2025 (5) TMI 1106 - AAAR - GST

Free silver from old batteries must be included in GST taxable value for manufactured batteries under Section 15(4) Rule 27(b)

The AAAR held that silver supplied free of cost by naval formations in the form of old batteries must be included in the taxable value for GST calculation ... Calculation of GST - value of the Silver supplied free of cost by the Naval Formations (in the form of old batteries) are to be included in the taxable value adopted by the applicant on the batteries manufactured by the applicant and supplied to the Naval Formations for the purpose of payment of GST or not - HELD THAT:- In the instant case, the free supply material supplied by the recipient of goods to the supplier is an additional consideration (non-monetary) for the supply. This non-monetary consideration i.e supply of used batteries free of cost has a direct nexus with the underlying supply. The appellant stands to gain substantial economic benefit out of the free issue material provided by the receiver of goods. Here the appellant is not paid wholly in money. The contract is for the supply of Silver Oxide - Zinc Torpedo propulsion Battery Type A-187M3-Complete with Hardware. The main input/raw material namely Silver is supplied free of cost against Bank Guarantee in the form of old and used batteries by the recipient, in addition to the consideration in money value for the supply of said Silver Oxide - Zinc Torpedo propulsion Battery. Hence, the provision of Section 15 (1) of the CGST Act, 2017 alone is not sufficient to adopt the transaction value as the value of supply of goods or services or both is not applicable for determining the value of supply in the appellant’s case when a substantial part of raw material viz, Silver is supplied free of cost by the receiver of supply. As per Section 15 (4) of the Act, where the value of the supply of goods or services or both cannot be determined under sub-section (1) of Section 15, the same shall be determined in such manner as may be prescribed. Accordingly, corresponding rules for valuation under various circumstances are prescribed for ascertaining the taxable value in such cases. The value of Silver supplied free of cost by the Naval formation in the form of old batteries is required to be included in the taxable value in terms of provisions of Section 7 read with Section 2 (31), Section 15 (2) (b) as also Section 15 (4) of the CGST/TNGST Act read with Rule 27 (b) of the CGST/TNGST Rules, 2017. Conclusion - The consideration for supply under GST includes both monetary and non-monetary components, and free supplied integral raw materials must be valued and included in the taxable value. Issues Presented and ConsideredThe core legal questions considered by the Appellate Authority for Advance Ruling (AAAR) are:Whether the value of Silver supplied free of cost by the Naval formations in the form of old and used batteries is to be included in the taxable value of the new Silver Oxide Zinc Torpedo Propulsion batteries manufactured and supplied by the appellant for the purpose of payment of GST.Whether the cost of free supplied Silver (as used batteries) can be excluded from the transaction value under GST on the basis of contractual arrangements between the appellant and the Naval formations.Whether the provisions of Section 15(2)(b) of the CGST Act, 2017, which require inclusion of amounts the supplier is liable to pay but which have been incurred by the recipient, apply to the present facts.Whether the appellant's reliance on Circular No. 47/21/2018-GST and the precedent of moulds and dies supplied free of cost by OEMs to component manufacturers is applicable to the present case involving Silver supplied free of cost.Whether the appellant's contention that the transaction qualifies as job work under Section 2(68) and Section 143 of the CGST Act, thereby attracting GST at a lower rate, is sustainable.Issue-wise Detailed AnalysisInclusion of Free Supplied Silver in Taxable ValueThe legal framework central to this issue includes Section 7 (Scope of Supply), Section 2(31) (Definition of Consideration), and Section 15 (Value of Taxable Supply) of the CGST Act, 2017, along with Rule 27 of the CGST Rules, 2017.Section 7 defines 'supply' as including all forms of supply of goods or services made or agreed to be made for a consideration in the course or furtherance of business. Section 2(31) defines 'consideration' broadly to include any payment made or to be made, whether in money or otherwise, in respect of or for the inducement of supply of goods or services.Section 15(1) states that the value of supply shall be the transaction value, which is the price actually paid or payable for the supply where the supplier and recipient are not related and the price is the sole consideration. Section 15(2)(b) further mandates inclusion in the value of supply of '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.'The appellant manufactures Silver Oxide Zinc batteries and supplies them to Naval formations. The Silver, a principal raw material, is supplied free of cost by the Naval formations in the form of old and used batteries. The appellant extracts Silver from these used batteries and uses it in manufacturing new batteries. The appellant includes the cost of extraction but excludes the value of the free supplied Silver from the taxable value.The Court interpreted these provisions to mean that the value of Silver supplied free of cost by the Naval formations is a non-monetary consideration forming part of the overall consideration for the supply. The appellant receives a substantial economic benefit by utilizing the Silver supplied free of cost, which is integral to the manufacture of the batteries. Thus, the value of this Silver cannot be excluded from the transaction value for GST purposes.The appellant's argument that the contractual arrangement excludes the value of free supplied Silver from the taxable value was rejected. The Court emphasized that statutory provisions cannot be overridden by commercial contracts. The obligation to include the value of such free supplied inputs arises under Section 15(2)(b), which applies where the supplier is liable to pay for inputs but the recipient incurs the cost. Here, even though the Silver is supplied free, it is a cost the appellant would have otherwise borne, and thus its value must be included.Key evidence included the contract terms, the cost of extraction, and the economic reality of the transaction showing that Silver is an essential input supplied by the recipient.Applicability of Circular No. 47/21/2018-GST and Precedents on Free Supplied Capital GoodsThe appellant relied on Circular No. 47/21/2018-GST dated 8-6-2018, which clarifies valuation treatment for moulds and dies (capital goods) supplied free of cost by OEMs to component manufacturers. The circular exempts the inclusion of such free supplied capital goods in the taxable value of supply under GST.The Court distinguished the present facts from the circular's context. The circular pertains to capital goods used by component manufacturers, where the taxability is on the supply of services or components and the free supply of tools does not form part of consideration. In contrast, here Silver is a raw material, an integral part of the final product, not a capital good or tool. The free supply of Silver directly affects the value of the finished battery supplied. Therefore, the circular and related precedents such as the AAR ruling in Lear Automotive India Private Limited were held inapplicable.Job Work ArgumentThe appellant contended that if the transaction is treated as job work under Section 143 and Section 2(68) of the CGST Act, the applicable GST rate would be 18% instead of 28%. Job work is defined as any treatment or process undertaken by a person on goods belonging to another registered person.The Court analyzed the facts and found that the appellant is not merely processing goods belonging to another but is manufacturing new batteries using Silver extracted from old batteries. The transformation involved is significant and not limited to treatment or process on goods owned by the recipient. Hence, the job work classification was rejected.Valuation Rules under Rule 27Since the consideration for supply is not wholly in money, Rule 27 of the CGST Rules applies. Rule 27(b) requires the value of supply to be the sum of consideration in money and any further amount equivalent to the non-monetary consideration, if known at the time of supply.Applying this, the value of the free supplied Silver must be added to the contract price to arrive at the taxable value for GST purposes.Significant HoldingsThe AAAR upheld the Authority for Advance Ruling's decision that the value of Silver supplied free of cost by the Naval formations in the form of old batteries must be included in the taxable value of the batteries supplied by the appellant for GST calculation.The Court stated verbatim: 'The value of Silver supplied free of cost by the Naval formation in the form of old batteries is required to be included in the taxable value in terms of provisions of Section 7 read with Section 2 (31), Section 15 (2) (b) as also Section 15 (4) of the CGST/TNGST Act read with Rule 27 (b) of the CGST/TNGST Rules, 2017.'It was further held that 'Mere contract or agreement between the parties shall not be considered as final in determining the taxability of a transaction. The contract/agreement entered should also take into account the provisions of statute.'The Court rejected the appellant's reliance on the Circular No. 47/21/2018-GST and the job work classification, clarifying that the facts differ materially from those covered by the circular and job work provisions.In conclusion, the ruling confirmed that the consideration for supply under GST includes both monetary and non-monetary components, and free supplied integral raw materials must be valued and included in the taxable value.