Prologue
The decision of the Supreme Court in Govind Saran Ganga Saran v. CST1 explained that there are four components of tax, their criticality being such that “[i]f those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity”. Of the four components, “fourth is the measure or value to which the rate will be applied for computing the tax liability”.2 Hence, it is imperative that a fiscal legislation, to be able to validly impose the exaction, carries a well-defined valuation mechanism which enlists the scope of taxable basis within the coverage of the charging provision.
Background
The goods and services tax (GST) legislations came into force from July 2017. They encapsulate and further the provisions of the erstwhile indirect tax laws (such as central excise, service tax, value added tax, etc.). Section 15 of the Central Goods and Services Tax Act, 2017 (CGST Act) which is the sole pivot of the valuation mechanism under the GST laws, contains five sub-sections. These can be summarised as under:
(i) Sub-section (1) lays down that “transaction value” i.e. “the price actually paid or payable” for a supply shall ordinarily be the taxable “value” for the levy of GST. For the transaction value to be accepted, it is essential that: (a) the supplier and the recipient of the supply should not be related; and (b) the price is the “sole consideration” for the supply. To supplement this provision, the CGST Act contains a comprehensive list of entities which are considered related persons’3 and an expansive definition of “consideration”4.
(ii) Sub-section (2) provides a list of mandatory inclusions in the value of the supply.
(iii) Sub-section (3) spells out certain discounts which are excluded from the taxable value.
(iv) Sub-section (4) declares that where the transaction value cannot be adopted, then the valuation of the supply shall be carried out in terms of the “rules” framed under the CGST Act.5
(v) Sub-section (5) reserves the right with the Government to notify a special valuation mechanism for specific supplies.6
Plainly read, the statutory scheme is rather precise as regards the ingredients, inclusions and exclusions which define the contours of valuation under the GST law. However, its application — particularly, while transposing the jurisprudence under pre-GST legislations and in the wake of contractually defined obligations of the parties — have obtained mixed reactions in judicial opinions. One such area which is examined in this article is the taxability of expenses incurred by the recipient of supply.
Dissecting the statutory scheme
Clause (b) of Section 15(2) dealing with mandatory inclusions states as under:
(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.
Ordinarily, the amounts charged by the supplier from the recipient constitute the taxable value. However, this provision obliges inclusion of amounts incurred by the recipient (without being charged by the supplier) in the taxable value. A close reading of the provision reveals that not all amounts incurred by the recipient are to be included in the taxable value. Instead, only the amount which the “supplier is liable to pay in relation to such supply” is to be included. The reason for such a reading of the statutory provision is the principle of strict interpretation of taxing statutes — most aptly articulated by Rowlatt, J., in his classic statement —
In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.7
The application of the aforesaid interpretative standard being applied to Section 15(2)(b) implies that one must inter alia regard the contractual covenants agreed between the parties to determine if the “supplier is liable to pay” the amount. If the contractual stipulations are to the effect that the liability to pay an amount is not of the supplier but of the recipient itself, then perhaps it is arguable that such amount is not covered within the scope of Section 15(2)(b). This exercise is in addition to another test to be satisfied — whether the amount expanded is “in relation to such supply”.
Thus, it is evident that the determination of taxable value under Section 15, particularly the ascertainment of the amounts to be inclusion under sub-section (2)(b) is not straightforward and the exercise is a mixed question of facts and law with the outcome differing with even minute differences in factual settings.
Appreciating the judicial opinion
A decision of the Uttaranchal High Court has brought to fore the fissures in the statutory provision under consideration.8 In this case, the agreement was for transportation of goods. The service provider was required to deploy its vehicles and carry out the transportation activity. The fuel for transportation, however, was to be provided by the service recipient, free of cost to the service provider. Under the contractual terms, fuel would be supplied by the service recipient in required quantity depending on load and trip and the ownership of the fuel always remained with the service recipient. The consideration clause under the agreement provided that the service recipient shall pay only the freight charges to the service provider.
In the above background, the question was whether the amount representing the cost of fuel was required to be included for the GST valuation purpose. The service provider took a position that the freight charges alone would constitute the taxable value. The GST Authority for Advance Ruling9 disagreed and directed inclusion of fuel cost in the taxable value. This ruling was approved by the GST Appellate Authority for Advance Ruling. This stand of the GST authorities was challenged before the High Court.
Disapproving the position adopted by the GST authorities, the Uttaranchal High Court extended various reasons to declare that cost of fuel was not to be included in the taxable value notwithstanding the stipulation in Section 15(2)(b) of the CGST Act. For ease of reference, these reasons have been enlisted under suitable headings as under:
(i) Relevance of consideration identified in the contract: The High Court emphasised that “the only consideration flowing between the parties … is the freight charges. Fuel is not a consideration agreed under the proposed agreement between the petitioner and the service recipient”.10
(ii) Section 15(2)(b) is contingent upon contractual terms: “As per Section 15(2)(b) of the CGST Act, 2017, there has to be a contract, or one has to enter into contract or be a part of contract in some capacity as to who is liable to pay for the supply of fuel. As per the agreement, the liability to pay for the cost of the fuel was never on the petitioner-transporter. He was only to be paid freight charges under the Goods Transport Agency (GTA) Rules, 2017, and in this backdrop, the cost of fuel could not be added as per Section 15(2)(b) of the CGST Act, 2017.”
(iii) Free of cost supplies are not taxable: Relying upon the decision of the Supreme Court11 in Service Tax Law12 context and certain GST Advance Rulings13, it is to be concluded that fuel being supplied free of cost by the recipient could not be covered within the GST value.
In concluding so, the High Court rejected the submissions of the GST Department that “the running condition of a vehicle cannot be achieved without fuel, as in the absence of fuel the vehicle cannot move from one place to another to transport the goods. Thus, without transportation of goods due to absence of fuel or any other reason the same cannot be termed as “GTA service” and the same is liable to be taxed under GST services. In ordinary course of GTA business the essential cost of fuel is borne, in normal and ordinary course, by the service provider only i.e. the transporter”. In other words, the GST Department had represented the contractual covenants be ignored and instead pragmatism should define the ingredients of Section 15(2)(b), which stand has not been acceded to by the High Court. Instead, adopting the observations of the Supreme Court in service tax context, the High Court has concluded that only the amount which is “consideration for rendering the services” should be included within the taxable value.
The principle which emanates from the decision vindicates the interpretation flowing from the plain reading of the statutory provision that not every charge incurred by the service recipient is to be reckoned for GST valuation purpose under Section 15(2)(b). In cases wherein the charges incurred by the service recipient are not linked with the supply executed by the service provider, it has been similarly ruled,14 such charges would not be covered within scope of Section 15(2)(b) and thus would not be liable to be included within taxable value.
One would have thought that this decision, being a fair interpretation of the law, culls the controversy. However, the decision of the Uttaranchal High Court does not notice a prior decision of the Chhattisgarh High Court15 which has adopted a diametrically opposite stand in similar factual position. Being of the view that the entire business of transportation of the service provider would come to a standstill in the absence of fuel, the High Court declared that the arrangement between the parties had to be ignored, and the cost of fuel was required to be mandatory included in the taxable value besides the freight. The following reasoning was ascribed by the Chhattisgarh High Court in its construct of Section 15(2)(b):
21. The very definition and existence of the petitioner who is to provide transportation service, by plain and simple interpretation would point out the entire business and survival is premised and interdependent on the vehicles for transportation of goods. The obvious factor would be the vehicle cannot run without fuel. Therefore, the design of the entire activity of GTA is based on supply of fuel to the respective vehicles. In absence of fuel, the entire business activity would stand arrested to provide service. Therefore, the need of fuel is glued for survival of a GTA. If the GTA has stitched up to provide service by obtaining fuel on free of cost (FOC) basis by contract with recipient company, this phenomenon would transcend the activity which reflects a broader shift in name of contract, therefore, the revenue has power to remove the lid to find out the object and purpose.
22. In the instant case, the scope of supply as defined in Section 7 of the GST Act purports “all forms of supply of services” made or agreed to be made for consideration “in the course” or “furtherance of business”. The words used in Section 7(1)(a), “in course” or “furtherance of business” would point out about service to be provided by the transporter as a GTA. The contention of petitioner that the “consideration” is required to be confined as per the terms of agreement cannot be given a literal interpretation. Section 2(31) of the CGST Act, 2017 mandates that “consideration” in relation to supply of goods or services includes: (a) any payment whether in money or otherwise made or to be made; and (b) monetary value of any act or forbearance for the inducement of supply of goods or services. Reading of Section 2(31) along with scope of supply as defined under Section 7(1)(a) makes it clear that the petitioner who is a GTA wanted to transport the goods for recipient. The recipient is not a GTA or engaged in business of transport. Consequently, it is the petitioner GTA “in course” or “furtherance of business” has agreed to supply the goods or service for consideration. When it is the primary business of the GTA, in order to allow running the vehicles by fuel, it is a potential combination. If that part of responsibility is delegated by way of an agreement to the recipient, in such a case, the recipient would step into the shoes of GTA as its component and would be playing central role in setting narratives.
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25. Section 15(2)(b) says that the value of supply shall include any amount that the supplier is liable to pay in relation to such supply but it has been incurred by recipient of supply and not included in the prices actually paid. This section imposes statutory obligation. The very existence of petitioner as GTA is for goods transport. Naturally, it would be the obligation for the GTA to run the vehicles and this factor needs a merited attention. The provision of Section 15(2)(b) has been tried to be bypassed by the agreement wherein the diesel was agreed to be supplied FOC by service recipient to the GTA. If we look into the facts by other angle, the expenses to fill the diesel in vehicle in furtherance of supply of service in normal condition was to be incurred by the GTA and it was his liability to fulfil such supply. However, in this issue, the expense of fuel has been agreed to be incurred by the recipient by agreement and value of diesel is excluded to evaluate the value of supply. The statutory provision of Section 15(2)(b) takes within its sweep to value, which is incurred by recipient. Therefore, even by agreement in between the GTA and service recipient, this statutory liability cannot be sidelined and the merited attention of the statute sets a red line. Therefore, in the instant case, the value of service agreed to be provided necessarily will depend on the nature of service and the nature of business. The petitioner who can survive to run the business of goods transport on fuel therefore cannot claim that the diesel is supplied by the service recipient free of cost, as such, it cannot be included as the fuel is an integral part used in providing the transportation service and is essential for GTA provider. Without fuel the entire business of GTA cannot survive. Therefore, fuel being an integral part cannot be bifurcated to overcome a tax liability.16 (emphasis supplied)
The aforesaid discussion clearly reveals that the Chhattisgarh High Court did not ascribe a meaning to the expression “supplier is liable to pay” as meaning that under the contract the supplier is liable to pay. One may arguably read the Chhattisgarh High Court to imply that (instead of contractual setting) a broad industry overview of the position is relevant and if the general practice of the industry and the business of the supplier merited the obligation of the supplier is liable to pay, it would be sufficient to trigger Section 15(2)(b) and include the costs/expenses within the taxable value. Clearly, the conclusion of the Chhattisgarh High Court is at variance with the Uttarakhand High Court both on the legal construct of Section 15(2)(b) and the factual paradigm (of transportation service providers) considered by the two High Courts. Though an appeal against the decision of the Chhattisgarh High Court is pending consideration of the Supreme Court,17 nonetheless the cleavage of judicial opinion on the construct of Section 15(2)(b) clearly reveals the complexities arising from its interpretation.
Other cases in the GST landscape similarly reveal the complexities in the application of Section 15(2)(b); for illustration, coaching services with provision of books, study material;18 turn-key projects;19 free of cost facilities such as liquified petroleum gas (LPG) supply, refrigerator, furniture, etc. provided by the factory owner to canteen and catering services provider;20 free of cost materials supplied by the airlines to aircraft maintenance service providers;21 free of cost cement and iron provided by service recipient for manufacturing of precast manholes undertaken by the supplier;22 etc. reveal the multifarious issues relating to determination of the taxable value under the GST framework.
Construing “liable to pay” test
There is another perspective which seems not to have been canvassed in the aforesaid decisions which is the manner of construing the expression “liable to pay” employed in Section 15(2)(b). The provision is silent as to the trigger which causes such liability, the aforesaid decisions have construed liable to pay as meaning contractual liability of the supplier to pay such amounts. However, the provision itself does not state “liable to pay under contract”. In such circumstances, another approach which may be adopted is to give natural colour to the expression “liable” which has a flavour of an obligation under the law. Put differently, it is arguable that the expression “liable to pay” only refers to those liabilities which supplier incurs under law but are incurred by the recipient. For illustration, a transporter of goods is liable under law to pay toll tax or vehicle entry tax and if such tax is borne by the recipient of transportation service, then it would be included in the taxable value.
One may argue that in fiscal statutes “it is contrary to all rules of construction to read words into a statute which the legislature in its wisdom has deliberately not incorporated”,23 and hence, when the statute does not state “liable to pay under contract”, it cannot equally be read to mean “liable to pay under law”. Nonetheless, there are two key reasons to flavour the latter interpretation as it limits the scope of the taxing provision. First, the doctrine of fairness,24 which has received recent exposition in fiscal jurisprudence, calls for an approach wherein the subject is not unduly burdened with tax liability in absence of clear statutory prescription. Second, it is equally settled that “[i]f the legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the taxpayer must be adopted.”25 Of course one has to await judicial acceptability of this proposition, nonetheless it is an approach which quells the interpretative disputes arising from the current construction of Section 15(2)(b) because unlike contractual covenants, which differ from case to case, the liability to pay under law is more definitive and thus results into a greater legal certainty in the application of Section 15(2)(b).
Epilogue
Commercial contracts and party autonomy permit the contracting parties to agree to bear distinct costs and expenses towards execution of the contract. Thus, there would be myriad situations wherein the parties provide distinctively, depending upon negotiations, their respective bargaining power and, above all, the availability of inputs and other resources for the purpose of executing the supply wherein the expenses may be borne or shared by the recipient of supply. The twin tests under Section 15(2)(b) that: (a) the “supplier is liable to pay” the amount but it has been borne by the recipient; and (b) the amount expanded is “in relation to such supply”, both require finer appreciation of the factual paradigm and thus are contentious. In short, in situations where costs or expenses are incurred by the service provider shall perpetually remain a vexed question the answer to which is likely to vary with hair-splitting differences in facts of each supply. Clearly such a position cannot be the objective of the law — which, instead, craves for certainty in fiscal legislations. Such situation calls upon a review by the policymakers of the complexities and the potential litigation arising from the current language of Section 15(2)(b) of the CGST Act to adopt an appropriate amendment insulating the vagaries arising from the application of the valuation mechanism.
*Advocate, Supreme Court of India; LLM, London School of Economics; BBA, LLB (Hons.) (Double Gold Medalist), National Law University, Jodhpur. Author can be reached at: mailtotarunjain@gmail.com.
2. 1985 SCC OnLine SC 326, para 6.
3. Central Goods and Services Tax Act, 2017, S. 15.
4. Central Goods and Services Tax Act, 2017, S. 2(31) defines “consideration” for the purpose of the GST laws in the following terms:
“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; and
(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.
5. Central Goods and Services Tax Rules, 2017, Ch. IV (CGST Rules) stipulates the mechanism for “determination of value of supply”. It contains general rules as also special rules qua specific supplies.
6. For illustration, see, Central Goods and Services Tax Rules, 2017, R. 31-A, which prescribes the valuation mechanism for “supply in case of lottery, betting, gambling and horse racing”, Central Goods and Services Tax Rules, 2017, R. 31-B, which prescribes valuation mechanism for “supply in case of online gaming including online money gaming”, etc.
7. Cape Brandy Syndicate v. Inland Revenue Commissioners, (1921) 1 KB 64. Cited with approval inter alia in Ranbaxy Laboratories Ltd. v. Union of India, (2011) 10 SCC 292.
8. New Jai Hind Transport Service v. Union of India, 2024 SCC OnLine Utt 3345.
9. Gurjinder Singh Sandhu, In re, 2022 SCC OnLine Utt AAR-GST 3.
10. 2022 SCC OnLine Utt AAR-GST 3, para 10.
11. Union of India v. Intercontinental Consultants & Technocrats (P) Ltd., (2018) 4 SCC 669 and CST v. Bhayana Builders (P) Ltd., (2018) 3 SCC 782. The latter decision inter alia observes as under:
13. A plain meaning of the expression “the gross amount charged by the service provider for such service provided or to be provided by him” would lead to the obvious conclusion that the value of goods/material that is provided by the service recipient free of charge is not to be included while arriving at the “gross amount” simply, because of the reason that no price is charged by the assessee/service provider from the service recipient in respect of such goods/materials. This further gets strengthened from the words “for such service provided or to be provided” by the service provider/assessee. Again, obviously, in respect of the goods/materials supplied by the service recipient, no service is provided by the assessee/service provider. Explanation 3 to sub-section (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before, during or after provision of such service, implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient, naturally, no amount is received by the service provider/assessee. Though, sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed, however, it is subject to the provisions of sub-sections (1), (2) and (3). Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value.
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16. In fact, the definition of “gross amount charged” given in Explanation (c) to Section 67 only provides for the modes of the payment or book adjustments by which the consideration can be discharged by the service recipient to the service provider. It does not expand the meaning of the term “gross amount charged” to enable the department to ignore the contract value or the amount actually charged by the service provider to the service recipient for the service rendered. The fact that it is an inclusive definition and may not be exhaustive also does not lead to the conclusion that the contract value can be ignored and the value of free supply goods can be added over and above the contract value to arrive at the value of taxable services. The value of taxable services cannot be dependent on the value of goods supplied free of cost by the service recipient. The service recipient can use any quality of goods and the value of such goods can vary significantly. Such a value, has no bearing on the value of services provided by the service recipient. Thus, on first principle itself, a value which is not part of the contract between the service provider and the service recipient has no relevance in the determination of the value of taxable services provided by the service provider.
12. I.e. Finance Act, 1994, Ch. V.
13. The rulings cited in the High Court decision are: (a) Sunil Giri, In re, 2022 SCC OnLine Raj AAR-GST 4; (b) Hical Technologies (P) Ltd., In re, 2019 SCC OnLine Kar AAR-GST 55; (c) Nash Industries (I) (P) Ltd., In re, (2020) 73 GSTR 308; and (d) Lear Automotive India (P) Ltd., In re, 2018 SCC OnLine Mah AAR-GST 22.
14. Tamil Nadu Generation and Distribution Corpn. Ltd., In re, (Tamil Nadu GST Advance Ruling No. 11/ARA/2024 in Application No. 80/2023/ARA, decided on 20-6-2024). Contra, see, Tejas Constructions & Infrastructure (P) Ltd., In re, 2019 SCC OnLine Mah AAR-GST 41
15. Shree Jeet Transport v. Union of India, 2023 SCC OnLine Chh 5982.
17. Shree Jeet Transport v. Union of India, SLP(C) No. 26867/2023.
18. Symmetric Infrastructure (P) Ltd., In re, 2021 SCC OnLine Raj AAR-GST 7.
19. GVS Projects (P) Ltd., In re, 2019 SCC OnLine AP AAR-GST 34.
20. Musashi Auto Parts (P) Ltd., In re, 2020 SCC OnLine Har AAR-GST 4.
21. Tata Advanced Systems Ltd., In re, 2023 SCC OnLine Guj AAR-GST 20, following Shree Jeet Transport v. Union of India, 2023 SCC OnLine Chh 5982, and opining that the free supplied material are crucial/critical components of the aircraft.
22. Natani Precast, In re, 2023 SCC OnLine Raj AAR-GST 7.
23. State of Maharashtra v. Shri Vile Parle Kelvani Mandal, (2022) 2 SCC 725, para 17, following Godrej & Boyce Mfg. Co. Ltd. v. CIT, (2017) 7 SCC 421.
24. See generally, CIT v. Vatika Township (P) Ltd., (2015) 1 SCC 1 (5-Judges).
25. State of Bombay v. Automobile and Agricultural Industries Corpn., 1960 SCC OnLine SC 180.
