MAY 04, 2017

By S Sivakumar, LL.B, FCA, FCS, ACSI, MBA, Advocate and R Vaidyanathan, M Com, M Phil, Consultant

IN what could come as a huge relief for Industry, it appears that reimbursements are not to be included for valuation of supply, under Section 15 of the CGST, Act. The said Section 15 reads as under:

Value of taxable supply.

15. (1) The value of a 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.

(2) The value of supply shall include -

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(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;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and 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 goods or supply of services;

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation .––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

(3) The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if–

(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 on the basis of document issued by the supplier has been reversed by the recipient of the supply.

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), 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.

The readers will note that the very important word 'reimbursable expenditure' is conspicuously missing in this Section. Also, read the definition of the term 'consideration' appearing in Section 2(31) of the CGST Act, which reads as under:

(31) "consideration" in relation to the supply of goods or services or both 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 recipient or by any other person but shall not include any subsidy given by the Central Government or a 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 the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

Here also, there is no reference to reimbursements, here

Compare these statutory provisions under the CGST Act, 2017 with Section 67 of the Finance Act, 1994 which deals with valuation of services. An explanation was specifically added by the Finance Act, 2015 with effect from 14-5-2015, which reads as follows:

"Explanation.- For the purposes of this section,-

[(a) "consideration" includes-

(i) any amount that is payable for the taxable services provided or to be provided;

(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.".  

The Government had inserted this explanation with an intent to get over the impact arising out of the decision of the Delhi High Court in Intercontinental Consultants and Technocrats Pvt Ltd v Union of India and Anr reported in - 2012-TIOL-966-HC-DEL-ST which was affirmed by the Hon'ble Supreme Court, wherein, it had been held that, in the absence of a statutory provision, reimbursements cannot be included for purposes of valuation of services and that, Rule 5(1) of the ST (Determination of Value) Rules, 2006 was held to be ultra vires Sections 66 and 67 of the Finance Act, 1994

With no reference to reimbursable expenditure being part of the valuation, it would seem clear that reimbursements cannot form part of the value of supplies, under the GST law. Even the draft GST Valuation Rules do not specifically mention that reimbursements are includible, despite that the concept involving' pure agent' is being retained under the GST law. However, in our view, in the absence of a provision in Section 15 of the CGST Act, 2017 or in the definition of 'consideration' under Section 2(31) of the CGST Act, 2017, reimbursements cannot be included in the value of supplies, for levy of tax under the GST law. This could come as a huge relief for Industry and especially for large companies, wherein, it is common practice to incur expenditure at the group level and then seek reimbursements from the group companies.

In our view, reimbursements cannot be included under any of the other clauses contained in Section 15(2) of the CGST Act, 2017.

Before concluding -

It is, of course, interesting to know that, even the draft GST law issued in November 2016 did not specify 'reimbursements' for valuation purposes. However, in the draft model GST law issued in May 2016, there was a specific provision for reimbursable expenditure to be included in valuation of supplies in terms of Clause 15(2)(g), which read as under:

(g) any reimbursable expenditure or cost incurred by or on behalf of the supplier and charged in relation to the supply of goods and/or services;