FEBRUARY 18, 2025

By Somesh Jain, Advocate

UNDER taxation laws, the determination of transaction value has always been a contentious issue.

The general perception is that when a transaction takes place between unrelated parties, the actual price paid is the consideration for the supply. Unfortunately, attention is not paid to non-monetary aspects or benefits received under the arrangement.

The Supreme Court in Commissioner of Central Excise Mumbai vs Fiat India Pvt Ltd - 2012-TIOL-58-SC-CX held that for the cars sold at below the cost of production, the value for payment of excise duty would be the "cost" and NOT the "sale price".

The assessee - Fiat India P Ltd. filed a review petition and the Supreme Court on 27.11.2012, dismissed the same. [See 2012-TIOL-110-SC-CX]

Recently, the Hon'ble Supreme Court dealt with the issue of transaction value of excisable goods in the case of Bharat Petroleum Corporation Ltd. - 2025-TIOL-03-SC-CX

The Oil Marketing Companies (OMCs) entered into a Memorandum of Undertaking (MOU) for smooth supply and distribution of petroleum productsamongst themselves , to avoid any disruption in supply all over India, and to save on transportation costs, when compared with procuring petroleum products solely from their respective refineries.

Under the MOU, it was mutually agreed that the OMCs will sell and purchase petroleum products amongst themselves at the Import Parity Price (‘IPP'), which is defined as the landed cost of the products at the nearest port, plus the cost of transportation from the said port to the storage point of the selling OMC, which is lower than the price at which the products are sold to their dealers.

The tax department disputed that IPP cannot be the value of excisable goods as this is not sole consideration. The real consideration is ensuring uninterrupted supply to all OMCs at various places in India.

The Supreme Court decided the issue in favour of the revenue by observing -

"24. …. The object is to use the available products of each OMC on the terms and conditions set forth in the MOU.Thus, the object of the MOU is not to sell petroleum products on a commercial basis to other OMCs. The real object is to ensure that each OMC gets a smooth supply of petroleum products and any disruption of supply is avoided. …

28. Therefore, after taking into consideration the aforementioned parts of the MOU, it is crystal clear that the arrangement reflected from the MOU is essentially for ensuring that every OMC gets smooth and uninterrupted supply all over India, irrespective of whether an OMC has a refinery or otherwise in a particular part of India. Thus, from a plain reading of the MOU, we find that the real consideration for the MOU was to ensure an uninterrupted supply to all the OMCs at various places in India. The MOU incorporates mutual arrangements made by MNCs for an uninterrupted supply of petroleum products so that MNCs can further sell the products to their dealers. By no stretch of the imagination, it can be said that the price fixed under the MOU was the sole consideration for the sale by one OMC to the other. Hence, we concur with the conclusion in the impugned judgment that the price was not the sole consideration for sale. "

Distinguishing "motive" or "condition" of contract from "consideration" for the contract

Under the Contract Law, there is a well settled distinction between the motive for entering into a contract and consideration for the contract. "Motive" refers to the reason behind someone's actions, while "consideration" refers to the exchange of value between parties that makes a promise legally binding. This distinction was highlighted in a classic judgment of Queen's Bench Division of UK's High Court in Thomas v. Thomas - (1842) 2 QB 851 .

In the above case, a testator, shortly before passing away, expressed a desire that his widow should have the house in which he lived for the duration of her life, or £100. Following his death, his executors, "in consideration of such desire," agreed to transfer the house to the widow for her lifetime or as long as she remained a widow, "provided nevertheless and it is hereby further agreed" that she would pay £1 annually toward the ground rent and maintain the house. In an action by the widow for breach of this promise, the consideration was described as her commitment to pay and repair. An objection was raised by the executors that the declaration failed to mention part of the consideration, namely the testator's desire. Rejecting this objection, Patteson, J. observed:

"Motive is not the same thing with consideration. Consideration means something which is of value in the eye of the law moving from the plaintiff" .

Commenting on the above decision, Treitel in his treatise on The Law of Contract (Fourteenth Edition) observes:

"Consideration and motive are not opposites; the former concept is a subdivision of the latter. The consideration for a promise is (unless it is nominal or invented) always a motive for promising; but a motive for making a promise is not necessarily consideration for it in law."

Treitel further observed that motive can only amount to consideration if it is "of some value in the eyes of law".

A further distinction which needs to be kept in mind is between condition of contract and consideration for the contract. Chitty on Contracts (31 st Edition) highlights this distinction as under:

"It seems that the distinction between consideration and condition depends, in such cases, on whether "a reasonable man would or would not understand that the performance of the condition was requested as the price or exchange for the promise." In Thomas v Thomas the executors had not requested the plaintiff to remain a widow; .... The distinction is further illustrated by Carlill v Carbolic Smoke Ball Co [1893] 1 Q.B. 256, where the claimant provided consideration for the defendants' promise by using the smoke-ball; but her catching influenza was a condition of her entitlement to enforce that promise."

Australian GSTR 2001/6 on Non-Monetary Consideration also clarifies that for something to be considered as a non-monetary consideration, it must have "economic value and independent identity", i.e., "it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire."

If the above principles were applied to the facts in the case of Bharat Petroleum Corporation Ltd. (supra), an argument could have been adopted that getting smooth supply of petroleum is the only motive for entering into the contract and not consideration for the contract.

That the delivery of petroleum product at a place near to the supply location is only a condition of the contract. That this condition has no "economic value and independent identity" will be clear if the actual monetary consideration (Import Parity Price) is taken out of the equation.

Implication under GST Law

The GST law also levies tax on the basis of the transaction value, which is the price actually paid or payable for the supply (between unrelated parties) and where the price is the sole consideration. The term "consideration" is defined under the GST law to include:

(i) any payment made or to be made, whether in money or otherwise, and

(ii) the monetary value of any act or forbearance.

The first limb will cover monetary consideration as "payment" is generally considered as the act of paying or discharge of debt by money or its equivalent in value.

The second limb seeks to cover non-monetary consideration. However, the GST law takes into account only such non-monetary act or forbearance which has a "monetary value".

Thus, the GST law specifically recognizes that for an act or forbearance to be counted towards consideration, it should have "economic value and independent identity". A mere motive or condition of the contract cannot be put on the pedestal of consideration, unless it is something which is requested as a price or exchange for the promise.

Therefore, it becomes imperative for businesses to closely scrutinize all aspects of the transaction and the potential non-monetary benefits derived which can possibly be characterized by the tax department as consideration for the supply.

[The views expressed are strictly personal.]