TAXSUTRA All rights reserved

Valuation of Stock Transfers under Model GST Law - Recipe for Litigation?
Date : June 28 2016

Srinath S, Associate
Partner, Dhruva Advisors
LLP

Guruprasad G, Manager

INTRODUCTION
Valuation as a concept is the core to collection and administration of taxes under any tax law. It assumes
increased significance if it is in relation to Indirect Tax laws- which is an obvious choice of Central and State
governments for monetising incremental tax revenues. Since the GST model law is out in public domain for
comments from trade/industry and professional bodies, an attempt is hereby made to put few of the
transactions under scanner and examine their possible valuation under the relevant clauses of the model GST
law. Valuation provisions with regard to intra state, inter-state, import/export supplies are discussed in clause
15 of the draft Central/State GST Act,2016 (GST Law) and draft GST Valuation (Determination of value of
supply of goods and services) Rules, 2016 (GST Valuation Rules). In the light of the guiding principles
discussed in GST law and GST valuation rules, let us now see the aspect of valuation with respect to the
following transactions:
STOCK TRANSFERS
It is quite common in an organization, having PAN India operations, to stock transfer its goods to its other
units, depos, warehouses which cater to customer orders in different geographical area. Currently on stock
transfer of manufactured goods, both intra-state and inter-state, there is a levy of excise duty on removal of
goods. However, no output VAT or CST is payable. In the GST law there is paradigm shift of taxable event
which is supply. Accordingly, all transactions qualifying as a supply for a consideration would be subjected to
either levy of CGST/SGST or IGST depending on whether the supply is intra-state or inter-state. Further per
clause 3 read with schedule I of GST law, a supply of goods by a taxable person to another taxable person or
non-taxable person in the course of furtherance of business without consideration is also included within the
ambit of supply. In other words, Schedule I covers the transaction of stock transfer which is without
consideration.
Since the registration under GST is based on PAN and is also state specific and with an option of business
vertical specific, there appears to be levy of GST on all stock transfers made from one registration of the
assesse to another registration of the assesse be it intra-state (in cases where the registration is by business
verticals) or inter-state (in all cases). Further per clause 15 of GST Law, value of supply shall be transaction
value that is the price actually paid or payable for the said supply of goods where the supplier and the
recipient of the supply are not related and the price is the sole consideration for the supply. Further per clause
15(4)(ii) of GST Law the value of supply of goods in a situation where the supplier and recipient are related
would be required to be determined as per GST Valuation Rules. Per rule 3(5) of GST Valuation Rules, when
goods are transferred from one place of business to another place of the same business, the value of such
supplies would be the transaction value. Since transaction value is not defined in the rules but in the GST Law
then it becomes imperative to refer back to clause 15 of the GST Law which again refers back to GST
Valuation Rules (call it circular reference in MS-Excels language). Since a stock transfer does not involve any
consideration, though appears to be made taxable under GST but anomaly has been created to the extent of
its valuation.

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At this juncture it would also be relevant to refer to rule 3(4) of GST Valuation Rules which states that the
transaction value shall be accepted even if supplier and recipient of supply are related, provided that the
relationship has not influenced the price. Further if value cannot be determined under rule 3(4) or rule 3(5)
then it requires the value to be determined by sequential application of rule 4 to 6 which are comparable price
method, computed value method and residual method using reasonable means.
It is expected that these provisions would subject stock transfer valuation to detailed scrutiny by the tax
authorities which may give rise to domestic transfer pricing like scenario as it currently exists under Income
Tax Act and consequential litigation. Since the fundamental principle of GST is to allow seamless credit it
would be appropriate that the Government takes note of such anomalies and introduce an alternative valuation
mechanism for stock transfers, preferably cost + x%, to reduce any associated compliance and litigation cost
to the taxpayer and administrative cost to the Government on a revenue neutral exercise, in the sense that
GST paid on stock transfer by one unit of the taxpayer would be available as credit to other unit of the
taxpayer (provisions similar to extant Rule 8 of the Central Excise Valuation Rules).

ROYALTY PAYMENTS
Royalty is a form of payment made to an intellectual property (IP) holder for the use of the IP. In a business
scenario an importer would undertake to import goods from a foreign supplier for sale in India for which an
agreed consideration is paid. Additionally, there may be an agreement by virtue of which the importer is liable
to pay royalty to the foreign supplier for use of his brand name in India which is also displayed/printed on the
goods so supplied.
The value of royalty to be paid is normally determined as a percentage of sale of such goods in India.
Currently these royalty payments are dear to the Customs Officers and the Service Tax officers as each of the
authorities have been demanding Custom Duties and Service Tax respectively on such payments.
The extant Customs Valuation Rules with regard to import stipulates that if the royalty is required to be payable
in relation to the imported goods and as a condition of sale of such imported goods then it would form part of
the value for payment of customs duties. However, having been subjected to the levy of customs duties the
same is not, by default, considered to be exempt from the levy of service tax. In other words, under the extant
provisions of Service Tax law, temporary transfer or permitting the use or enjoyment of any intellectual
property right is a Declared Service and attract levy of service tax on reverse charge basis if the service
provider is outside India. This has been a matter of long drawn litigation and in few instances courts have held
that the taxable events are different under Customs Act, i.e., import of goods and under Service Tax Laws, i.e.,
provision of service and accordingly have refrained granting exemption from inclusion of royalty while arriving
at the assessable value of customs even in cases where service tax has been paid and vice versa (a case in
example is the levy of service tax on import sea freight, which is subjected to customs duty also).
However, from the tax payers point of view it has always been debated that the consideration paid towards
royalty can either be for the right to use which comes bundled with the import product, though consideration is
spilt, or it is separately received as a service and accordingly cannot be included in the value for both Customs
duty and Service Tax purposes which would amount to dual levy. Under the GST Law, in addition to basic
customs duty, import of goods would be subjected to IGST in lieu of CVD and SAD and import of services
would also be subjected to same levy of IGST(In terms of Sl. No. 5(c) of Schedule II, temporary transfer or
permitting the use an IP is treated as Service) Since the value of royalty, be it included as part of goods or
services would have suffered same tax, i.e., IGST, it is expected that GST would bring relief to the existing
anomalies on this aspect of double taxation of royalty. However, in the interest of the business, suitable
representation may be necessary.

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CONCLUSION
The progressive efforts of the Central Government of taking GST closer to reality has been commendable and
the release of Model GST law for public comments has the effect of making the stake holders faith more firm
about its speedy implementation. While the Model GST Law is wide enough to cover the principal concepts of
Goods and Services Tax regarding levy, supply, valuation and administrative mechanisms, it is imperative for
the trade and industry to evaluate each set of their operations vis--vis GST principles to discover the impact
and initiate necessary actions or consider making suitable representations where necessary.

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