The value of supply of goods orGST ACT2017 services or both between distinct or related persons other than through an agent, under Section 15 of the GST Act 2017, is determined as per Rule 28 of the CGST Rules, 2017. It primarily involves three methods:

1. Open Market Value:

• This is the ideal scenario, where the value is the full price an unrelated person would pay for the same goods or services in the open market, at the same time as the supply in question.

2. Value of Supply of Like Kind and Quality:

• If the open market value isn’t readily available, the value can be based on similar goods or services of the same type and quality being supplied in the market.

3. Secondary Methods:

• If neither of the above methods are feasible, different secondary methods may GST ACT2017be applied, as defined in Rule 30 and Rule 31 of the CGST Rules. These can involve calculations based on cost of production, acquisition, or provision of services, with various mark-ups as per specific situations.

Additional Points:

• Supplier’s Option: For goods meant for further supply by the recipient, the supplier can choose a 90% value based on the recipient’s subsequent saleGST ACT2017 price to unrelated customers.
• Eligibility for Full Input Tax Credit: If the recipient is eligible for full input tax credit, the declared invoice value is automatically considered the open market value.
• Related Persons: Transactions between related persons (as defined in the Act) have stricter scrutiny due to potential manipulation of pricing.

EXAMPLE

Scenario 1: Distinct Persons (Not Related)

State: Tamil Nadu

• Company A (Chennai) sells 100 GST ACT2017laptops to Company B (Bangalore) for Rs. 50,000 each. The invoice value is Rs. 50,00,000. Since the buyer and seller are distinct and unrelated, and the price is the sole consideration, the transaction value (Rs. 50,00,000) will be the taxable value.

Scenario 2: Related Persons

State: Chennai, Tamil Nadu

• Mr. X (father) owns aGST ACT2017 construction company and supplies building materials worth Rs. 10,00,000 to his daughter’s company (Y) in Chennai. Since they are related persons, the transaction value may not reflect the true market value.

In scenario 2, different methods can be used to determine the taxable value under Section 15:

• Open Market Value: If similar buildingGST ACT2017 materials are sold to unrelated customers in Chennai for Rs. 12,00,000, then Rs. 12,00,000 will be considered the taxable value.
• Value of Supply of Like Kind and Quality: If building materials of similar quality are not readily available, one can look at the cost of production/acquisition GST ACT2017plus a reasonable profit margin (e.g., 10%) to determine the taxable value.
• Cost-plus method: If neither of the above methods is practical, the taxable value can be calculated as the cost of supply (materials, labor, overhead) plusGST ACT2017 a reasonable markup (e.g., 10%).

FAQ QUESTIONS

• What is the purpose of Section 15?
  • Section 15 of the CGST GST ACT2017Act determines the value of supply of goods or services or both between distinct or related persons (except through an agent). This value forms the basis for calculating the GST liability.
• When does Section 15 apply?
  • It applies to all taxable supplies made in India, except for cases where GST ACT2017a specific rule or notification prescribes a different method of valuation.
• What factors are considered in determining the value of supply?
  • The primary factor is the consideration received or receivable for the supply.
  • If there is no consideration, the value will be determined based on open market value, value of like kind and GST ACT2017quality goods/services, or other methods prescribed by rules.

Specific scenarios:

• What if the consideration is not monetary?
  • The value will be determined by the fair market value of the GST ACT2017consideration received or receivable.
• What if the price is inflated or deflated due to related party transactions?
  • The department can adjust the value to reflect the open market value.
• What if the open market value is not available?
  • The value will be determinedGST ACT2017 based on the value of like kind and quality goods/services.
• What are the rules for valuing specific types of supplies?
  • Some specific rules exist for valuing goods on consignment,GST ACT2017 services where payment is deferred, and certain categories of services.

CASE LAWS

Section 15 of the CGST Act, 2017 lays down the general principle that the value of a supply of goods or services or both shall be the transaction value. Transaction valueGST ACT2017 means the price actually paid or payable for the said supply made at the time of supply, where the supplier and the recipient are not related and the price is the sole consideration for the supply.

However, in cases where the supply is made between distinct or related persons other than through an agent (as covered under Section 16)GST ACT2017, determining the value based solely on the transaction value might not be accurate. This is because there could be instances of under-valuing or over-valuing to evade taxes. Therefore, specific rules are laid down in the CGST Valuation Rules, 2017 (Chapter IV) to determine the value of supply in such scenarios.

Here’s a breakdown of the GST ACT2017relevant case laws under these rules:

Rule 28: This rule applies when the transaction value is not acceptable due to the relationship between the supplier and the recipient or other specified circumstances. The value of supply is then determined based on the open market value, which is the price an unrelated purchaser would pay for the same goods or services at the same time and place.

Case laws involving Rule 28:

• M/s. Hindustan Unilever Ltd. &Anr. vs. Union of India &Ors. (2019): The Supreme Court upheld the application of Rule 28 where the supply of goods from related parties was undervalued.
• M/s. Jindal Aluminium Limited vs. CCE & ST, Chandigarh (2019): The Punjab and Haryana High Court held that Rule 28 can be applied even if there is no evidence of under-valuation, if the relationship between the parties suggests a possibility of manipulation.

Other relevant rules:

• Rule 29: This rule deals with situations GST ACT2017where the open market value cannot be determined accurately. Here, the value of supply is based on the cost of production/acquisition of goods or cost of provision of services, with a 10% markup.
• Rule 30: This rule applies in specific GST ACT2017cases like supplies to related parties through agents, supplies of scrap, and certain services, prescribing specific methods for determining the value of supply.