goods or
services or both.
Comments: Need for proviso is because the employer
and the employee are related persons as has been 37

seen when section 15 of CGST Act was discussed

above.
SOME SUPPLIES WITHOUT CONSIDERATION
BUT LIABLE TO GST

December 2017
 3. Supply of goods—
 (a) by a principal to his agent where the agent
undertakes to supply such goods on behalf of the

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principal; or
 (b) by an agent to his principal where the agent
undertakes to receive such goods on behalf of the
principal.
 4. Import of services by a taxable person from a
related person or from any of his other
establishments outside India, in the course or
furtherance of business.
38
4.6.1 VALUATION RULES – RULE 32

December 2017
Rule 32 contains provisions for determination of
value in respect of some specific supplies.
1. Currency exchange or money changing.

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i. For currency, when exchanged from or to,
Indian rupees, the value shall be difference
between buying/selling rate and the RBI
reference rate for that currency multiplied by
total units of currency.
 Illustration: US $ 1000 are sold by a customer
at the rate of Rs.65 per US$. RBI reference rate
is Rs.65.5 that day.
 Value of taxable service = (RBI reference rate –
selling rate) x Total units. 39

 = 65.5-65x1000 = Rs.500.
4.6.1 VALUATION RULES – RULE 32

December 2017
ii) Where RBI reference rate for a currency is not
available, the value shall be 1% of the gross amount
of Indian rupees provided or received.

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In the above illustration, if RBI reference rate is not
available, value will be 1% of Rs.65000 or Rs.650/-.
iii) Where neither of the currencies exchanged is
Indian Rupee, the value shall be equal to 1% of the
lesser of the two amounts the person changing the
money would have received by converting any of the
two currencies into Indian Rupee on that day at the
reference rate provided by RBI.
 Illustration: 1200 US$ are exchanged to 960 British
pounds. RBI reference rate for US$ is Rs.60 and RBI
reference rate for British pounds is Rs.80. The value 40
will be 1% of lower of Rs.72000 and Rs.76800 i.e.
Rs.720/-.
4.6.1 VALUATION RULES – RULE 32

December 2017
iv) The rule also gives an alternative option which has
to be opted for a financial year and cannot be
withdrawn once opted during the same financial year.

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In such a case value will be
 Up to Rs. One lakh, one percent of the gross amount
of currency exchanged subject to a minimum of
Rs.250/-.
 Rs.1000 + half of a per cent of the gross amount of
currency exchanged for an amount exceeding Rs. One
lakh and up to Rs. Ten lakh.
 Five thousand rupees and one tenth of a per cent of
the gross amount of currency exchanged for an
amount exceeding ten lakh rupees subject to a 41

maximum of Rs. 60000/-.

4.6.2 VALUATION RULES – RULE 32

December 2017
2. The value of supply of services in relation to
booking of tickets for travel by air would be five
per cent of the basic fare in the case of domestic

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bookings, and at the rate of ten per cent. of the
basic fare in the case of international bookings of
passage for travel by air.
Explanation - For the purposes of this sub-rule,
the expression “basic fare” means, that part of
the air fare on which commission is normally
paid to the air travel agent by the airline.

42
4.6.3 VALUATION RULES – RULE 32

December 2017
3. The value of supply of services in relation to life insurance
business shall be:
a) the gross premium charged from a policy holder reduced

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by the amount allocated for investment, or savings on
behalf of the policy holder, if such amount is intimated to
the policy holder at the time of supply of service;
b) in case of single premium annuity policies other than (a),
ten per cent of single premium charged from the policy
holder; or
c) in all other cases, twenty five per cent of the premium
charged from the policy holder in the first year and
twelve and a half per cent of the premium charged from
policy holder in subsequent years:
Provided that nothing contained in this sub-rule shall apply
where the entire premium paid by the policy holder is only 43
towards the risk cover in life insurance.
4.6.4 VALUATION RULES – RULE 32

December 2017
 4. In case of second hand goods trade, the
difference between the selling price and the
purchase price would be the value. This is subject

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to the condition that second hand goods are sold
without processing or after processing without
changing its nature and no input credit has been
availed after purchase.

44
4.6.5 VALUATION RULES – RULE 32

December 2017
 5. The value of a token, or a voucher, or a coupon,
or a stamp (other than postage stamp) which is
redeemable against a supply of goods or services

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or both shall be equal to the money value of the
goods or services or both redeemable against such
token, voucher, coupon, or stamp.

45
4.6.6 VALUATION RULES – RULE

December 2017
6. The rule provides for issue of notification
declaring the value of supply to be nil in respect
of taxable services on the recommendation of the

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GST council in transaction between related
parties or separately registered units of a single
person where input credit is available under
section 17(5) of CGST Act.

46
ISSUES- INTER-BRANCH SERVICE’S

December 2017
 To what extent like kind & quality be stretched
 First internal comparable of like kind and quality, if such
comparable not available then go to external comparable

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of like kind and quality.
 While external comparable of like kind & quality – brand
value.
 Eg: Can services of Blue Dart be compared with Hand to
Hand Delivery Courier Company
 Eg : Can services of Blue Dart be compared with Fedex

47
ISSUES- INTER-BRANCH SERVICE’S

December 2017
 A & CO Cas in Blore, has its branch at Chennai AB
& CO, AB & Co at Chennai gets an audit assignment
in Chennai, for which AB & Co called for 2 of A &

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Co’s employees for 10 days to complete audit
assignment.
 Value to be billed by A & Co to AB & Co =
 OMV = Rs 2500 per man day
 Value of like kind & quality = Rs 3000 per man day
 Actual amount billed = 1500 per man day.

48
ISSUES IN VALUATION

December 2017
 Is stock transfer to your branch an actual sale?
 Reconciliation : Supply Vs sale
What is the value of stock transfer, from A in

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
Karnataka to B its branch in TN, in respect of
stock transfer?
 OMV= 10,000
 Like kind or quality = 10,500
 COP +10% = 12,000
 90% of value of S.P by the recipient, to unrelated
party.
 Value ???
49
REMOVAL OF GOODS AS FREEBIES

December 2017
•Consideration paid for such
Buy one get one transaction is the value on which
GST to be paid.
free is only a

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•No ITC reversal required. (Could be
litigated)
marketing •Only a marketing strategy and not

gimmick
actual free supply, as advertised.

•Not a supply, as no consideration.

•ITC reversal required.
•Can it fall under schedule I or II-
Free sample Supply

distribution •If supply, then no ITC reversal

required.
50
 REMOVAL OF GOODS AS
Hiregange

DONATIONS

December 2017
 In GST, supply includes all types of supplies
 Few matters to be treated as supply though there is no
consideration
 Disposal of assets is supply. Ex: Donation of
computers. Whether inputs are business assets?
 Valuation for Mechanism for supply?
 Reversal of credit on such computers required?

51
REMOVAL OF GOODS AS DONATIONS,
SAMPLES

December 2017
 Section 17 – Input restriction if goods issued as
samples or disposed as gifts. For finished goods is
Section 17 applicable?? If yes, valuation? Or is it

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supply as per Schedule II?
 Transfer of business assets which would no longer
form part of asset for consideration or not is supply
of Service - Schedule II sl.no.4.

52
FREE SUPPLY

December 2017
 Should value of free supply be included for the
purpose of valuation?

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 If yes what should be the value?

 Is free supply of material a supply?

 Can it fit into the Section 7- Levy Supply?

 Can the recipient of free supply of material avail

ITC?

53
WARRANTY

December 2017
 Original invoice value would have factored
warranty cost. Therefore, no GST.
No credit reversal needed. Section 17 does not

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
contain any restriction.
 Supply in extended warranty, to such extent it is
liable for GST.

54
DEALER OF SECOND HAND GOODS

December 2017
 Taxable supply by person dealing with second
hand goods.
 No ITC credit availed

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 Value shall be difference between SP-PP, where
value is negative, it shall be ignored for GST.
 Non dealer but registered who has not availed
ITC till 2020 – on 65% of rate applicable.

55
SOME RELEVANT CASE LAWS UNDER
EARLIER LAWS

December 2017
 Section 15 Vs GST Valuation Rules - Ispat
Industries Ltd Vs CC 2006 (202) ELT 561 (SC)

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 FOC material by customer – Burn Standard
Company Ltd Vs UOI – AIR 1991 SC 1784

 Independent factory price available = same material

captively consumed- same price – CCE Vs Scan
Synthetics – 2008 TIOL 34 SC

56
 December 2017
 Price of identical goods to be compared at same
commercial level/ activity - Elite Packaging
Industries Vs CC 1992 (60) ELT 311 (SC)

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 Cash ,Trade & Volume discount known at time of
supply – Purolator India Ltd Vs CCE – 2015
(332) ELT 227 SC

 Post delivery exp – CCE Vs Ispat Industries Ltd –

2015 (324) ELT 670 SC
57
 December 2017
 Supplementary Invoice – Interest? – Steel
Authority of India Vs CCE, Raipur – 2015

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(326) ELT 450 (SC)

 50% Sales Tax retention no payable in future –

Maruti Suzuki Ind Ltd – 2014 (307) ELT 626
(SC)

 Supply below cost – CCE Vs FIAT India Pvt

Ltd – 2012 (283) ELT 161 (SC) 58
 December 2017
 Huge advances along with order - CCE Vs
Hindustan National Glass and Industries

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Ltd – 2016 (332) ELT 193 SC

 Amortisation of tools/ moulds – Moriroku UT

India Vs State of UP – 2008 (224) ELT 365
(SC)

 Piercing of corporate veil - CC Vs East African

Traders 2000 (115) ELT 613 (SC) 59
 December 2017
 Demurrage after import - not includible - CCE
Vs Mangalore Refinery 2015 325 ELT 214

Hiregange
(SC)

 Subsidy from Govt as Policy - not includible -

CCE Vs Mazagon Dock Ltd 2005 (187) ELT 3
(SC)

 Interest on receivables – not includible - CCE

VS Hero Honda Motors 326 ELT 8 (SC) 60
 December 2017
Hiregange
[email protected] or
madhukar&@hiregange.com
Google indirect tax committee
61