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6 : Value of taxable supply of goods or services or both

Value of taxable supply of goods or services or both

6.1 Transaction value is basis for valuation
The value of a supply of goods or services or both shall be the transaction value, that 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 - section 15(1) of CGST and SGST Act.
Conditions for accepting transaction value for valuation - The conditions for accepting transaction value are -
(a) supplier and recipient should not be related (b) price is sole consideration.
Reasonable nexus between measure and nature of levy of tax is sufficient . - It is not necessary that there
should be direct relation between measure of levy and nature of levy. Measure is not controlled by nature of levy.
Reasonable nexus between measure and nature of levy of tax is sufficient - CCE v. Grasim Industries Ltd. (2018)
94 taxmann.com 312 = 360 ELT 769 (SC - 5 member bench).
6.1-1 Value does not include GST but includes other taxes
Any taxes, duties, fees and charges levied under any statute other than the SGST Act or the CGST Act or the
IGST Act or GST (Compensation to States for Loss of Revenue) Act; are includible in value, if charged
separately - section 15(2)(a) of CGST Act.
Thus, SGST and CGST will be payable on net value only.
'Value' for GST will not include IGST, CGST, SGST, UTGST and GST Compensation Cess. However, other
taxes (like entertainment tax or some other cess) will be includible if charged separately in invoice.
Value for payment of IGST, CGST and SGST in Kerala State would not include Kerala Flood Cess - As per
rule 32A of CGST Rules inserted w.e.f. 28-6-2019, Value for payment of IGST, CGST and SGST will not
include Kerala Flood Cess payable under clause 14 of Kerala Finance Bill, 2019.
'Value' does not include TCS under Income Tax Act - The Value does not include Tax Collected at Source
under Income Tax Act, as TCS is not a tax on goods but an interim levy on income - para 5 of CBI&C circular
No. 76/50/2018-GST dated 31-12-2018 as amended vide corrigendum No. 20/16/04/2018-GST dated 7-3-2019.
What is meant is that if amount of invoice is 100 and TCS is Rs 2, GST is payable on 100 and not 98.
6.1-2 Amount paid by recipient on behalf of supplier
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 - section 15(2)(b) of CGST Act.
This cannot cover 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.
However, if amount was contractual liability of supplier but paid by recipient on his behalf, that amount will be
includible in 'value' for purpose of payment of GST.
Even if this amount is addible in value, obviously payment will not be received in respect of this amount from
recipient. Normally, if payment is not received from recipient, proportionate input tax credit has to be reversed as
per section 16(2) of CGST Act. However, in such cases, it will be deemed that the payment has been received.
Thus, reversal of proportionate input tax credit will not be required – second proviso to rule 37(1) of CGST
Rules, inserted w.e.f. 13-6-2018.
This second proviso should apply with retrospective effect, though the rule does not specifically say so.
6.1-3 Incidental expenses incurred before supply

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Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply,
including any amount charged for anything done by the supplier in respect of the supply of goods or services or
both at the time of, or before delivery of the goods or, as the case may be, supply of the services are includible in
value - section 15(2)(c) of CGST Act.
Thus, expenses like weighment, loading in factory, inspection, testing before supply will be includible in 'value'.
Design charges incurred before supply will also be includible.
Development charges like design and tooling are includible in value - Development charges like design and
tooling are includible in value these are necessary concomitant of final sale price - Tata Johnson Controls v.
State of Maharashtra (2017) 105 VST 107 (Bom HC DB). [decision in sales tax matter but principle applies in
GST also, as it is a composite supply].
6.1-4 Interest, late fee or penalty for delayed payment
Interest or late fee or penalty for delayed payment of any consideration for any supply is includible in value - -
section 15(2)(d) of CGST Act.
The term 'delayed' obviously means 'delay beyond agreed terms'. This interpretation can also be justified because
the word 'interest' has been used with the words 'late fee' or 'penalty'. This is on the principle of 'Noscitur a
sociis'- Meaning of a word should be gathered from its context i.e. by associate words.
Thus, GST should not be leviable on normal interest payable by recipient as per agreed terms of contract.
This is also justifiable from the fact that 'interest' is an exempt supply as per Notification No. 12/2017-CT (Rate)
and No. 9/2017-IT (Rate) both dated 28-6-2017, effective from 1-7-2017.
GST on penal interest on EMI (Equated Monthly Instalment) - Often loan granted for purchase of goods is
repaid in Equated Monthly Instalments (EMI). The EMI includes both principal and interest. If EMI is not paid
within scheduled time, additional/penal interest is charged. CBI&C, vide circular No. 102/21/2019-GST dated
28-6-2019 has clarified as follows -
(a) If the seller himself grants EMI instalments - In this case, if the seller charges penal interest, it will be
part of value of goods as per section 15(2)(d) of CGST Act and GST will be payable by seller, even if
charged separately at rate applicable to sale of goods.
(b) If loan is provided by finance company directly to the buyer - If loan is granted by finance company or
Bank to buyer, the seller of goods is out of picture once sale is made. The buyer pays EMI and penal
interest amounts to finance company/Bank. In this case, the interest (including penal interest) is exempt
under Sr. No. 27 of Notification No. 12/2017-CT (Rate) dated 28-6-2017.
In Infrastructure Development Finance Co. Ltd. v. ACIT (2019) taxmann.com 205 (Mad HC), it has been held
that liquidated damages recovered from borrowers in case of default in case of payment of interest and other
dues (which was 2.10%), was really 'interest'. [Decision under section 10(23G) of Income-tax Act but principle
can apply to GST)].
In a contrary view, it was held that Receipt of penal charges by finance companies on delayed payment of EMIs
would be receipt of amounts for tolerating act of their customers for having delayed/defaulted on their EMI
payments and would be taxable as supply as per Sr. No. 5(e) of Schedule II of CGST Act - Bajaj Finance Ltd., In
re [2018] 99 taxmann.com 236 (AAR - Maharashtra). - confirmed in Bajaj Finance Ltd. In re (2019) 108
taxmann.com 1 (AAR - Maharashtra), where it was held that this can get covered under 'tolerating an act or
situation'.
No GST in delayed payment charges/interest recovered on supply of electricity, as electricity is exempt - In
Madhya Pradesh Poorv Kshetra Vidyut Vitaran Co. Ltd. In re (2019) 72 GST 63 = 101 taxmann.com 100 (AAR-
MP), it was held that distribution and supply of electricity is exempt. Delayed payment surcharge (interest) is not
a separate service. It is included in value of supply and it is also exempt - same view in TP Ajmer Distribution
Ltd., In re (2019) 103 taxmann.com 227 (AAAR- Rajasthan).
No GST on delayed payment charges recovered from clients by stock broker - A stock broker, who is engaged
in business of purchasing and selling of shares on behalf of clients on Stock Exchange platform, is not liable to
pay GST on delayed payment charges collected from clients - SPFL Securities Ltd., In re [2019] 76 GST 141 =
109 taxmann.com 109 (AAAR-Uttar Pradesh). [The applicant had relied on FAQ No. 80 issued by CBI&C on
banking sector on 27-12-2018, where it was clarified that GST is not payable on delayed payment charges for
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debit for settlement obligation or margin trading, as this is in nature of loan and advances and interest is not
taxable].
There is exactly contrary view in Indo Thai Securities Ltd. In re (2019) 111 taxmann.com 104 (AAR-MP), where
it has been held the additional amount for delayed payment which is termed as interest, late fee or penalty is part
of stock broking service and is includible in value for GST purposes.
In my view, if interest is charged, there should be no GST, but some amount in nature of penalty is charged, GST
should be leviable on these amounts.
6.1-5 Tax payable when value is inclusive of GST
Legally, GST is to be indicated separately in tax invoice. However, provision has been made for situations where
GST is not shown separately in tax invoice.
If value of supply is inclusive of IGST, CGST, SGST or UTGST, the tax payable will be calculated by back
calculations as follows—
Tax amount = [Value inclusive of tax × Tax rate in % of IGST or CGST plus UTGST/SGST]/(100 + sum of
applicable tax rates in %). - rule 9 of Valuation Rules - Rule 35 of CGST and SGST Rules, 2017.
Note that the provision applies only the value of supply included GST. The rule does not say that the value is
deemed to be inclusive of GST.
For example, when GST is payable under reverse charge, the amount charged by supplier of goods or services
cannot be taken as inclusive of GST.
Illustration - If value inclusive of IGST is Rs. 1180 and IGST rate is 18%, integrated tax amount (IGST) =
(1,180 × 18)/(100+18) = 21,240/118 = 180. Value = 1,000. Check that value plus integrated tax = Rs. 1,180.
6.1-6 When demand is raised for past period
If a person has not paid GST and demand is made later, issue arises whether the amount charged by him should
be taken as inclusive of GST or exclusive of GST.
If goods are cleared without payment of duty and later demand is raised, the invoice value should be taken as
cum-duty price and duty payable should be calculated by back calculations - CCE v. Maruti Udyog 2002 AIR
SCW 1039 = 141 ELT 3 = 2002(3) SCC 547 = 49 RLT 1 = 122 Taxman 105 (SC 3 member bench) - review
petitions and civil appeal dismissed by 3 member bench of SC on 9-12-2004 (179 ELT A102) - informed to trade
and earlier circular No. 749/65/2003-CX dated 26-9-2003 withdrawn - CBE&C circular No. 803/36/2004-CX
dated 27-12-2004 - also quoted with approval in CCE v. Dugar Tetenal India Ltd. (2008) 224 ELT 180 (SC).
Let us hope that the case law will be valid in GST also.
However, since Input Tax Credit is not admissible if invoice is beyond one year, ITC cannot be availed.
6.1-7 GST on outward freight, packing and other charges in tax invoice
In case of FOR basis contracts, the supplier arranges transport. In that case, he pays GST under reverse charge on
outward freight. He then charges outward freight in the tax invoice. In such case, the outward freight charged is
part of value of goods and GST is payable on value including outward freight. Similarly, packing charges,
weighment charges and other charges are includible in value for levy of GST. The GST rate is same as applicable
to goods, as this is a composite supply as per section 2(30) of CGST Act.
It is not correct to charge freight separately and charge GST @ 5% as the service of supplier of goods is not
Goods Transport Agency Service at all.
In FAQ Nos. 28 and 29 of FAQ on Mining issued by Directorate General of Taxpayer Services on 31-7-2017. It
has been clarified that in case of FOR contracts, it is a composite contract and GST is payable on outward freight
(GST rate will be same rate as for goods, as clarified in FAQ No. 29). The supplier will pay GST on reverse
charge on the freight charged by GTA and the credit of same will be available. - - In case of ex-works contract,
the service tax on GTA will be paid by buyer under reverse charge and he can take its ITC. This will be so when
goods are booked by supplier but freight is paid by recipient (buyer).
6.2 Subsidies directly linked to supply other than Government subsidies
Subsidies directly linked to the price excluding subsidies provided by the Central and State Governments are
includible in 'value' for charge of GST.
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Explanation.—The amount of subsidy shall be included in the value of supply of the supplier who receives the
subsidy - section 15(2)(e) of CGST Act.
This is also made clear in definition of 'consideration' in section 2(31) of CGST Act.
Subsidy payable to suppliers by person other than Government when part of sale price - In Ponni Sugar
(Erode) Ltd. v. DCTO (2005) 142 STC 543 (SC), it was held that total amount of consideration, including other
amounts which represent the expenses required for completing the sale are includible in taxable turnover, as the
seller would ordinarily include all of them in the price at which he would sale the goods. In this case, it was held
that transport charges for bringing sugar cane from factory to mills, incurred by mill owner, are includible in
taxable turnover, as otherwise, the seller would be required to incur these expenses. This would be so even if the
cane growers were to receive transport subsidy from the purchaser (sugar mill owner).
Any subsidy paid to suppliers or to others on behalf of suppliers to ensure scheduled delivery is component of
selling price. These are not post sale expenses - EID Parry v. ACCT (2000) 2 SCC 321 = 2000 AIR SCW 86 =
117 STC 457 = AIR 2000 SC 551 [In this case, the sugar factory had paid planting subsidy to cane growers
(suppliers) and transport subsidy to transporters. The cane growers were to give delivery at the factory gate.
Hence, it was held that if the subsidy was not given, the suppliers would have to spend the amount and would
have included these payments in the sale price].
Subsidy received from Government was not includible even earlier - In Neyveli Lignite v. CTO 124 STC 586 =
(2001) 9 SCC 648 = 2001 AIR SCW 3917 (SC 3 member bench), it was held that subsidy received from
Government of India under Fertilizer (Control) Order is not part of taxable turnover. It is de hors the contract of
sale with buyer. - followed in EID Parry v. ACCT (2002) 126 STC 112 (Mad. HC DB).
In COT v. Bongaigaon Refinery (1999) 114 STC 26 (Gau HC DB), it was held that subsidy received from oil
pool account for difference between ex-factory price and retention price is not part of sale price - - view
confirmed in COT v. Bongaigaon Refinery (2006) 147 STC 358 (SC).
Subsidy not connected with specific sale not includible? - It may be noted that a general subsidy which is not
specifically connected to sale of any specific goods will not be includible.
In Tisco General Office Recreation Club v. State of Bihar (2002) 126 STC 547 (SC), appellant, a dealer, was
running canteen for employees of the company. The prices were below cost price. However, TISCO, without any
statutory obligation, as a staff welfare measure, was making good the excess of expenditure over income. The
subsidy was not relatable to any item of food. It was held that the lump sum subsidy made ex gratia cannot form
part of sale price [validity of this judgment in GST will have to be tested, as value for purpose of GST is
transaction value only if price is 'sole consideration'].
6.3 Discount or incentive given after supply
The value of the supply shall not include any discount that is given:
(a) before or at the time of the supply provided such discount has been duly recorded in the invoice issued
in respect of such supply; and
(b) after the supply has been effected, provided that (i) such discount is established in terms of an
agreement entered into at or before the time of such supply and specifically linked to relevant invoices;
and (ii) input tax credit as is attributable to the discount has been reversed by the recipient of the supply
- section 15(3) of CGST Act.
Thus, discount after supply is permissible as deduction only if it was known before or at the time of supply.
There is provision of issue of 'credit note' for deficiency in supply. However, section 34(1) of CGST and SGST
Act do not make provision for issue of credit note for passing of discount which was not contemplated at the
time of supply.
Further, if incidence of GST and interest has been passed on to another person, reduction in output tax liability of
the supplier shall not be permitted - proviso to section 34(2) of CGST and SGST Act.
Ad hoc discount given after supply is not eligible for deduction from 'value' – In UltraTech Cement Ltd., In re
[2018] 95 taxmann.com 289 (AAR - Maharashtra), the post supply amounts were paid to the Dealer towards
"rate difference" and "special discount" There was no pre fixed criteria, basis or rationale for arriving at the
quantum of these discounts. It was held that these discounts are not complying with the requirements of section

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15(3)(b)(i) of the CGST Act and therefore cannot be considered and allowed as discount for the purpose of
arriving at the 'transaction value' in terms of Section 15 of the CGST Act.
However, in my view, credit note without GST can be issued by supplier. In that case, the recipient can avail
entire ITC of GST charged by supplier, as credit note is as good as 'payment made to supplier' and hence any
reversal of ITC is not required.
Giving trade discount after sale is a regular trade practice - In Maya Appliances P. Ltd. v. ACCT (2018) 2 SCC
756 = 90 taxmann.com 317 = 66 GST 210 (SC 3 member bench), giving benefit of discount at a point of time
subsequent to original sale/purchase is a regular trade practice and qualifies for deduction. All regular trade
discounts are allowable as permissible deductions. It is a matter of common experience that in the present
contemporary competitive market, trade discounts not only are dependent on variable factors but also might be
strategically not disclosable at the time of original sale/purchase – confirming Southern Motors v. State of
Karnataka (2017) 3 SCC 467.
Trade discount can be given later through credit note - In IFB Industries Ltd. v. State of Kerala (2012) 4 SCC
618 = 49 VST 1 = AIR 2012 SC 1466 = 295 ELT 186 (SC), it was held that trade discounts are allowable as
deduction even if not shown in invoice but given separately by credit note - same view in T V Sundaram Iyengar
v. State of Karnataka (2012) 51 VST 249 (Kar. HC DB) * State of Karnataka v. Reliance Industries Ltd. (2012)
51 VST 274 (Kar. HC DB) * Nagarjuna Fertilizers v. ACCT (2012) 51 VST 453 (WBTT) * Pratham Motors (P.)
Ltd. v. ACCT (2014) 51 taxmann.com 74 = 71 VST 522 (Kar. HC DB) * Southern Motors v. State of Karnataka
(2017) 3 SCC 467 = 59 GST 502 = 77 taxmann.com 251 = 98 VST 207 (SC).
Trade discounts given on basis of performance of dealers in the previous quarter is allowable as deduction from
value – Maya Appliances v. ACCT (2018) 66 GST 210 = 90 taxmann.com 317 (SC).
The statutory provision in respect of discount is clearly against normal business practice.
Supplier can issue credit note with GST or without GST - As per section 34(1) of CGST Act, credit note with
GST can be issued only by supplier. Supplier can issue credit note with GST if tax charged in invoice exceeds
the tax payable or where goods are returned or where goods or services are found to be deficient.
As per section 34(1) of CGST Act as amended vide CGST (Amendment) Act, 2018 w.e.f. 1-2-2019, one credit
note can cover multiple invoices [ease of doing business].
This credit note with GST reduces the GST liability of supplier and reduces availability of Input Tax Credit of
the recipient.
In case of discounts, such discount can be passed on in tax invoice itself at the time of supply.
Such credit note can be issued after supply of goods or services only if such discount was established by
agreement before or at the time of supply and specifically linked to relevant invoices, i.e. discount was known at
the time of supply though quantified and passed on later.
In my view, even if discount was known at the time of supply, credit note without GST (financial credit note) can
be issued and in that case, any adjustment of GST liability of supplier and ITC eligibility of recipient is not
required, as issue of credit note with GST is not mandatory under section 34(1) of CGST Act. It is only a facility.
Often, such discount is passed on after supply due to commercial reasons after negotiations, where such discount
was not contemplated at the time of supply.
In such case, the supplier can issue credit note without GST (termed as financial credit note). This view is
confirmed in Para D of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.
In such case, GST liability of supplier and ITC eligibility of recipient does not get affected.
Issue of credit note by supplier is as good as receiving payment from recipient and hence reversal of ITC by
recipient under section 16(2)(c) of CGST Act is not required.
If supplier does not issue credit note, recipient should issue debit note without GST - If supplier does not issue
credit note, recipient should issue debit note without charging GST. If he does not do so, it can be argued that the
recipient has not made full payment to supplier and hence proportionate ITC is reversible as per provisions of
section 16(2)(c) of CGST Act.
It may be noted that debit notes and credit notes are accounting methods of making and receiving payments.

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No adjustment of GST on bad debts - There is no provision for adjustment of GST in case of bad debt - FAQ
No. 48 issued by CBI&C on banking sector on 27-12-2018.
6.3-1 Quantity discounts - Buy more, save more - Discounts known before supply
In some cases, discounts are known before supply of goods or services but may be given after supply. In some
case, staggered quantity discounts are offered based on quantity purchased by recipient.
Para C of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 clarifies as follows -
Discounts offered by suppliers to customers (including staggered discount under 'Buy more, save more scheme'
and post supply volume discounts established before or at the time of supply) are excluded to determine value of
supply if such discount fulfils requirements of section 15(3) of CGST Act. Recipient is required to reverse ITC.
However, supplier is entitled to full ITC of inputs, input services and capital goods in relation to supply of goods
or services or both on such discounts (i.e. it is not necessary to reverse ITC proportionate to such discounts).
6.3-2 'Buy one get one free' or 'one item free' offers
Often there are schemes like two soaps at the price of one or free tooth brush with tooth paste. Really, it is not
'free supply'. In fact, it is case of two or more supplies with a single price. At the most, it can be treated as supply
of two goods for the price of one. In such cases, rate of tax will depend on whether it is composite supply or
mixed supply. Further, ITC will be available in relation to supply of goods or services or both as part of such
offer Para B of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.
6.3-3 Discounts offered after supply - Secondary discounts
Often, discounts are offered after supply of goods or services are made. Such discounts are not known before
supply. In such cases, financial/commercial credit note(s) can be issued without GST. The recipient of goods or
services can avail entire ITC of GST charged by supplier in his original invoice - Para D of CBI&C circular No.
92/11/2019-GST dated 7-3-2019.
This view was reiterated in para 5 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019. The CBI&C
circular dated 28-6-2019 has been withdrawn ab initio vide CBI&C Circular No. 112/31/2019-GST dated 3-10-
2019.
Really, departmental circular is not a statutory provision. The departmental circular only explains department's
view on any matter, which is not binding on assessee (In fact, it is not binding on department also). Thus, if
circular explains some provision which is legally correct, it continues to be valid even after withdrawal of
circular.
In my view, the aforesaid provision as explained in CBI&C circular dated 28-6-2019 is legally correct and
continues to be valid, even if circular has been withdrawn [In this case, it is more so as that provision was
explained in earlier circular dated 7-3-2019 also].
Financial/commercial credit note means credit note other than that specified in CGST Rules, i.e. without any
GST implication.
This is correct as credit note is one mode of adjusting liability and issue of credit note means payment has been
received by supplier in full.
Often, discounts are offered after supply of goods or services are made. Such discounts are not known before
supply. In such cases, financial/commercial credit note(s) can be issued without GST. The recipient of goods or
services can avail entire ITC of GST charged by supplier in his original invoice, without reversal of ITC - Para D
of CBI&C circular No. 92/11/2019-GST dated 7-3-2019 - view reiterated in para 5 of CBI&C circular No.
105/24/2019-GST dated 28-6-2019.
Post sale discounts without requiring dealer to do any further act - In some cases, post sales discounts are
given by manufacturer or wholesaler (supplier) to dealer without any further obligation or action required at the
dealer's end. Such post sale discount will relate to original supply of goods. It would not be included in value of
supply if conditions of section 15(3)(b) of CGST act are satisfied i.e. discount was known prior to supply. In
such case, credit note with GST can be issued as per provisions of rule 53 of CGST Rules. If such discount was
not known prior to supply, financial/commercial credit note can be issued without GST. In that case, reduction is
GST liability is not possible, but the recipient of goods or services is not required to reverse the Input Tax Credit
of tax charged to him in the invoice of supplier - paras 3 and 5 of CBI&C circular No. 105/24/2019-GST dated
28-6-2019.
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The CBI&C circular dated 28-6-2019 has been withdrawn ab initio vide CBI&C Circular No. 112/31/2019-GST
dated 3-10-2019.
Really, departmental circular is not a statutory provision. The departmental circular only explains department's
view on any matter, which is not binding on assessee (In fact, it is not binding on department also). Thus, if
circular explains some provision which is legally correct, it continues to be valid even after withdrawal of
circular.
In my view, the provision as explained in CBI&C circular dated 28-6-2019 is legally correct and continues to be
valid, even if circular has been withdrawn.
In Kwality Mobikes P Ltd. In re (2019) 110 taxmann.com 369 (AAR - Karnataka), the applicant had received
volume discount for sales and purchases of motor vehicles over and above the target. The credit note was issued
by supplier without GST. It was held that the credit note issued by dealer does not have any effect on the value of
supply. It is only financial document to account adjustment for incentives received. There is no effect on liability
of discount.
GST not payable on additional post sale discount given by supplier to dealer to augment sales - In some cases,
the dealer may have to sale the goods at lower prices (may be even below purchase price) to augment sales, due
to market conditions. In such cases the supplier (manufacturer/wholesaler) gives additional discount to the
dealer, to enable dealer to sale at lower prices. This additional discount is additional consideration by supplier of
goods (manufacturer/wholesaler) to the dealer. The dealer would be liable to pay GST on that amount - para 4 of
CBI&C circular No. 105/24/2019-GST dated 28-6-2019.
The CBI&C circular dated 28-6-2019 has been withdrawn ab initio vide CBI&C Circular No. 112/31/2019-GST
dated 3-10-2019.
The circular said that this additional consideration would be liable to be added to the consideration payable by
the customer for the purpose of arriving value of supply in the hands of dealer. However, the final customer can
get ITC only on basis of amount paid by him.
For example, normal sale price of a product is Rs. 1,00,000. However, in view of market conditions, the dealer is
able to sale the product only at Rs. 75,000. In that case, the supplier (manufacturer/wholesaler) may give
additional discount of (say) Rs. 20,000 to the dealer. In that case, the dealer is liable to pay GST on Rs. 95,000
[Rs. 75,000 sale price plus Rs. 20,000 additional consideration received in form of additional discount].
However, the customer will be eligible to avail ITC (if he is otherwise eligible) on Rs. 75,000 only (as stated in
para 4 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019).
The CBI&C circular dated 28-6-2019 has been withdrawn ab initio vide CBI&C Circular No. 112/31/2019-GST
dated 3-10-2019.
Practically, what is stated in the circular not possible. The customer is not even aware of the additional discount
given by manufacturer/wholesaler to the dealer. He is aware of only net price to be charged to him. Thus, invoice
on him can be only for Rs. 75,000.
Further, if market conditions are bad, it is common business practice to lower prices so that goods get sold at
whatever price market can accept.
The circular was impractical as it was difficult to establish that such discount was (or was not) to augment sales.
To that extent what was stated in the circular dated 28-6-2019 was highly litigation prone and it is good that the
circular dated 28-6-2019 has been withdrawn.
Post Sale discount where dealer is required to do further act - In some cases, post sale discount is given by
manufacturer/wholesaler to dealer requiring dealer to undertake further obligation like special sales drive,
advertisement campaign, exhibition etc. In that case, the additional discount given is for undertaking such
activity and would be in relation to service supplied by dealer to supplier of goods (manufacturer/wholesaler). In
that case, the dealer will be liable to issue tax invoice to supplier (manufacturer/wholesaler) and charge GST. The
supplier of goods (manufacturer/wholesaler) can take Input Tax Credit of such tax of GST charged to him by the
dealer - para 3 of CBI&C circular No. 105/24/2019-GST dated 28-6-2019. The CBI&C circular dated 28-6-2019
has been withdrawn ab initio vide CBI&C Circular No. 112/31/2019-GST dated 3-10-2019.
In fact, in that case, it is not discount on sales, but payment for sales promotion expenses incurred by dealer on
behalf of manufacturer/wholesaler, though termed as discount. If some amount is paid by
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manufacturer/wholesaler for sales promotion, dealer should issue tax invoice to manufacturer/wholesaler and the
manufacturer/wholesaler can take Input Tax Credit of GST charged in the tax invoice of dealer. To that extent, in
my view, what is stated in the circular dated 28-6-2019 is correct.
However, it is difficult to establish that such discount was (or was not) for sales promotion expenses and to that
extent what was stated in the circular dated 28-6-2019 was highly litigation prone. It is good that the circular has
been withdrawn.
Issue of credit note means payment received by supplier - In Shiva Electricals v. CST (2007) 7 STR 35 = 3 STT
105 (CESTAT), it was held that issue of credit notes also amounts to payment (to recipient) - relying on Mohd.
Ekram Khan v. CTO 2004(6) SCC 1083 (SC), where it was held that issue of credit note to client is also a form
of payment - view upheld in CST v. Shiva Analyticals (2009) 21 STT 328 (Karn HC DB).
In MRF Ltd.,In re [2019] 75 GST 542 = 108 taxmann.com 65 (AAAR - Tamilnadu), applicant was getting post
sale, post supply and post issue of invoices discount. Thus, the appellant was making net payment to supplier
after deducting such discount. It was held that the appellant (recipient of goods or services) is not required to
reverse the ITC on such discount and issue of commercial credit note (without GST) is sufficient [reversing
decision in MRF Ltd. In re (2019) 73 GST 485 = 103 taxmann.com 278 (AAR-TN)].
In Kwality Mobikes P Ltd. In re (2019) 110 taxmann.com 369 (AAR - Karnataka), the applicant had received
volume discount for sales and purchases of motor vehicles over and above the target. The credit note was issued
by supplier without GST. It was held that the credit note issued by dealer does not have any effect on the value of
supply. It is only financial document to account adjustment for incentives received. There is no effect on liability
of discount.
Ad hoc discount given after supply is not eligible for deduction from 'value' - In Ultra Tech Cement Ltd., In re
[2018] 69 GST 188 = 95 taxmann.com 289 (AAR - Maharashtra), the post supply amounts were paid to the
Dealer towards "rate difference" and "special discount" There was no pre fixed criteria, basis or rationale for
arriving at the quantum of these discounts. It was held that these discounts are not complying with the
requirements of section 15(3)(b)(i) of the CGST Act and therefore cannot be considered and allowed as discount
for the purpose of arriving at the 'transaction value' in terms of Section 15 of the CGST Act.
However, as stated above, financial credit note without GST can be issued by supplier. In that case, the recipient
can avail entire ITC of GST charged by supplier, as credit note is as good as 'payment made to supplier' and
hence any reversal of ITC is not required.
6.3-4 Quantity Discount permissible
In some cases, quantity discount is given by way of additional supply e.g. 11 pieces are supplied for price of 10.
In Golden Tobacco Ltd., In re [2019] 106 taxmann.com 409 (AAR - Maharashtra), applicant, who was sellers of
cigarettes, intended to offer extra quantity of cigarettes (quantity discount) in addition to normal quantity against
same consideration as a taxable supply to its distributors. They intended to supply additional packs of cigarettes
along with regular supply of cigarettes without receiving any additional consideration for additional packs. It was
(indeed rightly) held that such extra packs of cigarettes wouldn't be exigible to GST
Case law in excise about quantity discount - In quantity discount, a dealer receives from the assessee a stated
extra quantity if he buys a certain other quantity. That this will happen is known and agreed at the time the
transaction is entered into. It is, therefore a trade discount and is allowable as deduction. - CCE v. Hindustan
Lever 2002(142) ELT 513 (SC 3 member bench).
Trade discount may be in form of cash discount or in the shape of goods. Quantity discount has precisely the
same effect as money discount, as in both cases, there is reduction in price charged to customers and hence
permissible - Queen's Chemists Mfg. Dept. v. CCE - 1979 (4) ELT (J 454) (Bom HC) - quoted with approval in
Guljag Chemical and Plastics Pvt. Ltd. v. CCE - 1993 (63) ELT 710 (CEGAT).
Case law in sales tax about quantity discount - Quantity discount given to stockists in form of additional
quantity (of medicines) for higher off-take is a form of trade discount. It is not includible in taxable turnover -
Mapra Laboratories v. State of Bihar (2004) 135 STC 157 (Pat HC DB) - same view in State of Tamil Nadu v.
Ultramarine and Pigments (1980) 46 STC 220 (Mad HC) * Dey's Medical Stores v. CTT (2004) 134 STC 14
(All HC) * Gulf Oil Lubricants v. CCT (2017) 59 GST 443 = 77 taxmann.com 231 (Ker HC).

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Year end quantity discount - Quantity rebate allowed as discount by dealer through credit notes at end of the
year as per scheme is allowable as deduction from value - Godavari Fertilizers v. CCT (2004) 138 STC 133 (AP
HC DB) - same view in State of AP v. T V Sundaram Iyengar (1987) 65 STC 41 (AP HC DB).
6.3-5 Input Tax Credit to be reversed if payment is not made to supplier within 180 days
As per second proviso to section 16(2) of CGST Act, if payment of invoice amount is not made to supplier
within 180 days, input tax credit is required to be reversed.
It seems that the intention is to avoid bogus transfers of input tax credit e.g. if a person has excess input tax
credit, he can pass on this credit to others. However, the remedy thought of seems to be worse than disease as
many genuine transactions will get affected. It is not clear why Government is acting as recovery agent of
suppliers.
Further, the provision of interest is baffling. Interest is compensatory in nature. Here, interest is payable even
when Government money was not used at all.
Often in case of large works contracts, some retention money is kept which is released after warranty period.
Further, some deductions from invoice for various reasons is common. In such case, this provision will create
great nuisance to taxable persons. Post-sale discounts after negotiations are common in business.
All such transactions will get affected. It will be necessary to issue credit notes and debit notes.
Pay tax with interest even if supplier has paid full tax to Government - an unfair provision - On one hand, post
supply discounts are not allowed as deduction from 'value' for GST. On the other hand, if less amount is paid to
supplier, corresponding input tax credit is required to be reversed with interest, even when entire tax amount has
been paid to Government by supplier. This is double whammy and absolutely unfair provision.
6.3-6 No unjust enrichment if discount amount returned to buyer by cheque or credit note
If credit note is issued after supply, its input tax credit can be adjusted in Electronic Credit Ledger.
Even otherwise, there is ample case law that if the discount amount is refunded by supplier by way of credit note
or cheque, there is no unjust enrichment and refund is admissible.
In UOI v. A K Spintex (2009) 234 ELT 41 (Raj HC DB), it was held that once credit note is issued to customer
who has issued corresponding debit note, bill amount minus amount of credit/debit note becomes price of goods.
In such case, incidence of duty cannot be assumed as passed on to purchaser. Doctrine of unjust enrichment does
not apply. Refund is not deniable - followed in* RPG Cables v. CCE (2009) 240 ELT 684 (CESTAT SMB)
*Hindalco Industries v. CCE (2009) 240 ELT 693 (CESTAT SMB) * CCE v. Sirpur Paper Mills (2010) 253 ELT
269 (CESTAT) [The decision was noted but not followed in SPBL Ltd. v. CCE (2010) 254 ELT 104 (CESTAT)].
Same view has been held in CCE v. Solaris Chemtech (2011) 273 ELT 191 (Karn HC DB) * Sudhir Papers v.
CCE (2012) 276 ELT 304 (Karn HC DB) * CCE v. Jineshwar Malleables (2012) 281 ELT 43 (Karn HC DB) *
CCE v. Gokak Mills (2013) 295 ELT 392 (Karn HC DB) * Hyderabad Chemical Supplies v. CCE (2015) 320
ELT 756 (AP HC DB) * CCE v. Bhushan Steel (2015) 319 ELT 347 (CESTAT).
In Thermo Heat Tracers v. CCE 2001(132) ELT 455 (CEGAT), it was held that once manufacturer has credited
buyer's account with disputed amount of duty, manufacturer took back incidence of duty on himself. In such
case, the question of buyer passing on the burden to third person does not arise. - same view in Indo Flogates
Ltd. v. CCE 1997(20) RLT 443 (CEGAT SMB) * Siltap Chemicals v. CCE 2006 (193) ELT 461 (CESTAT) *
CCE v. NVK Mohd Sultan (2008) 223 ELT 276 (CESTAT SMB) * CCE v. Modest Infrastructure (2011) 33 STT
278 = 14 taxmann.com 28 (CESTAT) - view confirmed in CCE v. Modest Infrastructure (2012) 37 STT 505 = 27
taxmann.com 6 (Guj HC DB).
6.4 Meaning of 'consideration'
'Consideration' in relation to the supply of goods or services or both to any person, includes
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for
the inducement of, the supply of goods or services or both, whether by the said person or by any other
person; but shall not include any subsidy given by Central or State Government.
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the
supply of goods or services or both, whether by the recipient or by any other person, but shall not
include any subsidy given by Central or State Government - section 2(31) of CGST Act.
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Clause (b) would cover service of 'refraining from act or tolerating an act or situation'.
6.4-1 Deposit is not consideration
A deposit, whether refundable or not, given in respect of the supply of goods or services or both shall not be
considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply
- proviso to section 2(31) of CGST Act.
Normally, term 'deposit' is used when amount is refundable and term 'advance' is used when amount is adjustable
(and not refundable). However, definition of 'consideration' envisages non-refundable deposit also.
GST is payable when advance is received. Hence, instead of receiving advance from customer, it is advisable to
receive 'deposit'. In that case, GST will be payable only when such deposit is adjusted against supply.
No GST on interest free refundable deposits received - In Maharashtra E-Square Leisure (P) Ltd. In re (2019)
73 GST 547 = 104 taxmann.com 258 (AAR - Maharashtra), it has been held that no GST is payable on
refundable interest-free security deposit received by lessor. However, if, at the time of return of deposit, some
amount is withheld, GST will be payable on such amount.
However, this will raise issues under Companies Act, 2013.
GST on notional interest on interest free refundable deposit? - In Rajkot Nagarik Sahakari Bank Ltd. In re
(2019) 76 GST 397 = 108 taxmann.com 515 (AAR-Gujarat), it was held that GST is payable on notional interest
on interest free refundable deposit [really no provision in law to consider notional income, except in case of
related party transactions].
6.4-2 Price should be 'sole consideration'
The term 'price is sole consideration' has been copied from valuation provisions in excise, customs and service
tax. This was required as excise duty or customs duty was on 'goods' and service tax was on 'services'. However,
in GST, the tax is on 'supply of goods or services or both'.
The 'consideration' should be for supply of goods or services or both. Since the input tax credit is integral part of
law of GST, the term 'supply' has to be read with reference to 'input' and 'input services' which are eligible for
Input Tax Credit.
6.4-3 Free supplies made by recipient and amortized cost of patterns, tools, dies etc. are not includible in
value for GST
In excise, customs and service tax valuation provisions, free supplies made by recipient are required to be added
for valuation. Similarly, amortised cost of patterns, dies, tools etc. supplied by customer are required to be added.
Controversy of 'reimbursement of expenses' which was there in service tax law will also arise.
As regards addition of amortised cost of tools and dies supplies by principal manufacturer (OEM i.e. Original
Equipment Manufacturer) to supplier of components, it has been clarified as follows – (a) The manufacturer who
has supplied the tools and dies on Free of Cost (FOC) basis is not required to reverse the ITC on such moulds
and dies (b) The component manufacturer is not required to add amortised cost of tools and dies in the value of
components supplied by him to the principal manufacturer (c) However, if the contract was that the component
manufacturer will himself manufacture and use the tools and dies but are supplied by OEM, then OEM has to
reverse the ITC and amortised cost of tools and dies is required to be added in value of components supplied by
manufacturer of components – CBI&C circular No. 47/21/2018-GST dated 8-6-2018.
This view has been accepted and followed in Lear Automotive India (P.) Ltd.,In re [2018] 100 taxmann.com 311
(AAR - Maharashtra) – same view in Toolcomp Systems (P.) Ltd.,In re [2019] 108 taxmann.com 107 (AAR -
Karnataka).
There was exactly contrary view in Nash Industries (I) (P.) Ltd.,In re [2018] 99 taxmann.com 134 = 71 GST 64
(AAR - Karnataka), where it was held that amortised cost of tools supplied by customer is required to be added
[seems CBIC circular was not brought to notice of Advance Ruling Authority]. Luckily, this decision has been
reversed in appeal in Nash Industries (I) (P.) Ltd.,In re [2019] 103 taxmann.com 91 (AAAR - Karnataka).
In my view, the circular and decision of AAR-Maharashtra and AAAR-Karnataka are correct, for following
reasons.
The tax is on 'supply' and not on 'goods or services' as such. Thus, only what is supplied should be added to
'value'.
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Further, addition of these amounts to 'value' is against the concept of Input Tax Credit principle as some costs
will be added to 'value' on which the supplier will not be able to avail any input tax credit.
This will also be against the second proviso to section 16(2) of CGST Act, which requires that value of goods
and tax thereon must be paid within 180 days, otherwise proportionate Input Tax Credit is required to be
reversed.
Thus, adding amortised cost of tools and dies and free supply items is not in harmony with section 16 of CGST
Act at all.
It is well settled that law has to be interpreted as whole and not piece meal, as per rule of Harmonious
construction, as discussed below.
In Moriroku UT India v. State of UP (2008) 224 ELT 365 = 15 VST 559 (SC), it has been held that there is no
provision of adding cost of tooling, etc., in UP Trade Tax Act and hence such cost is not addible.
Decision in case of construction services applies here also - The provision of adding value of free supplied
material to contractor (service provider) in case of construction services has been held invalid in Bhayana
Builders v. CST (2013) 42 GST 76 = 38 taxmann.com 221 (CESTAT LB). This decision has been upheld in CST
v. Bhayana Builders P Ltd. (2018) 3 SCC 782 = 66 GST 320 = 91 taxmann.com 109 (SC).
The ratio of this judgment should apply to tools, dies, fixtures also.
The decision was followed in case of supply of free diesel to transporter - CCE v. Karamjeet Singh & Co. Ltd.
(2018) 70 GST 821 = 100 taxmann.com 60 (SC).
In ABL Infrastructure v. CCE (2019) 72 GST 102 = 102 taxmann.com 262 (SC), contrary view of Tribunal was
upheld. However, it seems earlier decision of Supreme Court was not brought to notice of Supreme Court. The
judgment of Supreme Court is brief and without detailed reasons.
6.4-4 Returnable packing material
In some cases, goods are packed in returnable packing, like gas cylinder, drums etc. In such case, tax is payable
only on consideration received for the supply - S No. 61 of Tweet FAQ released by CBE&C on 26-6-2017.
Thus, it is not required to add amortised cost of durable and returnable packing.
6.4-5 Transaction value acceptable even if supply is below cost
In West Coast Paper Millsv.CCE [2018] 92 taxmann.com 287 (CESTAT), service was supplied to employees
against consideration. There was no allegation by revenue that such consideration received by assessee had been
understated. Hence, it was held that there was no scope for varying taxable value [really doubtful, as in such case
price is not the sold consideration. Lower price was charged only because it was indirect (cashless) benefit to
employees.
6.4-6 Charity (Dharamda) is not includible in value
In D J Malpani v. CCE (2019) 9 SCC 120 = 106 taxmann.com 29 = 74 GST 407 = 366 ELT 385 (SC 3 member
bench), assessee was collecting dharamda (charity) separately in invoice. It was voluntary on purchasers. The
charity amount collected was not taken as income of assessee. It was observed that dharamda is means 'an alms
or a gift in charity'. Dharamda is not includible in assessable value, as it is not consideration for sale [the
decision in case of Central Excise but principle should apply under GST also].
6.4-7 Value of goods transport service to include diesel supplied free by customer?
In Navodit Agarwal In re [2019] 73 GST 636 = 104 taxmann.com 420 (AAR-Chhattisgarh), the appellant was
providing goods transport service of cement. The recipient of service was supplying diesel free to the appellant
(transporter of goods). It was held that cost of free diesel is includible in value of goods transport service, as
diesel is important and integral part of business process of transport of goods.
This decision can be justified in view of peculiar provisions in respect of Goods Transport Agency (GTA)
Service as GST is payable only @ 5%. This rate is considering the cost of diesel involved. Otherwise, GST will
normally apply only on what is supplied.
6.4-8 Donation without consideration not subject to GST
Donation without any instructions for its use are not subject to GST. However, where donor is receiving benefit
in terms of advertisement or publicity, it is taxable under GST i.e. if donations are with instructions would be
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taxable if donor is receiving identifiable benefits in terms of advertisement or publicity - Students' Welfare
Association In re (2019) 73 GST 650 = 103 taxmann.com 449 (AAR-Maharashtra).
6.5 Meaning of 'related person'
Explanation (a) to section 15 of CGST Act states that for the purposes of CGST Act, persons shall be deemed to
be "related persons" if -
(a) such persons are officers or directors of one another's businesses.
(b) such persons are legally recognized partners in business.
(c) such persons are employer and employee
(d) any person directly or indirectly owns, controls or holds twenty five per cent or more of the outstanding
voting stock or shares of both of them
(e) one of them directly or indirectly controls the other
(f) both of them are directly or indirectly controlled by a third person
(g) together they directly or indirectly control a third person; or
(h) they are members of the same family.
Explanation (b) - The term "person" also includes legal persons.
Explanation(c) - Persons who are associated in the business of one another in that one is the sole agent or sole
distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
This definition has been practically copied from Rule 2(2) of Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007 and Rule 2(2) of Customs Valuation (Determination of Value of Export Goods)
Rules, 2007, except that in clause (d), the percentage shareholding has been increased from 5% to 25%.
6.5-1 Meaning of 'family'
"Family" means,—(i) the spouse and children of the person, and (ii) the parents, grand-parents, brothers and
sisters of the person if they are wholly or mainly dependent on the said person - section 2(49) of CGST Act.
The definition is very practical and sensible.
Otherwise, broad definition of 'family' includes many persons which whom the taxable person has practically no
financial transactions or often they are not even on speaking terms.
6.5-2 Price to related person acceptable if the recipient is eligible for entire ITC
Even if the supply is to related person, if the recipient is eligible for full input tax credit, the value declared in the
invoice shall be deemed to be the open market value of goods or services - proviso to rule 28 of CGST and
SGST Rules.
This is a very sensible provision as when the recipient can take entire input tax credit, there cannot be any
intention to evade tax.
Really, this provision should apply to all transactions, as in such cases, there can be no intention to evade tax.
6.5-3 Price to related person acceptable if it is same as charged to others
Merely because two parties are related to each other will not amount to under valuation per se. It will depend on
facts and circumstances of each individual case - CC v. Clariant (India) Ltd. (2007) 210 ELT 481 (SC).
In Siemens Ltd. v. CC 2000(126) ELT 1134 (CEGAT), it was held that even if buyer is a subsidiary company,
invoice price should be accepted if the relationship has not affected the invoice price and price is same as the
price sold to other independent buyers.
In SRF Ltd. v. CC 2003 (158) ELT 642 (CESTAT), it was held that even if buyer and seller are related persons,
the transaction value is required to be accepted if relationship has not influenced price. Once he demonstrates
that, transaction value cannot be rejected on basis of import of another person of much smaller quantity and of
different variety - same view in Gemplus India v. CC (2005) 185 ELT 269 (CESTAT) * General Motors India P.
Ltd. v. CC (2009) 235 ELT 364 (CESTAT).
In Rehau Polymers v. CC (2014) 301 ELT 116 (CESTAT), the price between related parties was based on cost
plus method. There was no financial flow-back. It was held that the price is required to be accepted.
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In Prodelin India v. CCE 2005 (181) ELT 73 (CESTAT), it was held that even if importer is joint venture in
which foreign supplier is a partner, that itself is not ground to make addition to sale price. If there is nothing on
record to indicate that sale price was not full commercial price, transaction value has to be accepted as assessable
value - view confirmed in CC v. Prodelin India 2006 (202) ELT 13 (SC).
A sole selling agent or sole distributor can be considered as 'related' only if he falls in one of the aforesaid
criteria. Whether the principal is in a position to 'control' the agent is a matter of fact and should be considered
on merits of each case. Thus, mere fact that Indian importer is a sole agent or distributor does not make him a
'related person' - Hydrokrimp A.C. (P.) Ltd. v. CC - (1996) 81 ELT 162 (CEGAT).
Agreement relating to maintenance of standards of quality of products to be manufactured under licence from
foreign supplier does not mean there is legal or operational control of foreign collaborator. Transaction value is
acceptable. CC v. Borasara Machines 1999(107) ELT 408 (CEGAT).
Mere holding of 40% equity does not by itself sufficient to enable the one to have direct or indirect control over
other. -.- The question whether a person controls the other is a question of fact and not question of law - CC v.
Modi GBC Ltd. 1999(114) ELT 931 (CEGAT). - departmental appeal dismissed by SC 2000(120) ELT A70.
Mere shareholding by foreign supplier cannot be cause for rejecting transaction value - Vivem Metalkat v. CC
(2009) 240 ELT 127 (CESTAT).
If relationship between importer and supplier did not influence the price, invoice value has to be transaction
value - Thermon Heat Tracers Ltd. v. CC 2006 (198) ELT 37 (CESTAT).
In Bureau Veritas v. CC 2003 (156) ELT 688 (CESTAT), it was held that even if there was steep fall in prices and
even if buyer and seller are related, the transaction value is required to be accepted, if it is not influenced by
relationship between buyer and seller - decision upheld in CC v. Bureau Veritas AIR 2005 SC 1292 = (2005) 3
SCC 265 = 2005 AIR SCW 993 = 181 ELT 3 (SC 3 member bench).
Even if importer and supplier are both 100% subsidiaries of another foreign company, transaction value is
acceptable if price is uniform world wide. - Procter and Gamble v. CC 2002(144) ELT 704 (CEGAT).
In CC v. East African Traders 2000(115) ELT 613 (SC), it was held that authorities can pierce the corporate veil
to ascertain whether the buyer and seller are indeed related persons within the meaning of the rule. [Piercing
corporate veil means looking behind the facade to see the persons who are in real control]. [The Tribunal had
held that even if MD of supplier company is brother of importing firm, supplier and importer cannot be treated as
related person. However, Supreme Court has said that they can be treated so by piercing the corporate veil].
6.5-4 Piercing corporate veil
Legally, company has identity which is independent of its members. However, if company is only a facade,
Court can look behind the scene and see the real state of affairs. This is called 'lifting of corporate veil'.
In Calcutta Chromotype Ltd. v. CCE AIR 1998 SC 1631 = 1998 AIR SCW 1379 = 1998(3) SCC 381 = 25 RLT
866 = 99 ELT 202 (SC), it was observed - 'If persons behind manufacturer and buyer are same, authorities can
lift the veil of a company, to see it was not wearing that mask. -. - As to when the veil should be lifted will
depend upon facts and circumstances of each case'.
Thus, if Court finds that company is only a facade and actually there is unity of interest between two companies
and two companies are really one, Court can lift the corporate veil and treat the two companies as 'related' even
if legally, two companies cannot be 'relative' of each other.
In CCE v. 'J' Foundation (2015) 324 ELT 422 (SC), buyer and seller companies were of same group. Selling
pieces to such group companies was much lower compared to prices charged to others. Hence, corporate veil
was torn and it was held that test of mutuality of interest is established. The group companies were held as
'related persons'.
In CC v. East African Traders 2000(115) ELT 613 (SC), it was held that authorities can pierce the corporate veil
to ascertain whether the buyer and seller are indeed related persons within the meaning of the rule.
6.6 Government can notify any other method
Notwithstanding anything contained in section 15(1) or section 15(4) of CGST Act, the value of such supplies as
may be notified by the Government on the recommendations of the Council shall be determined in such manner
as may be prescribed - section 15(5) of CGST Act.
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Thus, any other method (like value based on MRP) may be fixed. However, 'value' cannot be determined on
basis of production capacity.
6.7 Rate of exchange of currency for determination of value
Rate of exchange for value of taxable goods - The rate of exchange for determination of value of taxable goods
shall be the applicable rate of exchange notified in CBE&C under section 14 of CGST Act as on date of supply
of such goods in terms of section 12 of CGST and SGST Act - rule 34(1) of CGST Rules, 2017 (amended w.e.f.
27-7-2017).
6.7-1 Rate of exchange for determination of value of services
Determination of rate of foreign exchange is relevant for determination of value of services in case of export of
services and import of services. The rate is also relevant when place of supply of service is India and hence GST
is payable under reverse charge, but payment is received in foreign exchange.
Rate of exchange for value of taxable services - The rate of exchange for determination of value of taxable
services shall be the applicable rate of exchange as per Generally Accepted Accounting principles (GAAP) on
the date of time of supply of such service, in terms of section 13 of CGST Act - rule 34(2) of CGST Rules, 2017
(amended w.e.f. 27-7-2017).
This provision has been made, since, as per section 129(1) of the Companies Act, 2013. Financial Statements of
companies must comply with Accounting Standards, and shall be in prescribed form.
Thus, it will be easy to reconcile value of service tax as per books of account and as per service tax returns.
6.7-2 Generally Accepted Accounting principles on effects of changes in foreign exchange rates
Generally Accepted Accounting Principles (GAAP) are contained in AS-11 [Accounting Standard 11] in
Companies (Accounting Standards) Rules, 2006 issued Central Government in December 2006, on
recommendation of NACAS [National Advisory Committee on Accounting Standards] under section 210A of
Companies Act, 1956.
The AS-11 is on 'Effects of Changes in Foreign Exchange Rates'.
Section 132 of the Companies Act, 2013 envisages constitution of National Financial Reporting Authority
(NFRA). One of function of NFRA is to recommend Accounting Standards. However, this section is not yet
notified.
Till constitution of NFRA under the 2013 Act, National Advisory Committee on Accounting Standards
(NACAS) constituted under section 210A of the 1956 Act will continue to function.
Thus, presently accounting standards as notified in December 2006 are in force.
The highlights [only as relevant for service tax valuation] are as follows -
Initial recognition of foreign currency transactions - Initially, foreign currency transactions shall be recorded
by applying an exchange rate at the time of transaction [In case of service tax, it should as on date of Point of
Taxation as per POT Rules]. Alternatively, average for a week or month can be used if there is no significant
fluctuation in exchange rate.
Valuation at the balance sheet date - (a) Monitory items like cash, debtors, creditors and loans shall be valued at
closing rate of foreign exchange [This provision would become relevant if payments in foreign exchange were
not made as on date of balance sheet].
(b) Non-monetary items like fixed assets, long term investments shall be carried at historical cost. Non monetary
items like inventory, current investments shall be calculated on basis fair exchange value [This provision may
not normally apply in respect of service tax valuation].
Treatment of foreign exchange rate difference - This can arise if (a) transaction is being reported at a rate
different form the rate at which it was initially recorded [i.e. actual realisation or payment was different than that
initially recorded in books of account] (b) transaction is settled at a rate different from the one taken for reporting
in the last financial statement (as at that time payment was not made or received).
All types of exchange differences will be charged to profit and loss account for that period.
Difference between amount booked in accounts and actual amount received to be taken as gain/loss in foreign
exchange -Difference between amount booked in accounts as per prevailing rate and actual amount received in
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rupees is to be taken as gain/loss in foreign exchange. This appears as separate figure in annual accounts.
Thus, the initial amount as booked in the accounts remains unaltered. Since the service tax is paid on amount as
booked at the time of invoice, that amount does not change later due to fluctuations in foreign exchange rates.
Thus, the service tax as charged originally on basis of prevailing rate at that time does not change even if actual
amount received is less or more.
Accounting treatment of forward foreign exchange contracts - In forward contract, there is agreement to buy
from or sale to other party at a future date for an agreed foreign exchange rate :
(a) If the forward foreign exchange contract was entered to minimize risk due to fluctuations in exchange
rate is mainly contract for managing risk. The difference between the foreign exchange rate at the date
of inception of the foreign exchange contract and the forward rate as specified in the contract is termed
as 'premium' or 'discount'. The exchange difference should be recognized by crediting/debiting profit
and loss account. The forward premium paid should be expensed out over the tenor of contract.
(b) If the forward exchange contract was entered for trading of speculation in foreign exchange. Here
object is not to reduce risk but to gain [such contracts are not normally envisaged in normal business
transactions of providing or receiving goods or services].
Treatment of foreign exchange rate difference in case of capital assets - The normal accounting treatment for
foreign exchange rate differences is that these should be recognized as gains or losses in foreign exchange in
financial accounts.
However, in case of depreciable capital assets, para 46A of AS-11 provides optional method. As per this option,
exchange difference (positive or negative) related to depreciable capital assets is to be deducted or added in the
cost of depreciable assets (both tangible and intangible), and then depreciation is to be charged on the revised
carrying amount.
Para 46A is optional to company i.e. company can decide either to add/the difference in foreign exchange rate in
value of asset or to carry the difference directly to foreign exchange gain/loss account in profit and loss account.
Income tax provisions - Section 43A of Income-tax Act provides that if there is difference between rate of
exchange when asset was entered into books of account and the actual rate at which the payment was made, the
difference shall be adjusted in the 'actual cost' of asset, irrespective of method of accounting adopted by assessee.
Thus, though para 46A of AS-11 is optional to company for preparing accounts as per Companies Act, for
income tax purposes, the foreign exchange rate difference must be added/deducted to arrive at 'actual cost' of
such asset.
Then, depreciation will be calculated as per revised 'actual cost'.
Determination of foreign exchange rate - RBI publishes a 'reference rate of foreign exchange' on daily basis.
Foreign Exchange Dealers Association of India (FEDAI) also publish 'Fixing rate' on daily basis and
weekly/quarterly average rates. These are only average rates.
These rates give only rough indication of exchange rate at which transaction is likely to take place, after
considering variations due to difference between buying rate and selling rate, bank commission etc.
Foreign Exchange Rates as announced by Banks - The Authorised Dealers (mostly Banks) dealing in foreign
exchange quote different rates as follows –
Bid Rate Selling of foreign exchange among banks (Inter Bank Rate)
Ask Rate Purchasing of foreign exchange among banks (Inter Bank Rate)
DD Purchasing rate of foreign exchange inclusive of bankers margin.
TT Selling of foreign exchange inclusive of bankers margin.
The Inter Bank Rate (IBR) for both Bid/Ask are the universal rates traded between banks. This does not consider
any form of margin.
Bid Rate is the rate at which a bank can sell foreign currency and Ask Rate is the rate at which a bank can buy
foreign currency. All rates quoted by the bank will be in the form of Bid Rate and Ask Rate.

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IBR (Inter Bank Rate) is formed by the demand and supply of foreign currency at any point in time. This is
quoted by two main service providers i.e. Thomson Reuters and Bloomberg terminals available with banks and
other financial institutions.
The DD/TT rates are conversion rates provided by banks to customers for receivables or payables which include
bank margin.
In other words Bid Rate and Ask Rate is the universal worldwide rates, whereas DD and TT are the rates
inclusive of banker's margin.
The DD and TT rates are considered for transactions between bank and customer. This rate can be considered for
calculation of exchange rate for the purpose of service tax also.
Source of getting the foreign exchange rate - There are various websites (some free and some paid).
Information about world currencies is available on www.xe.com or www.oanda.com.
However, most authentic foreign exchange rate to be taken for valuation would be the DD and TT rate from
bankers of taxable person, as that is the rate at which actual transaction will be taking place.
6.8 Valuation Rules if transaction value not ascertainable
If valuation is not possible on basis of provisions of transaction value under section 15 of CGST and SGST Act,
valuation will be on basis of Valuation Rules as contained in CGST Rules. These are discussed in next chapter.

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