Sandesh Mundra & Associates, Chartered Accountants Eastern India Regional Council of The ICAI Valuation under GST 9th August, 2017 Confirm Date. Sandesh Mundra & Associates, Chartered Accountants

Activities referred in Schedule I & II Supply Includes Sale Transfer Barter Exchange Licence Rental Lease Disposal Activities referred in Schedule I & II Section 7(1) Schedule I - ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION 1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. 3. Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business. Schedule II - ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES 1. Transfer (a) any transfer of the title in goods is a supply of goods; (b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services; (c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods. 2. Land and Building (a) any lease, tenancy, easement, licence to occupy land is a supply of services; (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services. 3. Treatment or process Any treatment or process which is applied to another person's goods is a supply of services. 4. Transfer of business assets (a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person; (b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services; (c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless— (i) the business is transferred as a going concern to another person; or (ii) the business is carried on by a personal representative who is deemed to be a taxable person 5. Supply of services The following shall be treated as supply of services, namely:— (a) renting of immovable property; (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software; (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and (f) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. 6. Composite supply The following composite supplies shall be treated as a supply of services, namely:— (a) works contract as defined in clause (119) of section 2; and (b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration. 7. Supply of Goods The following shall be treated as supply of goods, namely:— Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

Section 7(2) Activities specified in Schedule III Supply Excludes Activities specified in Schedule III Activities undertaken by Govt Which includes CG, SG or any Local Authority Engaged as public authorities Section 7(2) Schhedule III - ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES 1. Services by an employee to the employer in the course of or in relation to his employment. 2. Services by any court or Tribunal established under any law for the time being in force. 3. (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities; (b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause. 4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased. 5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. 6. Actionable claims, other than lottery, betting and gambling. Explanation.—For the purposes of paragraph 2, the term "court" includes District Court, High Court and Supreme Court

Composite Supply

Composite Supply Principal Supply Naturally bundled supply by a taxable person consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply Principal Supply supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary Naturally bundled implies that the recipient of the supply has no option to decide whether he wishes to receive the various elements of the supply being provided as a bundled supply. Whereas, if such an option to decide is possible then the supply cannot be said to be ‘naturally’ bundled and such a supply will not be ‘composite’ supply. (As per recent Government view)

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply Goods / supplies Insurance Packaging Suppliers Customers Composite Goods / Supplies Transport Principal Supplies

Is Single Price A Mandate ? The Act is silent about single price or bifurcated price in invoice for composite supply, the verticals are open. This can be justified as anyhow the rate of the principle supply would be applied. Illustration: Screen of Mr. A’s laptop breaks. He goes to the service center for repair. Assuming GST rates be: Screen – 18% & Repair service – 12% Situation 1 Particulars Amount (Rs.) Screen 2000 Repair Service 500 Total 2500 GST @ 18% 450 Net Value 2950 Situation 2 Particulars Amount (Rs.) Screen Repair 2500 Total GST @ 18% 450 Net Value 2950

Taxability The tax liability on a composite supply shall be determined in the following manner A composite supply comprising two or more supplies, one of which is a Principal supply, shall be treated as a supply of such principal supply;

Composite Supply Treated as Supply of Service The following composite supplies shall be treated as a supply of services, namely:- works contract as defined in clause (119) of section 2; and supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

Indicators Composite Supply One price, one invoice  Integral, Incidental, Tie-in component Dominant supply Different components • Mixed tax liabilities of components • Mixed supplies of goods and services • Same tax rate GST treatment of supply Single tax treatment based on dominant supply either zero rate, standard rate or exempt)

Mixed Supply

two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. Mixed Supply

Taxability The tax liability on a mixed supply shall be determined in the following manner A mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

Illustration A 5-star hotel in Hyderabad provides a 5 day/4 nights package with the breakfast and one day Visit to Ramoji Film city. The inclusion of Visit to Ramoji Film city in this package is not a natural requisite to accommodation in the hotel. Hence, this does not amount to composite supply. This is a mixed supply.

Separate tax treatment based on separate components Indicators Mixed Supply One price, one invoice  Integral, Incidental, Tie-in component X Dominant supply Different components • Mixed tax liabilities of components • Mixed supplies of goods and services Same tax rate GST treatment of supply Separate tax treatment based on separate components

Section 15 – Valuation of Taxable Supply “Value of 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”

Inclusion in Value of Supply Section 15(2) Any taxes, duties, cesses, fees and charges other than levied under GST Amount expended by recipient which was liable to be paid by supplier & not included in actual amount paid Incidental expenses including packing and commission and any amount charged for anything done Any interest, penalty, late fee for delayed payment of any consideration * Subsidies directly linked to price excluding subsidies provided by CG and SG * Explanation - The amount of subsidy shall be included in the value of the supplier who received the subsidy.

Exclusion from Value of Supply Discount Given before or at the time of supply If recorded in the invoice issued Given after supply If discount is established in terms of agreement Before or at the time of supply and linked to relevant invoice ITC attributable to discount reversed by recipient Section 15(3)

Related Person as per Section 15 Officers or Directors One another’s business Partners Legally recognized partners in business Service Employer and Employee Ownership Any person directly or indirectly holds 25% or more in both of them Family Members of same family Others Sole agent or sole distributor or sole concessionaire Control One of them directly or indirectly control the other Both of them are directly or indirectly controlled by third person Together they directly or indirectly control a third person * The term “person” also includes legal persons.

Illustration : “Price is the Sole Consideration” (Supplier) (Recipient) Billed client for work done for Rs. 50,000/- as per contact terms including the cost incurred for travelling to various places for work. Charged interest for late payment Paid the billing amount after 6 months Value of Supply = 50,000 + interest charged

Rules: Determination of Value of Supply (Rule 27 to 35)

Applicability of Valuation Rules Consideration not wholly in money Related Party Transactions Supply through Agent Non-Monetary Consideration

Rule 27 – where the consideration is not wholly in money (b) Consideration in Money + amount equivalent to consideration not in money (a) Open market value If not (a), then If not (a) & (b), then (d) Consideration in money + Consideration determined u/r 30 or 31 (c) Value of supply of goods or services or both of like kind and quality If not (a), (b) & (c), then

Thus value of Supply is ₹24,000 Illustration 1 ₹20,000 Market value is ₹24,000 Thus value of Supply is ₹24,000 Exchange

Market value is not known Illustration 2 ₹40,000 Market value is not known Thus value of Supply is ₹40,000 + ₹4,000 = ₹44,000 Market value ₹4,000

Value will be of the supply of like kind and quality Illustration 3 Value will be of the supply of like kind and quality Like kind and quality ₹

Rule 28 – Transaction between distinct or related person, other than through agent Open Market Value 1st Option Value of supply of goods or service of like kind and quality If open market value not determined Value as determined u/r 30 or 31 in that order If not determined by 1st two options value = 90% of price charged for supply of goods of like kind by recipient to his customer not being a related person If goods purchased are for further supply *If recipient is eligible for full ITC, value declared in invoice shall be treated as open market value

Illustration 1 ₹ Value in the invoice is deemed to be the Open market value If eligible for input tax credit

Rule 29 – Supply of goods made or received through an agent 1st Option Open Market Value If goods purchased are for further supply At the option of supplier, value = 90% of price charged for supply of goods of like kind and quality by recipient to his customer not being a related person If not determined by 1st two options Value as determined u/r 30 or 31 in that order

₹ Illustration Agent ₹ 5000 Subsequent Supplies Principal Supplier The value of the supply made by the principal shall be Rs.4550 OR where he exercises the option the value shall be 90% of the Rs.5000 i.e. is Rs.4500 Principal Supplier ₹ 4550 ₹ Independent Supplier Agent Like kind and quality ₹ 5000 Subsequent Supplies

Rule 30 – Value of supply based on cost If value of goods or services or both not determined as per above rules Cost of acquisition of goods or cost of provision of services 110% of cost of production or manufacture

Illustration 1 Value not determined as per above rules 110% of cost of manufacture OR Cost of Acquisition Value not determined as per above rules

Rule 31 – Residual Method If value of supply of goods or services not determined under any of above rules – Value shall be determined using reasonable means consistent with the principles and the general provisions of Section 15 and these rules. In case of supply of service, supplier may opt for this rule, ignoring rule 30.

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 2(a) Whether exchange in or from INR Is RBI Reference Rate available Value = [Buying or Selling Rate (-) RBI Reference Rate] x Total units of Currency Purchase or sale of Foreign currency YES YES NO NO 1% of lesser of the two amounts the person charging the money would have received by converting any of the two currencies in INR at reference rate 1% of INR provided or received by person changing money

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 2(b) If value not determined as per above provision Value determined at the option of supplier Purchase or sale of Foreign currency including money changing Rs. 250 to Rs. 1,00,000 1% of the gross amount of currency exchanged Rs. 1,00,001 to Rs. 10,00,000 Rs. 1,000 + 0.5% for part exceeding Rs. 1,00,000 upto Rs. 10,00,000 Above Rs. 10,00,000 Rs. 5,000 + 0.1% for part exceeding Rs. 10,00,000

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 3 Service in relation to Air Ticket Booking by Air Travel Agent Domestic Booking International Booking 5% of Basic Fare 10% of Basic Fare *“Basic fare” means that part of air fare on which commission is normally paid to the air travel agent by the airlines.

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 4 Service in relation to Life Insurance Business Gross Premium Charged Single Premium Annuity Policy All Other Cases Provided that nothing contained in this sub rule shall apply where the entire premium paid by policy holder is only towards the risk cover in life insurance Gross Premium (-) Amount allocated for investment 10% of single premium charged 1st Year = 25% of premium charged Subsequent Years = 12.5% of premium charged

Rule 32 – Determination of value in respect of certain supplies If goods taken from unregistered defaulter of loan, debt etc. Purchase Price = Cost to defaulter as reduced by 5% per quarter (between date of purchase and date of disposal by person making such repossession Dealing in Second Hand Goods ITC not availed If value of supply is negative, then ignore it Value = Selling Price (-) Cost Price Sub-Rule 5

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 6 Value of token, or a voucher, or a coupon, or a stamp (other than postage stamp) redeemable against supply of goods or services shall be equal to the money value of goods or services or both redeemable against such token, voucher, coupon or stamp.

Rule 32 – Determination of value in respect of certain supplies Sub-Rule 7 Specified in Para 2 of Schedule I Supply between related / distinct person Where ITC is available Value shall be deemed to be NIL Schedule I – Para II - Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

Rule 33 – Value of Supply in case of Pure Agent Incurred expenses or bear costs as pure agent On behalf of Supplier Recipient Not included in the value of supply On satisfaction of following conditions #

Conditions to consider under pure agent Rule 33 – Value of Supply in case of Pure Agent Conditions to consider under pure agent Supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorization by such recipient Payment made by the pure agent on behalf of the recipient has been separately indicated in the invoice issued by the pure agent to the recipient of service Supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account #

Rule 33 – Value of Supply in case of Pure Agent Pure Agent means a person who – Enters into a contractual agreement with the recipient to act as his pure agent to incur expenditure or costs in the course of supply. Neither intends to hold nor holds any title to the goods or services so procured or supplied as pure agent of the recipient. Does not use for his own interest such goods or services so procured. Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account

Rule 34 – Rate of exchange of currency, other than INR, for determination of value For determination of value of “taxable goods” Shall be applicable rate of exchange Determined by Customs Board u/s 14 of Customs Act, 1962 For date of time of supply Determined u/s 12 of CGST Act

Rule 34 – Rate of exchange of currency, other than INR, for determination of value For determination of value of “taxable services” Shall be applicable rate of exchange Determined as per GAAP For date of time of supply Determined u/s 13 of CGST Act

Tax Amount Rule 35 – Value of supply inclusive or taxes under GST [Value inclusive of tax (x) Tax rate in %] [100 (+) Tax rate in %] Tax Amount

Y S U I K E

Free Issue of Materials & Free Samples :- What will be the value of supply of free issue of material if price recovered from client if price not recovered from client and not included in contract Whether free samples distributed to regular customers will be included in value of supply ? Ans 1: If value of free issue material recovered from client – Taxable If value of free issue material not recovered from client and not included in contract – Not taxable Ans 2: If free sample given to customers being related or distinct person – It will be covered by entry 2 in Schedule 1 (supply without consideration) and will be taxable otherwise not taxable.

Supply through and from Agent Q: What will be the value of supply for both principal and agent in case where supply of goods made through agent and collection received by principal from agent was after deducting commission of agent ? Q: Whether agent will be considered as pure agent or not in case where supply is made by principal and collection is received by agent and then reimbursed to principal? Ans 1: If agent is unregistered than supply from principal to agent will be taxable. If principal mention the place of agent as his additional place of business than not taxable. For agent the commission charged will be value of supply and for principal, transaction value will be the value of supply. Ans 2: If agent is providing pure agent service in addition to his service and mentioning the amount received as pure agent than such amount will be deducted from the value of supply and not taxable.

Supply through and from Agent Q: What will be the value of supply in case principal has added agent’s place as his additional place of business ? Q: What if the agent is registered or not under GST ? If agent is unregistered than supply from principal to agent will be taxable. If principal mention the place of agent as his additional place of business than not taxable. For agent the commission charged will be value of supply and for principal, transaction value will be the value of supply.

Job-Work Q: Job worker registered under GST has opted to pay @ 0.5% under composition scheme. Can department ask him to pay @ 1% considering the activity to be manufacture ? What all values will be included if the activity amounts to manufacture ? If it is job work than value of only service will be considered. If the output product from job work results to manufacturing activity, then all value of goods will also be considered.

Transportation, Packing, Insurance & Other Charges :- What will be the valuation for following :- Particulars Situation Contract describes the scope of delivery of goods in the hands of supplier Freight is charged in the invoice and collected from customer Separate invoice is raised for transportation of goods Freight is not charged in invoice, and customer has taken goods on his own risk Freight is charged in the invoice and collected from customer In case of taxable goods, freight will be included in the value of supply and will be charged at the rate at which goods are charged. In case of exempt goods, Freight will be included in the value of supply and will be charged at the rate at which goods are charged i.e. at nil rate. 2. Separate invoice is raised for transportation of goods 1. In case of taxable goods, If contract defines that delivery of goods will be done by supplier then irrespective of single or multiple bills, the tax will be levied at the rate of goods. 2. In case of exempt goods, Same as (1) above 3. Freight is not charged in invoice, and customer has taken goods on his own risk 1. In case of taxable goods, Value of freight not liable to tax 2. In case of exempt goods, Value of freight not liable to tax

Transportation, Packing, Insurance & Other Charges :- What will be the valuation for following :- Particulars Situation Contract involve ex-factory / ex-works delivery of goods Freight is not charged in the invoice but paid by customer to transporter Separate invoices raised for goods and transportation When contract is silent on delivery clause When freight is charged in invoice When freight is not charged in invoice and delivery of goods was done by receiver Contract involve ex-factory / ex-works delivery of goods Freight is not charged in the invoice but paid by customer to transporter 1. In case of taxble goods - Will not be included in value of supply of goods 2. In case of exempt goods - Will not be included in value of supply of goods 2. Separate invoices raised for goods and transportation 1. In case of taxable goods - Freight will be included in the value of supply and will be charged at the rate at which goods are charged. 2. In case of exempt goods - Freight will be included in the value of supply and will be charged at the rate at which goods are charged i.e. at nil rate. B. When contract is silent on delivery clause 1. When freight is charged in invoice 1. In case of taxable goods - It will be included in the value of supply 2. In case of exempt goods - It will be included in the value of supply & taxable at nil rated 2. When freight is not charged in invoice and delivery of goods was done by receiver 1. In case of taxable goods - It will not be included in the value of supply 2. In case of exempt goods - It will not be included in the value of supply.

Textile Sector :- What will be the value of supply when providing “Buy one Get One Free” offer to customers ? Transaction value of free item to be found as per rules and it will be value of supply along with goods whose value is determined.

Telecom Sector :- What will be the value of supply in case of SIM Card provided to users for accessing to telecom network for various services ? Sim cards are the medium through which TSPs provide network accessing services to users. They are not sold to customers.

Real Estate Sector :- Q: Land deduction provided to real estate service providers is deemed to be one third of the collection received from buyer. What will be the valuation under GST if other charges recovered from buyer such as stamp duty charges, preferential location charges are separately indicated in the agreement Not indicated separately in the agreement Q: How to determine the value in case the value of land is more than one third amount of collection ? Land deduction is given 1/3rd of amount collected. If land value is more than 1/3rd value, then also 1/3rd deduction available.

Real Estate Sector :- Q: If the customer is paying the land value amount directly to land owner and construction amount to developer, then whether the value of supply of construction service shall be determined including the total consideration received (construction amount + land amount) and claiming land deduction or value shall be the only amount received towards construction service ? Value shall be determined inclusive of land value + construction amount

Trading Q: Cash voucher given to customer in the bags of product supplied. Customer can encash the voucher afterwards. Will it be treated as post supply discount? Post supply discount if established in contract – not included in the value of supply

Service provided by bank to its another branch ? Banking Sector :- Service provided by bank to its another branch ? Related party transaction – Schedule 1 Para 2

Mining Sector :- Q: Whether free issue of books to employees paid in course of employment and on the basis of wage agreement with value below Rs.50, 000/- per employee will attract GST ? Gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both (as per Schedule 1 of the CGST Act, 2017). Free issue of coal based on the wage agreement is not a gift. Therefore, free issue of coal in this case will attract GST.

Pharmaceutical Sector :- Q: Whether formulations cleared have to be assessed to GST under transfer price mechanism or on the basis of MRP printed on them? The assessment of drugs and formulations under GST would be on the basis of transaction value at each level of supply with end to end ITC chain for neutralizing the GST paid at the procurement level.

E-Commerce Sector :- Q: It is very common that customers of e-commerce companies return goods. How these returns are going to be adjusted ? An e-commerce company is required to collect tax only on the net value of taxable supplies. In other words, the value of supplies which are returned are adjusted in the aggregate value of taxable supplies. (Refer to Explanation to Sec. 52(1) of the CGST Act, 2017).

Food Processing Sector :- Q: A registered person is supplying manufactured food products to another person. Transportation charges are required to be paid by the supplier but are actually paid by the recipient. Whether this transportation charges would be added in the supply value? If the supplier is liable to pay any amount in relation to a supply, such amount would be a part of transaction value, even if the same has been paid by the recipient. In this case, the transportation charges shall be added to the value of supply.

Sandesh Mundra & Associates Chartered Accountants sandesh.mundra@smaca.in www.smaca.in 304, Super Plaza, Nr.Prakash High School, Sandesh Press Road, Vastrapur, Bodakdev Ahmedabad - 380 054 079-40032950 09426024975