Valuation:

Whatever the price has been declared for an article or service is in

accordance with the GST provisions, if there is any effect of the relation
between the transacting parties on the price, etc is considered in
valuation. How to determine the value of supply in different
situations is valuation.

- Section 15: Tax as per transaction value

- Section 10: for compound or composition levy.

Under the Excise Act, there were 6 methods of valuations, but the service
tax regime followed the transaction value method only. These six
methods were:

1. Specific duty: Tariff Act. Duty based on specific measurements,

such as per metre, per kg, or related to lengths. The method was
very simple. However, the problem was that it couldn’t absorb
fluctuations in price. For instance, per quintal sugar will have 300
rs excise duty, whether the proce of sugar is 300 rs per kg or 30 rs
per kg will have no impact.
2. Tariff value: 3(2) of Central Excise Act,
3. Compound levy: Rule 15 authorised the executive to establish
simplified methods of valuation. It was part of delegated legislation.
This was challenged before the Supreme Court, which held that the
government has the power to develop some rough and ready,
hassle-free methods. However, these should be optional. These
methods were based on production capacity. The valuation was
fixed manufacturer-wise. This has been made compulsory under
section 3e of the Central Excise Act, making it mandatory.
4. Fixed method: 3A
5. MRP: 4A, the first essential condition was that only those goods
that were part of the 3 schedule, that is, by notification of the govt
rd

with a rate of abetment, second these goods should be covered

under the Legal Metrology Act, third, only the goods which are
intended for retail sale not bulk sale, then MRP system will apply.
For instance, a pen is a packaged commodity, covered under the
Legal Metrology Act, but who will decide the MRP? This is provided
under the Legal Metrology Rules.

Whirlpool India v. UOI SC 2008:

Whether a refrigerator is a packaged commodity or not.

CCE v. Kraftech Products Ltd. AIR 2008 SC 2238.

Jayanti Food Processing Ltd v. CCE 2007 8 SCC 34:

(READ) SC settled multiple issues regarding the MRP valuation scheme.

SC clarified that the MRP scheme is applicable only if the sale is intended
for retail sale. If a commodity is purchased by an industrial buyer, then
the MRP scheme will not be applicable.

This scheme has not been adopted under the GST regime, because this is
a control-based mechanism.

Right now, also, under the GST regime, so many items are purchased
where duties are inclusive in the price. For instance, a mobile phone is
purchased for 50,000, this is inclusive of the duties. Earlier, medicines
were under exclusive taxation. Currently, only services are covered
under the exclusive taxation method, but all goods fall under the
inclusive taxation mechanism.

All the packed commodities (open-packed as well as close-packed) were

governed under the Legal Metrology Act, and the MRP method was used
for valuation under the previous regime.

6. Transaction value methods – Central Excise Act, Section 4(1)

provides for the prerequisites for accepting a transaction:
1. Sale
2. Date and Place of Removal/ Time of Removal
3. The buyer and assessee are not related persons.
4. Price must be the sole consideration.

Appeal to the Supreme Court directly if the matter is related to the

valuation and classification of the article.

What is transaction value?

d) “transaction value” means the price actually paid or payable for

the goods, when sold, and includes in addition to the amount
charged as price, any amount that the buyer is liable to pay to, or
on behalf of, the assessee, by reason of, or in connection with the
sale, whether payable at the time of the sale or at any other time,
including, but not limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling organization
expenses, storage, outward handling, servicing, warranty, commission or
any other matter; but does not include the amount of duty of excise, sales
tax and other taxes, if any, actually paid or actually payable on such
goods.

A transaction refers to an agreement process, so what is the agreement

price? TV will include something more than just the price actually paid
for the goods; that additional element is the amount charged for
provisioning of raw material, art, engineering work, etc, in relation to the
supply. Hence, anything in connection or relation with the sale,
supplied by the supplier to the assessee. The same condition applies
under GST. But there are some basic differences between GST and
Excise.

When will price not be the sole consideration? What can be an

additional consideration?

 If they are related parties, then price won't be the sole

consideration.
 But in case of a transaction between independent persons too,
there can be additional considerations. A is selling units to B for
5000 per unit. A has charged 1 crore as an Advance payment. The
same goods are sold to C at 6000 per unit. Here, an advance
payment is the supplementary consideration. This advance
payment has influenced the fixation price. So, the transaction value
of 5000 will be rejected. The notional interest on that advance
payment will be the additional consideration, which will be added
to the transaction value.

Section 4 provides that taxes will be excluded from the transaction value.

- Identify transaction value, i.e., Price cum duty

- Find out the assessable value, which is without taxes.

Doctrine of unjust enrichment: A is a supplier and B is his customer. A

made a supply to B at the rate of 500 per unit, and 10% is the taxation
rate. The department mentioned that the rate is 5%. this extra payment
should be refunded to A or B? It will be transferred to the consumer
welfare fund, because it is difficult to identify the individual customer.

But in a situation where less tax is paid, then the supplier will have to
pay this extra.. This is unjust impoverishment.

The concept of impoverishment is applied in valuation as well. By default,

all transaction values are price cum duty.

CCE v. Maruti Udyog Ltd 2002 3 SCC 547:

SC held that the sale price will always be treated as cum duty (always
inclusive of duty). While manufacturing a car, a lot of metal scrap was
created. This was sold without considering the excise duty. The
department issued a notice claiming that this scrap is also taxable. The
question is whether the excise duty will be considered over and able the
selling price or within the price. The scrap was sold for 100 Rs, let's say
the rate of tax was 10%. Now, will this 10% be 100+10 or 10 will be
considered with 100, where 90 will be the price and 10 is the tax? The
correct method will be 90+10; the burden is already passed on to B, and
A does not need to pay an extra 10, which can result in unjust
impoverishment.

100 Rs was considered always inclusive of duty, no matter if tax was

charged or not.

AV = (Price cum duty – Permissible deductions)/ (1 + Rate of duty)

Rejection of Transaction value

Guru Nanak Refrigeration Corporation v. CCE 2003 153 ELT 249 S

& CCE v. Bisleri int pvt ltd 2005 6 SCC 58: Sole consideration

Eicher Tractors v. Collector of customs 2000 122 ELT 321 SC:

Relevant for understanding the expression “Ordinarily sold”

CCE v. Fiat India Pvt Ltd (2012) 9 SCC 332: The SC unsettled the
laws on transaction value. Not just the 4 elements under section 4, if the
manufacturer is selling goods below the cost of manufacturing, then also
the transaction value will be rejected. If a new company wants to enter
into Indian market, and they sell their goods below the cost of
manufacturing, you have to have a notional price margin in the sale. Can
the department challenge this cost?

This case discusses all three cases.

The first five methods are notified methods; just transaction method is
part of the Act. Which is why GST adopted only the transaction value
method. These five methods, hardly 200 articles and products were
covered, rest of the goods were covered by transaction value method.
These 200 goods were manufactured goods; they were all vulnerable to
change by mere notification.

Suppose product value is 1000 rs, and govt by notification says product
value is 60%, then 600 will be value for levy of taxed. The doubt is how
will it enhance the ease of doing business when the product value is
changed by government by mere notification. This was a control
mechanism.
Section 15 of the GST is almost the same as that of Section 4 of the
Excise Act, but under the compound levy, the basic fundamentals have
been changed.

GST Valuation

Two methods for determining the value

1. Composition levy: Section 10 CGST Act.

2. Transaction value: Section 15

Composition levy –

 Simplified tax, an optional scheme for eligible small suppliers.

Composition dealer issues a Bill of supply, not the GST invoice.
 Pay a fixed tax rate based on their turnover.

Composition scheme as per Section 10(1): If your turnover is ₹ 1.5 crore

in a financial year, then you can opt to be a composition dealer. A
composition dealer is not required to pay tax on the value but on the
turnover. Although it is part of the indirect taxation regime, it is not an
indirect tax; rather, it is a tax on the dealer.

· Taxation rate in this case 1% SGST and 2% CSST of turnover.

· If you are a restaurant service provider, then 2.5% SGST and 2.5%
CGST

· If you are a dealer, then .5% SGST and .5% CGST

Benefits:

1. No invoice is required; you can maintain any document as per the

business

2. No monthly return is required; just half-yearly and yearly is required.

Disadvantages:

1. Cannot claim input tax credit.

2. Cannot do inter-state business.

3. Cannot sell products through e-commerce operators.

4. Cannot make any non-taxable supplies. If you want to supply alcohol,

then that’s not permitted.
The moment the 1.5 cr. threshold is crossed in a financial year, the
dealer ceases to be a composition dealer and must be a GSTN dealer.

Transaction value – Section 15 of CGST (Value of taxable supply).

1. Section 15(1): The value of a supply of goods or services or both

shall be the transaction value, which is the price actually paid or
payable for the said supply of goods or services or both,
where the supplier and the recipient of the supply are not
related, and the price is the sole consideration for the supply.
2. Section 15(2): Apart from the transaction value, additional prices
have been mentioned under section 15(2).
a. Section 15(2)a: Taxed in addition to GST related to the value
of supply. Local taxes are charged on the supply. For
instance, the tenant pays rent to the owner, which is the
transaction value. But he is also required to pay house tax to
the Nagar Nigam. This will be added to the value of supply,
too. During COVID, the government started charging 1%
COVID fees on all transactions; this will be added to all
supplies. Another example can be the charging of flood cess.
b. Section 15(2)b: (amount paid in relation to supply, incurred
by recipient) Shipping charge in the case of destination
delivery contract, it is the responsibility of the supplier to pay
for transportation, but if he does not do so, and the recipient
bears the same.
c. Section 15(2)c: Incidental expenses like packaging,
commission, gift wrapping option of Amazon, etc.
d. Section 15(2)d: interest or late fees
e. Section 15(2)e: Subsidies directly linked to supplies but
excluding all those subsidies which are provided by the
government, for instance, a price support mechanism. Pepsi
manufactures the raw material and supplies it to the bottling
company. The final product is sold at 12 Rs per bottle. But
Pepsi says this should be sold at 10Rs/unit. If sold at 10, then
who will sustain these 2 Rs. Even if it is a case of
cartelisation, price support will be added to the supply value.
10+2 is the value of the supply.
3. Section 15(3): Discounts – when will they be added and when
excluded?

Conditions where discounts are allowed are bifurcated into two

categories, based on the time they are granted (Pre-supply and
given after supply is effected)

Excluded from the Value if:

a. before or at the time of the supply if such discount has been

duly recorded in the invoice issued in respect of such supply. For
 instance, all discounts that are happening or at the time of supply,
which are recorded in the invoice then they are fully allowed. In a
car dealership, where a car is sold at 5% discount, which is
recorded in the invoice, the car is of 5 lacs, but GST will apply only
on 4.75 lacs.
b. Not reflected in the invoice but mentioned in the agreement,
but it is allowed – If D makes the payment within a month, then
Dealer will receive 1% discount on the 5 lac rupees. The invoice
has already been issued, and just the payment is left. Between the
date of payment and the issue of the invoice, whichever comes first
is the time of supply. So, A has already paid the taxes. This 1%
discount is mentioned in the agreement. How to process this? This
1% will be issued by A to D in a credit note, plus 18% GST on this
5000, which is a 5900 Rs worth credit note. A total of 90,0000 has
been received as income tax credit, then 900 to be paid back to the
government as a reversal of credit. (This 1% discount is allowed
if part of the agreement, in the form of a credit note by the
supplier to the recipient.)

A condition where discounts are not allowed:

a. A supply a car to D, with no mention of a discount in the agreement.

A says you can pay money in 1 month. After the supply of cars from A to
D, A faces a severe cash problem. “A” offered if you make payment within
4 days, you’ll get a discount of 1% on that payment. D made the payment,
and has the right to claim 1% discount. But this is not allowed as a
deduction. GST will apply to the entire 5 lacs. Discount neither happened
at the time nor before supply, nor was it mentioned in the agreement;
this happened based on a separate agreement, which is why not
applicable under GST. This discount will not be reflected in the value.
These are commercial decisions, and not reflected in the value.

Two important circulars for secondary or post-sales discounts: No

92/11/2019 issued on 7 March 2019 and Circular No. 105/24/2019
th

issued on 28 June 2019.

th

Case laws on 15(2)b (Liability or obligation of supplier incurred by the

recipient):

1. Nash Industries Pvt Ltd 2019 AAAR Karnataka

2. Harvinder Singh Bhaitia 2021 AAAR Chhattisgarh
3. Tejas Constructions and Infrastructure Pvt Ltd 2019 AAAR
Maharashtra
4. Commissioner Service Tax v. Bhayana Builders Pvt Ltd 2018 SC

For instance, A needs a taxi for travelling, both parties agree that only
the car has to be provided, and the fuel cost, toll charges will be incurred
by the recipient. What should be the subject matter of GST? 5000 is the
fuel cost, and 1000 is the Toll that was incurred by the R. Department is
claiming that the value of the service must be 5k taxi fees + 6k; just
because someone else undertakes your obligation doesn’t mean tax won't
apply. If we rely on the agreement to identify the value, it can be used as
a colourable value for reducing the value to finally reduce GST.

We have to see the usual business practices.

Section 15(2). Five inclusions:

1. Any taxes, duties, cesses, fees and charges, levied under any other
law, in addition to GST.

• TDS v. TCS: Payer (recipient) deducts tax at source from the value
of supply (since it is his liability) and pays the supplier (payee)- this is
TDS. Recipient has to pay over and above the value of supply to the
supplier- this is TCS. The issue is whether TCS in GST (collected over
and above value of supply) is to be added back to the value of supply.

• PSM Automobiles Pvt. Ltd. v. UOI & Vision Motors Pvt. Ltd. v.
UOI, 2019, Kerala HC: Challenged Circular No. 76/50/2018 issued on
December 31, 2018 which clarified that the taxable value for GST shall
include the amount of TCS collected under Income Tax Act. Kerala HC
stayed the operation of this circular.

• CBIC Circular No. 20/16/04/2019 issued on March 07, 2019: this

clarified that TCS will not be added in the value of supply, since TCS is
not a tax. It is only a way of collection to ensure checks and balances- it
is a mechanism to collect tax and not a component of price.

2. Any amount which is the liability of the supplier to pay, but

recipient pays. On Section 15(2)(b):

- Nash Industries Pvt. Ltd., 2019, AAAR Karnataka

- Arvinder Singh Bhatia, 2021, AAAR Chhattisgarh
- Tejas Constructions & Infrastructure Pvt. Ltd., 2019, AAR
Maharashtra
- Commissioner, Service Tax v. Dhayana Builders Pvt. Ltd., 2018 SC

The above cases discuss the liability of supplier. For example, A provides
taxi services and provides for Rs. 5000 to C. Customer states that he
would provide for fuel cost and toll charges. Department claims that the
value would be Rs. 5000 + Rs. 5000 (fuel) + Rs. 1000 (toll), since these
are part of taxi services itself. It argues that it is the obligation of the
supplier, incurred by the recipient. While the agreement states it is the
liability of the recipient/customer, it can act as a colourable device to
reduce the value of supply and hence, the GST.

In some cases, it can so happen that there is an artificial division

between supplier and recipient and this must be tested on the anvil of tax
avoidance using colourable device; i.e., liability divided between parties
to reduce liability of tax. It is an artificial division and not normal trade
practice to divide such expenses. This is not accepted and this division
would be added back to the value of supply because it is the liability of
supplier incurred by recipient. The above cases clarify this.

ICU Medial India Ltd. LLP, 2021, AAAR TN: Appellant (ABC) was
providing software development services to its overseas holding company
(XYZ). During the course of supply of such services, the appellant
incurred expenses and added markup to claim the amount from holding
company. This is a case of export of services by ABC to XYZ. ABC’s
employees are travelling within and outside India relating to these
services. For travel expenditure, XYZ has issued a credit card to the
employees of ABC. Credit card bill is paid by XYZ directly to the bank on
an actual basis. Whatever is paid by XYZ is reimbursed by ABC to XYZ.
AAR stated that there is no link between software development services
and credit bill payment services. The latter is called as credit granting
services- this is a case of import of services and ABC has to pay tax on
reverse charge mechanism. Both services are different transactions-
credit granting is import of services by ABC and software development is
export of services by ABC. However, AAAR stated that both these are
related services and credit bill services are required for software
development services. Whatever ABC pays XYZ for credit card is to be
taken as “advance money” for the provision of software development
services. But, in experts’ opinion, this is incorrect, since there is a case of
reimbursement, where ABC pays back the money to XYZ. It cannot be
advance money and AAR was right in its holding.

3. Subsidies that are directly linked to price of supply not provided by

state or central government.

- Megha Pvt. Ltd., 2020, AAR Karnataka

- Surya Roshni LED Lighting Projects, 2021, AAR Odisha
- Rashmi Hospitality Services Pvt. Ltd., 2019, AAR Karnataka

If it is a capital subsidy, it should be a part of valuation, since it is not

directly linked to price. If it is a revenue subsidy that can be directly
linked to the price, it should be excluded from value of supply. Section
15(2)(e), however, does not make any such distinction. But authorities
have interpreted this term “subsidy” to include only revenue subsidy and
not capital subsidy.

For example, if the company provides Rs. 20 as a subsidy for the ordinary
Rs. 100 lunch/dinner, the employee would purchase it only for Rs. 80.
The company would pay the canteen owner this loss of Rs. 20 (price
support system). Suppose, instead of paying to the canteen owner, the
company exempts them from paying electricity bill, water bill, and rent.
These are not directly linked to the price, but they ultimately affect the
price and hence, should be added to the value of supply.

Section 15 of the GST is almost the same as that of Section 4 of the

Excise Act, but under the compound levy, the basic fundamentals have
been changed.

Karnataka Solar Power development AAR Karnataka 2020: PSU

obtained land on a lease basis from farmers in a particular location and
then sub-let those lands for solar power developers (SPD) to develop
solar power. The applicant collected rent from that land and also
collected a charge, known as the local area development fund, from these
solar power developers, in addition to the agreed-upon rent. Whether the
charge will be included as per 15(2)a or should not be part of the value.

The authority said that these charges are levied under the guidelines of
the Ministry of New and Renewable Energy. The first condition of the
section is fulfilled. The charge is collected separately, too, so the second
condition is also fulfilled.

Midcon Polymers Pvt Ltd 2021 AAAR: Appellant rented out its
commercial property. A collected monthly rent from tenants, also
collecting the refundable security deposit and property tax from tenants.
The question was regarding a refundable deposit, whether the notional
interest related to the security deposit should be added to the supply or
not? Cases on nominal deposits were decided by the SC in the previous
regime.

Metalbox India Pvt Ltd v. UOI 1995 75 ELT 453 SC & VST
Industries v. CCE AIR 1998 SC 1441: Security deposit

In the Metal box case, under an agreement, Ponds India Ltd gave an
interest-free advance to the metal box company of Rs 2cr. This advance
was to be maintained at the same level on the first working day of every
month and was to purchase raw material from the metal box. MB is
selling 90% of the raw material to Ponds. It is also providing a 50% trade
discount because of the advance deposit. Revenue claimed that the
advance deposit had influenced the fixation of the price. Nominal interest
on this 2 cr as additional consideration should be added to the value of
the supply or not. SC observed that this interest-free advance has
entered into an agreement, special

Nominal interest should be added to the supply.

VST industries: Similar facts,

A is selling goods to B, C and D. A asks for a security deposit; B and D

have paid it. A is selling goods at the same price to all. Here, the SC held
that because A is selling goods to three persons and there is no
difference in treatment amongst all three. So, the transactions are at
arm's length, and the deposit has not influenced the fixation of price.
Here we have a comparative analysis which was not possible in the case
of the metal box because 90% sale was directed towards one buyer only.

So, in Midcon Polymers Pvt Ltd 2021 AAAR, we have to see whether this
security deposit has influenced the fixation of price; if yes, then it will be
added, if no, then it won't be. Property tax is added always.

OLETY Landmark Apartment onus association 2021 AAAR

Karnataka: Amount in the form of sinking funds was collected from
members; this amount was utilised for maintenance of common facilities,
and it was not refundable. Whether this contribution, in addition to rent
be added to the value of the supply or not? Maintenance and repair by
the supplier to the recipient itself constitute supply. The authority noted
the difference between refundable and non-refundable deposits. The NR
deposits are themselves a consideration and should be added to the
supply, but this was not required because repair in itself is a supply. In
refundable money, money is mostly not a consideration, then the
question of adding or not can arise.

Ultra Tech Cements Ltd 2018 AAR Maharashtra: Here, the case is on
discounts, whether they are inclusive or excluded from the value. Only
two types of discounts are allowed:

1. It should happen either before or at the time of supply and be

reflected in the invoice.

2. Agreed in agreement, it should be clear in terms of agreement.

Any post-sales discounts are not going to be allowed in GST.

In this case, distributors are given discounts based on their sales. It was
not mentioned in the terms of the condition. The court held that no post-
sales discount can be claimed.

Santosh Distributors 2019 AAR Kerala: The applicant was an

authorised distributor of goods. As a distributor of patrol products
(Principal supplier), the applicant could supply the goods to the dealers
at reduced rates, which were pre-fixed by producers. In case of reduced
rates, the principal supplier reimbursed the applicant through
commercial credit notes.

It should have been seen as a subsidy because a private supplier is

providing price support to the distributor, but the authority has not even
investigated that argument at all. Authority looked at it from the
discount's perspective. It held that discounts are intended to increase the
sales volume, so this reimbursement forms consideration flowing from
the supplier to the dealer and should be included in the value of the
supply.

DRS Marine Services Pvt Ltd 2018 AAR Maharashtra: READ

Valuation Rules:

Applicable when the transaction value is not acceptable, when the value
of supply is not the only consideration, and there are other elements or
parties that are related parties, or price is not the sole consideration,
consideration is not wholly in cash.

Rules 27 to 35 are to be applied, and now the power is with the

department, shifted from the supplier to the department.

Rule 27 is applicable where consideration is not wholly in money form.

Rule 28 is applicable when transactions are between related parties or

distinct persons/

Rule 29 – Principal and agent transactions.

Rules 30 and 31 – Residuary rule. Cost price method and best judgment
method each.

Rules 31A, B and C are specific methods which apply to casinos,

gambling, actionable claims, betting, lottery, horse racing, online money
gaming, etc.

Rule 32 – Another special rule applies to a special transaction.

Transactions of booking air tickets, second-hand deals of cars, mobiles,
etc.

Rule 33 – Apply in case of pure agent service.

Rules 34 and 35 (meaning of open market value, like articles, etc) – apply
to all other rules because of being the general provision. \
Rule 27: Value of supply of goods or services where the
consideration is not wholly in money

27(a) Open market value – Fair market value or the arms-length

price can be determined by the following methods:

1. CUP

2. RSP

3. Profit Split Method

4. CPM

5. TNM

If A is selling goods to B, because of Rule 27, B is making some additional

consideration, but not in monetary form. A is also selling the same goods
to C, the entire consideration in money form. This second price can be
taken because it is comparable and a control method, and we can identify
the open market value.

27(b) – Total Money value – Money value and non-money value have to be
added to determine the value.

27(c) - Like-kind and quality value method, identical goods method or

similar goods method.

Comparison between two similar goods, that is, commercially

exchangeable goods. The same function, same activity can be performed.
Defined under Rule 35 explanation b.

27(d) – If none of the rules apply, then rules 30 and 31 will apply.

Rule 28: Value of supply of goods or services or both between

distinct or related persons, other than through an agent.

Who is a related party? Section 15 Explanation defines RP for the

purpose of valuation. Because in such transactions, price will not be the
sole consideration.

Who is a distinct person? Sch 1 (Supply topic) supply is being made

without consideration, but still tax will be applied. Brach office, business
verticals.
RPs are separate entities; distinct persons having a common PAN, there
will be different GSTN numbers.

Methods:

(a) be the open market value of such supply;

(b) If the open market value is not available, be the value of the
supply of goods or services of like kind and quality;

(c) If the value is not determinable under clause (a) or (b), be

the value as determined by the application of rule 30 or rule 31,
in that order:

Proviso 1 – Resale price method. Suppose A is selling goods to B for 100

Rs. But A and B are related parties. B is selling the same goods to C for
300, and they are non-RPs. The price will be 90% of the price between B
and C, and will be the price between A and B. 10% is the profit margin of
B.

Proviso 2 – A and B in the transaction, if B is RP. If B is eligible to claim

full ITC, then the invoice will be open market value. Although section 15
says the transaction value will not be acceptable when parties are RPs,
this proviso allows it just because full ITC can be claimed. If B knows that
the invoice is of lesser value, then B will get lesser ITC. But if B wants
full ITC, then the invoice cannot be of lesser value. No chance that B
would incur any loss when B can claim ITC, thus the invoice value is
acceptable.

Rule 29 - Value of supply of goods made or received through an

agent

Resale method

The principal (P) supplies the goods to the agent for further supply,
without any cost. A supplies this to the customers. A supplies to C for
5000 per quintal. A is also receiving goods from another person, D. D is
supplying A for 4500 per quintal.

What is the value of P and A’s transaction? Between the price charged
from the agent to the customer, 90% of that or the price at which the
agent received goods from a third person (Open market value) whichever
is more beneficial for P, will be accepted. If none apply, then Rule 30 or
31 will apply.

Shirdi Sai Nath Industries v. Deputy Commissioner Sales Tax,

2020 AP HC: Read
Rule 30 – Supply of goods

Rule 31 – Supply of services.

Rule 31A, B and C – transaction-specific supply

Rule 32 is also transaction-specific. This rule overrides the entire

valuation chapter.

· If you are in the business of exchanging foreign currency.

· Booking of tickets, and how to pay GST on that booking.

· Life insurance premium, how to determine value of supply.

· Dealer of 2 hand goods.

nd

· Supply as token, non-fungible, fungible etc.

Rule 33: Value of supply of services in case of pure agent

Through contractual obligations, if a pure agent has accepted services of

a third party on behalf of the recipient, then that is a problematic area.

The company hired a law firm for the incorporation of the company. The
firm charged various fees, including their service charge. But along with
that company also undertakes to pay fees to the registrar of the company
on behalf of the company. This is a statutory obligation. Whatever the law
firm charges for their services, should the registration fees be added in
the value of the supply, or will it be the pure agency fees of the company?

Customs house agent, if you export any goods, then you have to appoint
this agency, which pays customs duty and does everything required for
customs clearance. The payment due to the agent is statutory due, and
whatever is paid to him is not added to the value of the supply. These are
examples of pure agency.

These third-party activities are services of a pure agent and cannot be

added in the value of the supply.

What happens in contractual obligation?

Hadresh Kumar Ramesh Chandra Dave 2021 AAR Gujarat: A was

providing contract labour to its customers, A was issuing two invoices,
1st for reimbursement for the salary of labour and 2 for consultation
nd

services provided by the applicant himself.

Whether this is the case of pure agency or manpower supply? A pure
agent has to provide ancillary service also; the main service is to provide
labourers with what is the ancillary service? It is a case of supply of
manpower, and that’s it. GST will apply to service fees plus the salary of
the labourers.

For instance, NLUJ hires a watchman, outsources sweepers. The salary is

paid by the institution, but they are employees of the service providers.
NLUJ is reimbursing the service provider. Can NLUJ claim that the
service provider should be considered as a pure agent? No

ION Trading India Pvt Ltd 2021 AAAR Uttar Pradesh: ION Trading
took office premises on a lease basis, including a car parking space on
rent. Appellant incurred part of the expenditure for the car parking space
and collected the rest from the employees using the space.

Whether GST should apply to the entire rent of the car parking or the
amount paid by the company only? Whether the company is working as a
pure agent for their own employees? One of the essential conditions of
pure agency is that the invoice has to be issued by the pure agent in the
name of the recipient. Here, this is not the case, so GST must be paid on
the entire amount.

Jewel Classic Hotels Pvt Ltd 2021 AAR Haryana: Applicant was
providing various services like banquet hall, restaurant service, outdoor
event organising, etc. At the request of the recipient, third-party services
were also outsourced by the applicant. The vendors are making
additional arrangements, and they have issued an invoice in the name of
the applicant. The applicant recovered the amount from the recipient and
charged additional fees for the facilitation charge. Whether the services
supplied by the hotel are of pure agency? Not a case of pure agency.
Check the case for reasoning.

Karnataka State Warehousing Corporation 2021 AAR Karnataka

Premier vigilance and security Pvt Ltd 2018 AAR West Bengal

Arivu Educational Consultants Pvt Ltd 2019 AAR Karnataka:

Dummy classes, coaching institutions charge fees for coaching as well as
school fees. Whether coaching works here as pure agent of their
customer for the school fees. READ
Specs makers Opticians Pvt Ltd 2019 AAAR Tamil Nadu: On Rule
28 case

From the previous regime

CCE v. IFGL Refractories 2005 6 SCC 713: When the additional

consideration is added in the value of the supply if the additional
consideration is for the statutory benefit provided in law.

CCE v. Kishan Shekari Chini Mills AIR 2002 SC 57: On the definition
of Tax. Just 2 2-page judgments.

Classification

Why classification?

The rate of duty is determined based on the classifications.

Customs Tariff Act, the classifications are mentioned. There are four
columns in the Tariff Act. 1 is the HSN Code, 2 is about the description
st nd

of the goods, 3 is how to measure the goods (measurement units), and 4

rd th

is the rate of duty. Another 5 column that contains a preferential rate of

th

duty.

How to identify the tariff no?

We have adopted CCTA for the purpose of classification of goods under

GST without any changes at all. The GST notification in 2017, the mega
notification, determines the rate of duty on the goods. Service
accountancy code for services.

There are 21 sections and 98 chapters in the CTA. There are 5000 groups
under these chapters. Sections are just titles; each section contains a
chapter. In each chapter, there are multiple headings, then come the
sub-headings, which may have multiple sub-sub-headings. Usually, the
HSF classification starts from the chapter, not the section.

If the primary purpose of the product is to care – cosmetics. If it is to

cure – medicine. But if the primary purpose is to care, for the long term it
may cure too, and vice versa is also possible. But we do not look into the
end consequence, rather the primary purpose. This dispute was finally
settled in 2013. The dispute still continues. What is the primary purpose?
How to identify that all of which is very subjective.

6 Rules of interpretation or the GIR – General Interpretative rules under

Schedule 2.

1. Rule 1
2. Rule 2(a) and (b)

3. Rule 3(a)(b) and (c)

4. Rule 4

5. Rule 5(a) and (b)

6. Rule 6

By applying these 6 rules, we might have to adopt other rules of

classifications because of differences in goods. So, the court has to look
into judicial rules of classifications.

Is Softy a milk product or ice cream? We have to apply the popular

meaning theory. Plaza restaurant case, SC held that HSN classification
cannot be used in all cases. Technically, Softy is not an ice cream, but
popularly, it is known as ice cream.

Saurashtra Chemicals v. Collector of Customs, 1986 23 ELT 283

Appellate Tribunal

Collector of Customs v. Mastro Motors Ltd, AIR 2005 SC 1492:

How we apply the GIR while reading the exemption notification. Whether
these rules are binding or the notification exempting goods from GST will
be binding?

Dabur India v. CCE, 2005 4 SCC 9: On Ayurvedic v. medicines.

Example of Vico Termeric.

OK Play India Ltd v. CCE, 2005 180 ELT 300 SC: The SC laid down
guidelines on how to make the correct classification. There cannot be one
uniform test for correct classification, it is subjective and depends on the
chapters, headings, etc of the goods. No static parameter can provide
correct classification.

Full emphasis has to be placed on HSN classification. The section has no

role in the classification; the chapter title is for ease of reference, and the
most important part is the chapter notes and heading notes.

The second step is looking at the GIR; the rules have to be applied in a
sequence.

The last resort is the other rules of classifications that are based on
function, utility, shape and design, scientific relevance of the goods,
trade parlance theory, and popular opinion theory will be applied.

Collector of Customs v. Mastro Motors Ltd, AIR 2005 SC 1492:

How we apply the GIR while reading the exemption notification. Whether
these rules are binding or the notification exempting goods from GST will
be binding?

On what basis can the exemption notification be challenged? Can Art. 14

be the ground for challenge?

Importing the completely knocked down car, should it be classified as

components of a car or as a car? Any goods that are cleared as
unassembled but have similarities with finished goods, then they should
be classified as complete goods. If it is goods that are cleared in parts,
then it is classified as complete goods. But if only the parts are cleared,
then it is just parts and not complete goods.

Railway coaches are manufactured in coach factories, but for

classification, it is the coach itself.

Importing goods in different consignments at different ports – also used

as colourable devices to avoid classification as finished goods.

If in the exemption notification, the tariff heading is specifically

mentioned, then GIR will apply. The goods must fulfil all the criteria of
the heading mentioned number to avail the exemption. However, if an
item is specifically mentioned without any heading, then an exemption
can be made available. But revenue can deny the benefits, because of the
purpose of classification, it will be part of that heading, and the benefit of
notification might not be passed on. The SC clarified that for the purpose
of classification, it might be complete goods, but for exemption, it will be
parts of the goods only.

Rule 2(a) GIR (Applicable only if goods are cleared in part) – any
reference to incomplete goods will be finished products if it has the
essential characteristics of the finished product. READ this case

Salora International Ltd v. CCE 2012 284 ELT 4 SC

UOI v. Tara Chand AIR 1971 SC 1558

Rule 3 – Relevant in the absence of 2(b)

2(b) - Mixture or combination of two goods. How goods are classified

according to their essential function. Ex – Pencil with eraser, how to
classify this? A pencil is an essential tool. If goods are fixed with many
goods, then maybe both goods require equal consideration. Then rule 3
applies.

3(a) – If it is possible to classify goods in two entries, where one is

general and the other is specific, then the specific will prevail over the
general entry. For the kitchen sink, there are two entries: Sanitary wares
and household articles made from iron and steel.

CCE v. Wockhardt Life Sciences Pvt Ltd 2012 277 ELT 299 SC: on
Rule 3, dispute between specific entry and residuary entry. Specific entry
v. residuary entry within same chapter. The question was regarding
whether the product is to be classified as medicine or medicated
detergent. For example products like cleansing articles for removing
bacteria before operating, whether such cleansing solution will be
medicine or detergent? Whether it has any therapeutic use or
prophylactic use (measure of precautionary use). It has prophylactic
effect and hence it is a medicine not a detergent.

CCE v. Minwool Rock Fibres Ltd 2017 What if both entries are
specific? The entry that gives a beneficial interpretation to the assessee
then it will prevail.

If both headings are general then rule 3© will apply. The heading that
comes last in numerical order will apply.

Rule 3(b) is for composite goods, goods that are mixture for composition
of goods. Mobile phone is composite goods which contains so many
systems like audio, video. A might purchase a phone for camera but the
primary purpose of mobile is telephonic, so it should be classified as
mobile only. Even if the product is bought because of certain other
incidental characteristics. Here essential/Principal function test is
applied.

Rule 4: If it is not possible to classify as per the above-mentioned rules

then classify the goods as most similar goods, something that is
commercially exchangeable.

Rule 5 applies only to the packing materials and parts. For instance,
purchase of gun case, it should be classified with that product itself not
separately.

Rule 6 only says that if we use comparison between two headings or sub-
headings. The rule is heading can be compared only with heading and
sub-headings with sub-headings. Cross-comparison is not allowed.
CCE v. Cilns Labs and CCE v. Time Pharma 2013 14 SCC 133:
Medicine v. Cosmetics Product named mosturics is medicine or a
cosmetic. This product was used for dry skin conditions. It is available
without medical prescription. Can something that is purchased without
prescription be termed as medicine? Prescription cannot be the sole
criteria, because many medicines are available off the shelf.

This product has the prophylactic value and maybe in long term it can
cure the problem of dry skin. The ingredients used in its products clearly
shows its prophylactic value. Assessee also submitted prescriptions of
dermatologist, so it showcases its medicinal use. But SC decided on the
basis of prophylactic use.

Care versus cure principal was laid down by the SC in this case. If the
primary function of the product is care then it is cosmetics, if it is to cure
then it is medicine. We have to look into the primary function not the
long term effect.

For ayurvedic medicine, we have to look into the ingredients used. If the
ingredients are part of ayurvedic textbooks like charak Sanhita then it
will be considered ayurvedic medicine.

Pleasant time products v. CCE 2009 SC: difference between game

and puzzle. Puzzle – outcome is fixed but in game anything can happen.
Outcome is pre-decided and you have to achieve it in puzzle. Prison time
is neither educational game nor puzzle.

Tata Motors v. CCE 2008 222 ELT 289 SC

CCE V. Hindustan lever Ltd 2015 SC

CCE v. HP India sales Pvt Ltd 2007 8 SCC 404

Steps for classification under GST

1. Nature of supply- is it supply of goods or supply of services:
definition of goods/services; Schedule-II defines what constitutes
supply of goods and supply of services.
2. Rate of taxation for goods- exempted; NIL; 5%; 18%; 40%. Rely
completely on HSN, Rules & other principles of classification.
3. Rate of taxation for services- exempted; NIL; 5%; 18%; 40%. Rely on
Service Accountancy Code [with explanations].
4. Composite supply [Section 2(30] v. mixed supply [Section 2(74) read
with Section 8 of CGST Act].

COMPOSITE SUPPLY V. MIXED SUPPLY

Composite supply, as per Section 2(30), is supply by one taxable person
to another, has the following conditions
 i. Supply by a taxable person;
ii. Two or more taxable supplies;
iii. Supply has to be naturally bundled;
iv. Supply has to be in conjunction with each other;
v. Supply has to be made in the ordinary course of
business; and
vi. One of it has to be a principal supply.
a) The first step is to identify if it is a composite supply: if the first
five conditions are fulfilled, it is a composite supply.
b) The second step is to identify the principal supply- if it is supply
of goods or supply of services. If it is goods, rules regarding place
and time of supply of goods will apply. If it is services, rules
regarding place and time of supply of services will apply.
c) If principal supply is identified, the rate of tax is identified-
exempted; NIL; 5%; 18% and 40%.

Mixed supply, as per Section 2(74), has the following conditions:

i. Supply by a taxable person;
ii. Two or more taxable supplies;
iii. Supply for a single price (for instance, two different
supplies with two different invoices and with two different price
structures is composite supply and each is an individual supply, in
itself- this cannot be used as a colourable device for price
determination using another invoice; for mixed supply, there has to
be one single invoice).
iv. Supply has to be in conjunction with each other; and
v. Supply has to be made in the ordinary course of
business.
Mixed supply does not have goods/services naturally bundled.

Both the above have to be read with Section 8 for rates of taxation.

For instance, works contract and restaurant services are identified as

composite supply in Schedule III.

For example, accommodation services with breakfast is a composite

supply. Here, renting the property is the principal supply and
accordingly, the rate would apply (not for the restaurant service). Repair
& maintenance costs for 3 years, while purchasing the car, is a case of
composite supply- principal supply is supply of car.

Supp Supply 2 Natural In In the Composi Exampl

ly 1 ly conjunct ordinar te e
Bundle ion y course supply
d of
busines
s
Taxab Taxable Yes Yes Yes Yes Air
le travel
 and
flight
meal
Taxab Exempte Yes Yes Yes No Supply
le d under of food
Section with
11, CGST alcohol
Act

Note: Both the supplies have to be taxable, in order to constitute a

composite supply.

Pricing is not a criterion for composite supply- it can be priced

individually or at one price. But there can be two different prices and two
different invoices, and this can still constitute a composite supply since it
can be a colourable device to minimize liability. For example, renting of
hotel with breakfast- breakfast is separately availed and invoice is
separately given, it is still a case of composite supply. This can amount to
anti-avoidance measure since the rate of taxation is lower and hence, is
treated as composite supply. The criteria is to look at whether the
goods/services are naturally bundled- if the customers
normally/reasonably expect the supply together from the supplier in
conjunction and in ordinary course of business. Hence, there cannot be
any artificial division to minimize liability.

For example, supply of gift hamper which includes fruits and nuts, cakes,
aerated water etc. Each of these are taxable at different rates. Section 8
states that the highest rate amongst them will apply for the entire gift
hamper- this is a case of mixed supply. Here, the seller has to sell it in a
combination; if the buyer asks the seller to bundle 6-7 items, it is not
mixed supply.

For example, A has rented accommodation to B for Rs. 50,000 per month.
The ground floor is utilized by B for coaching classes; first floor for
residence. This is a case of mixed supply (not naturally bundled; supplied
for a single price). Rent for residence is exempted from GST (not
taxable); rent for commercial activity is taxable under GST. Landlord has
to pay GST rate of 18% on entire Rs. 50,000. If one has to avoid this,
landlord can rent Rs. 30,000 for residence and Rs. 20,000 for commercial
activity and minimize liability.

Cable Corporation of India Ltd., 2018, AAR Maharashtra

The applicant was engaged in supply of cable and along with it, provided
the supply of laying down the cable and termination of cable at the user
end. Applicant executed two agreements (two prices) with the customers-
one for supply of cable and one for supply of services, including survey,
installation/laying down, commissioning and termination of cable. The
agreements have a “cross fall breach clause”- if one agreement is
breached, the second agreement is automatically breached. Even if it is
for two different prices, the working of one agreement is dependent on
the working of another agreement- both are naturally bundled. Hence,
despite not having one single price, it is a case of composite supply. The
principal/dominant supply could be supply of cable (supply of goods).
Principal supply is defined in Section 2(90).

If the principal supply here is laying down/commissioning/termination of

cable, it is supply of services. The next question is whether it is works
contract (supply of immoveable property). Cable is immoveable goods
and hence, a works contract. In this case, it was held that supply of cable
is incidental supply and laying down cable is the principal supply- this is
because without installation of cable, there is no use.

For example, University purchases centralized air conditioning, including

installation, commissioning etc. It is a case of composite supply. Here,
the principal supply is installation, commissioning, etc. If it were a split
AC, then supply of AC would be the principal supply. What is a principal
supply would depend on the substance of the contract.

CCE v. Grasim Industries 2018 360 ELT 764 (5 judge bench): SC

held that it is not necessary that there should be a direct relation
between the measure and nature of levy. Reasonable nexus is sufficient
to determine a taxable event.

United Engineering Works 2019 AAR Karnataka:

1. Identify whether it is a composite supply or a mixed supply.

2. If CS, then identify what the principal supply is in this (PS of goods
or services)

3. If PS of service, then it can be bifurcated into Supply as a general

service or as a works contract.

The applicant was a manufacturer and supplier of pumping sets. The

appellant also provided installation facilities, commissioning and
electrification of the sets. The question was whether this was a composite
supply or not, and what the principal supply is.

Appellant argued that installation service is the Principal supply; further,

it is a works contract because after commissioning and electrification, it
becomes immovable property. Without electricity, its part cannot
perform its usual function. Revenue argued it was a supply of goods.

The court held in favour of the works contract.

RFE Solar Pvt Ltd 2019 AAAR Rajasthan: solar power generation
system. Case concerning the classification and tax rate of Engineering,
Procurement, and Commissioning (EPC) contracts for solar power
plants. RFE Solar appealed the AAR's decision to the AAAR, arguing that
the contract was predominantly for the supply of goods and should
qualify for a lower tax rate.

 Composite Supply and Works Contract: The AAAR confirmed

that the EPC contract was a "composite supply" and specifically a
"works contract" under the GST Act. A works contract involves the
supply of goods and services where the goods are used in the
course of executing the contract, resulting in the creation of an
immovable property.
 Solar Plant as Immovable Property: The AAAR determined that
a solar power plant, once installed, becomes an immovable
property. The court looked at the intention behind installing the
plant—that it is not for temporary use and is permanently attached
to the land—to define it as immovable property.
 Applicable GST Rate (18%): As a works contract for an
immovable property, the dominant nature of the supply is a service.
Therefore, the contract was taxable at the standard GST rate for
works contracts, which was 18%.
 Rejection of Lower Tax Rate: The AAAR rejected the appellant's
argument for a reduced 5% rate on the grounds that the contract
was a works contract involving the creation of an immovable
property, not a simple supply of goods. The lower rate was
applicable to specific renewable energy devices, but not to the
overall works contract for setting up the entire plant.

Sterlite Technologies Pvt Ltd. 2019 AAR Maharashtra: shows that

Sterlite Technologies Limited received rulings on the classification and
GST rate for setting up a telecom network.

In Health care system, IPD is exempted from GST. But an amendment

was made in 2021 regarding room rent; if the rent is more than 5k, then
it will be taxable. OPD services, purchase of medicine from outside are
taxable.

In the Education sector, all educational services are exempt from GST,
but commercial services like coaching or incidental services to education,
like a canteen, are subject to GST.

Ernakulam Medical Centre 2019 AAAR Kerala

Bombay HC Decision: Money collected from non-educational services,
but used for educational purposes, not for making a profit, then it won't
be taxable.

Restaurant, catering, sweet shops, etc

Pattabi Enterprises 2020 AAAR Karnataka, Macromedia Digital

Imaging Pvt ltd 2020 AAAR Karnataka, Maxwell company pvt ltd
2020 AAAR UP, Chhattisgarh textbook Corp AAAR Chhattisgarh
2019 Circular no. 11/ 11/ 2017: On printing and other things.

Textbooks are non-taxable, but workbooks and e-books are taxable under
GST because it is a service.

Vista Marina and Hydraulics 2019 AAAR Kerala, Premier Car Sales
Pvt Ltd. 2021 AAAR UP, Gujarat Narmada Valley Fertilisers and
Chemicals Ltd 2021 AAAR Gujarat, NEC Technologies India Pvt
Ltd. 2020 AAAR Gujarat: On Repair and maintenance services.

JVVNL 2021 Raj HC 15 Feb 2021: Torrent Power Ltd v. UOI 2019
Guj HC and Circular no. 34/8/2018