GST Update on free of cost material supplied and valuation under GST 94/2020-21

GST was formulated three years back and certain concepts like input tax credit, place of supply, valuation etc.which can be termed as heart and soul of the law have always been a matter of dispute from day of implementation. This update has been penned down to discuss the entanglements relating to valuation concept and their impact on taxpayer’s business in GST. Valuation of the goods/service is one of the important aspects as to computation of GST for any assessee. It is commonly seen that instead of supplier of goods procuring the materials, the recipient would provide goods or services free of cost to enable supply by manufacturer. At times consumables like diesel, explosives, electricity, water, may also be supplied by recipient without consideration which may or may not part of agreement. All these are used by supplier for providing the end goods/service. Within the valuation of taxable supplies, concept of free issue goods and services is one which is a matter of confusion and disputes under erstwhile laws of Central Excise/ Service tax and VAT laws.
Recently, AAR, Andhra Pradesh in case of Pulluri Mining and Logistics Private Limited pronounced that any material provided free of cost by the service recipient to the service provider would form part of supplyof service as per section 15(2)(b) of the CGST Act,2017. Before jumping onto the contentions and reasoning by the both the parties, we are hereby reproducing the extract of section which have been highlighted in this ruling.
(2) The value of supply shall include–––
…….
(b) 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;
The applicant, M/s Pulluri Mining & Logistics private Limited is a service provider rendering the support services relating to mining. The applicant has received work through an order from M/s Shree Jayajyothi Cement Pvt. Ltd. for executing mining contract at Srinagar in the nature of raising of Limestone (excavation) at Yanakandla Limestone Mines, and other such mines in Andhra Pradesh and to deliver Limestone to Yanakandla Limestone Hopper belonging to SreeJayajothi Cements Private Limited.
The works are to be carried out by using the listed equipment and vehicles. The listed heavy equipment & vehicles will be deployed for exclusive usage of this contract and shall not move out of the service recipient premises unless it is essential for the performance of the contract. HSD oil required for operating the above heavy equipment and vehicles will be under the scope of the service recipient and HSD oil is issued free of cost from the service recipient’s storage tank.
The appellant contended that the phrase any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supplyshall be understood as a consideration which has been included in total price payable to the service provider but for various reasons incurred by the service recipient. This section should be applicable where total contract price is inclusive of HSD oil but has been supplied by recipient on cost recovery basis. There is no payment of consideration from one party to another nor any recovery is done in invoice raised.
However, AAR has not replied to any of the contentions put forward by the applicant and stated that HSD oil provided by the service recipient for use in equipment forms an important and integral part of this business process i.e. excavation, transportation and delivery of limestone.
The Circular No.47/21/2018- GST dated 08.06.2018 issued by the CBIC refers to the situation where the moulds, jigs etc. are given by recipient,[Original Equipment supplier-OEM] on FOC basis to the supplier who uses such moulds, jigs etc. to manufacture and supply the finished goods to the recipient of supply. It clarifies that it does not constitute a supply under GST since no consideration is charged by the recipient for the moulds, jigs etc. This is only when supplier and recipient are not related persons such as group cos.
The Circular also clarifies that value of usage of moulds, jigs etc. (given on FOC basis) shall not be factored or amortized in the value of supply in a situation where the contract sets out that the recipient of supply shall supply moulds, jigs etc. which would be used by the supplier to manufacture the goods, since the said situation is not covered by Section 15(2)(b) of the CGST Act. Therefore, value of goods supplied on FOC basis cannot be included in the value of the supply as per the existing provisions of CGST Act read in conjunction with the aforesaid circular.
However, it made clear that the case is different where if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortized cost of such moulds/dies shall be added to the value of the components.
Therefore, this circular clearly states that if the agreement is of supply of material by recipient only and he is providing any material free of cost, then it should not form part of the supply.The above ruling contradicts the circular clarification.
Similarly held in Commissioner of Service Tax v. Bhayana Builders (P) Ltd. reported at 2018 (10) G.S.T.L 118 (SC) wherein the issue before the Apex Court was whether the goods and/or services supplied free by a service recipient and used for providing the taxable service of construction would be included in the computation of the gross amount, for valuation of taxable service. It was held that the value of the goods and the materials supplied free of cost by a service recipient to the provider of the taxable construction service would be outside the taxable value or gross amount charged as such amounts did not accrue to the benefit of the service provider, being neither monetary or non-monetary consideration paid or flowing from the service recipient.
In caseofMoriroku UT India (P) Ltd vs State of U.P.wherein the Supreme Court in context of UP Sales Tax had held that, price of moulds manufactured by customer so that vendor could use the same in manufacture of final components as per the specifications of the customer, would not be includible in the assessable value of the final components sold by the vendor to the customer as the cost of the same has been incurred by the customer and not by the vendor and accordingly, the same is not includible, in the absence of a specific provision providing for the same.
Moreover, the Advance Ruling in the case of Lear Automotive India Pvt. Ltd (2018 (12) TMI 766) held thatthe amortized value of the tool received on FOC basis from the customer is not required to be included in the value of finished goods manufactured and supplied by the applicant to the customer. The Lear ruling supra was in light of the 8th June Circular 47/2018 of CBIC.
In many times, the rulings pronounced by the authorities contradicts the circular or the amendments made in the GST and in addition to this, two advance rulings in the same matter differs. Time and again, we have addressed this issue in our updates that this problem can be solved to some extent by the formulation of National AAR (centralized judicial body) for the relief of taxpayers from this controversial affair. Else, assessees are now afraid of seeking advance ruling on settled issues. Advance ruling’s pro-revenue approach is unsettling the settled issues.

This is solely for educational purpose.

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GST Update on free of cost material supplied and valuation under GST 94/2020-21

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