Valuation of the goods/service is one of the important aspects as to computation of GST for any assessee.  Many a times instead of supplier of goods procuring the materials, the customer would provide goods [or services] free to enable supply by manufacturer.  Similarly there have been instances where the free of cost/FOC material such as steel cement, RMC, Capital Goods [equipment/machines]are supplied to service provider by the service recipient. Similarly services in the form of supervision, manpower supply, security could be provided by the client/ customer on free of cost basis.

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At times consumables like diesel, explosives, electricity, water, may also be supplied by customer.  All these are used by supplier for providing the end goods/service. However they may/ may not be the obligation of the customer. Such free supplies could be done for ease or control on costs or for ensuring quality or to speed up the delivery.

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. In this background, we look at an important issue in valuation under GST. The issue is on includability of value of FOC materials received by supplier and whether GST needs to be paid on same. 

In this article some relevant aspects as to valuation provisions and thereafter implication of free of cost supplies by customer and decisions/rulings which maybe relevant in context of GST are discussed.

Discussion on Circular no.47/2018-GST

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 amortised cost of such moulds/dies shall be added to the value of the components.

DISCLAIMER: The views expressed are strictly of the author and AGA. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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