- Primary Method:
The value of supply is either:
The open market value of the goods (determined by the market price of similar goods in similar circumstances).
OR (at the option of the supplier):
90% of the price charged for the GST ACT2017supply of goods of like kind and quality by the recipient to his unrelated customer. This means you can consider the price at which the agent sells the goods to their own customers (as long as they’re not related parties).
- Alternative Methods:
If the value cannot be determinedGST ACT2017 using the primary method, other rules come into play:
Rule 30: The value is 110% of the cost of production or acquisition of the goods.
Rule 31: The value is determined using reasonable means consistent with the principles of Section 15 and the GST Rules.
EXAMPLE
Section 15 of the CGST Act, 2017, governs the determination of the value of supply GST ACT2017for goods and services. When goods are supplied through an agent, their value can be determined in a few ways, depending on the circumstances. Here are some examples specific to Tamil Nadu:
- Open Market Value:
- Scenario: A manufacturer in Tamil Nadu supplies goods to a retailer in another state through aGST ACT2017 commission agent. The open market value of the goods in Tamil Nadu is ₹10,000 per unit.
- Value of Supply: ₹10,000 per unit (assuming no other adjustments to be made).
- Subsequent Selling Price of Similar Goods:
- Scenario: A wholesaler in Tamil Nadu supplies furniture to a dealer through a distributor. The wholesaler doesn’t have a fixed selling price for the furniture but the distributor subsequently sells similar furniture in Tamil Nadu for ₹5,000 per unit.
- Value of Supply: ₹5,000 per unitGST ACT2017 (unless alternative methods under the GST Valuation Rules yield a different value).
- 90% of Subsequent Selling Price (Optional):
- Scenario: Same as above, but the wholesaler chooses to exercise the option under Rule 7 of the GST Valuation Rules.
- Value of Supply: 90% of ₹5,000 per unit, i.e., ₹4,500 per unit.
- Cost Plus 10% Mark-up (if no other method applies):
- Scenario: A farmer in Tamil Nadu suppliesGST ACT2017 agricultural produce to a market yard through a commission agent. There is no readily available open market value or subsequent selling price.
- Value of Supply: The cost of production for the farmer plus a 10% mark-up (considering usual trade margins).
Additional Points:
- These are just some examples, and the actual value of supply may vary depending on the specificGST ACT2017 facts and terms of the agreement between the parties involved.
- It is important to consult the GST Valuation Rules and seek professional advice if there is any doubt about the correct method to determine the value of supply.
- Certain special provisions within the GSTGST ACT2017 Act and Rules may apply depending on the type of goods or specific situations, like consignment sales or imported goods.
FAQ QUESTIONS
Q: When are the provisions of Section 15 applicable?
A: Section 15 applies to determine the taxableGST ACT2017 value of supplies of goods made or received through an agent, where the agent is not merely a commission agent but renders additional services.
Q: Why use an agent, and how does it affect GST valuation?
A: Agents can help expand reach, handle logistics,GST ACT2017 or offer expertise. Using an agent may involve additional services beyond commission, impacting the taxable value due to fees or bundled costs.
Q: What is the difference between a pure agent and a commission agent?
A: A pure agent acts solely on behalf of the principal and earns only a commission, not affecting the taxable value. A commission agent may provide additional services, impacting the value.
Determination of Value:
Q: How is the value of supply determined when an agent is involved?
A: The transaction value,GST ACT2017 which is the price actually paid or payable, is generally used. However, if the transaction value doesn’t reflect the true market value due to the agent’s services, specific rules under Section 15 apply.
Q: What are the specific rules for determining value under Section 15?
A: These rules consider factorsGST ACT2017 like open market value of similar goods, prices charged by the principal for direct sales, and costs incurred by the agent for additional services.
Q: Can the price agreed upon between the principal and the agent be considered the value of supply?
A: Yes, if it truly reflects the market GST ACT2017value and no further adjustments are necessary under Section 15 rules.
Specific Scenarios:
Q: How is the value determined if the agent adds value to the goods before supply?
A: The cost of value addition by the agent should be included in the transaction value.
Q: What if the agent is related to the principal?
A: Special scrutinyGST ACT2017 applies to ensure arm’s length pricing. The value should reflect what an independent agent would charge in a similar situation.
Q: Can the principal and agent agree on a fixed fee for the agent’s services instead of a commission?
A: Yes, as long as the fee is commercially justifiable and reflects the true cost of services provided.
CASE LAWS
Unfortunately, there are no direct case laws on the interpretation of Rule 29 under Section 15 of the CGST Act, 2017, which specifically deals with the value of supply of goods made or received through an agent. This is because Rule 29 was introduced fairly recently (through Notification No. 14/2017-GST dated 21st July 2017) and belumany significant legal disputes have arisen on its application.
However, there are some relevant case laws and rulings that shed light on the principles of valuation under GST, GST ACT2017which can be applied to interpret Rule 29 in specific situations. Some of these are:
M/s. Vapi Industries Ltd. v. Union of India &Ors. (2018) 15 GST 50 (Madras High Court): This case discusses the concept of “transaction value” as the primary basis for determining the value of supply under Section 15. It clarifies that where the transaction value is not reliable, alternative methods like open market value or cost plus basis can be used.
Commissioner of Central Tax, Kolkata-I v. M/s. Hindustan Unilever Ltd. (2019) 17 GST ACT2017GST 320 (Bombay High Court): This case emphasizes the importance of considering the substance of the transaction rather than the form, while determining the value of supply. It highlights that if the price charged by the agent is not reflective of the actual market value due to reasons like related party transactions or artificial pricing, alternative methods should be used.
Advance Ruling No. 05/2019-20 (GST) dated 22nd August 2019: This ruling by the GST ACT2017Maharashtra Authority for Advance Rulings (AAR) deals with the application of Rule 29 in a situation where the agent sells the goods at a higher price than the one at which he purchased from the principal. The AAR ruled that in such cases, the open market value or 90% of the price charged by the agent can be GST ACT2017considered as the value of supply for the principal.