TaxTMI 
TaxTMI 
2022 (4) TMI 814
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....an association of farmers, engaged in supply of agricultural produce through concept of fair trade, is liable to pay GST on component of "Fair Trade Premium".? 3.2. Whether the component of 'Fair Trade Premium' constitutes consideration or additional consideration for supply of goods made by the applicant? 3.3. Whether component of 'Fair Trade Premium' can be treated as an ex gratia payment which is not liable for GST either as supply of goods or as supply of services? 4. Contentions of the applicant: 4.1. The applicant submits that they focus on issues of sustainable farming and trade justice. The intention is to enable farmers to access the global and pan Indian markets and improve their income following principles of ''Fair Trade". 4.2. The applicant submits that Fair Trade is an organised social movement and market-based approach that aims to help producers in developing countries to obtain better trading conditions and promote sustainability. Generally, farmers and workers at the beginning of the chain do not always get a fair share of the benefits of trade. The system of Fair Trade ensures that the farmers who are at the beginning point of the supply chain are ....
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.... must be paid. Fair Trade Minimum price is fixed taking into account various factors as cost of production and, other overheads. The price arrived at through such a scientific method of analysing cost, expense and profit will most often be above the prevalent general market price. The Fair Trade Minimum Price fixed are reviewed periodically depending on changed agrarian and market situation. Fair Trade Premium is an extra sum of money received by the farmers and workers for their produce or labour in addition to the price of the commodity. The availability of this incentive to the farmer/worker community is one of the prominent features of the fair trade concept, 4.3. Products eligible for Fair Trade Premium: The Fair Trade premium is available in particular to export from developing countries to developed countries, most notably for coconut, cashew, spices, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, nuts, handicrafts etc. The Fairtrade premium is calculated as a percentage of the volume of produce sold. The amount of premium, farmers receive differs from product to product and across regions. The price is reviewed every three to four years by the regu....
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....duct. The foreign buyer would pay the invoice price. The price which is attributable as consideration for the supply is retained by the exporter. The component of a premium is passed on to the Applicant. The premium, received by the applicant is allocated for purposes as is decided by the premium committee of the applicant. The premium committee consists of members who are elected representatives of farmers forming the society. Few instances of the project for which premium have been used during the previous years were submitted before the authority. Accordingly, a large part of the Fair-trade Premium is invested in converting farms to organic production so that farmers can benefit from higher prices and access quality conscious markets. It is also used to defer the organic certification costs of farmers. In another instance, the premium has been invested in solar-powered electric fencing to protect farms on the edge of forests from wild animals including elephants. The fences act as a benign deterrent to the wild animals straying into farmlands. This has been hailed as an innovative effort to -manage man-animal conflict and the UK charity, "The Elephant Family' characterized the c....
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....under Section 2(31) of the CGST Act they submit that "Consideration" is any payment, made or to be made in money or otherwise in respect of the supply or for inducement of supply of goods or service or both; the payment is by the recipient or by any other person and the consideration shall not include any subsidy given by the Central or State Government. It is, therefore, interpreted than consideration' is a payment made or to be made in respect of a supply. In other words, the component of consideration is integrally connected with "Supply". Though' supply, is not defined under the GST law, Section 7 of CGST Act, 2017, while dealing with the scope of 'supply', provides that supply includes 'sale'. There is no dispute regarding the fact that the transaction between the applicant and the buyer constitutes the sale of goods. The sale of goods is a bilateral transaction where the seller and buyer are the contracting parties. An essential ingredient of such a sale is the 'price' mutually agreed between the parties. Fixation of a price is a matter of agreement between the parties. Only such amounts which are made towards or in respect of sale alone can be treated as 'consideration'. ....
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.... invoice raised by the applicant is paid by the exporter. As far as the exporter-buyer is concerned, his legal obligation to abide by the contract of sale is completed as soon as the invoice price is paid. There is no further legal obligation on the exporter to collect premium and pass it on to the supplier, though they are doing the same as part of their social obligation under the fair trade scheme. The component of the premium is not borne by the first buyer who is the exporter but is paid by the importer abroad while purchasing a fair trade certified product. The exporter is only a conduit in passing on the same to the supplier. His status in Fair Trade parlance itself is the conveyor. The supplier is also an agent for receiving and keeping the amount and using it for developmental activities. 4.12. Another feature of consideration is that the supplier is entitled to appropriate the amount of consideration towards the sale price and there is no obligation attached to the way of accounting or spending such amount. But in the present case, the Fair Trade premium at the hands of the applicant is to be used only for the developmental activities of the farmer community who are me....
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....given by the Central or State Government. Hence, the amount. is not at all, in the nature of subsidy, to be covered either in the definition of consideration or scope of the transaction value. Further `Subsidy' is defined as money given as part of the cost of something to help or encourage it to happen; [Cambridge Dictionary] a grant or gift of money; [Merriam Websters]. A subsidy is generally understood as a payment made to help the consumer to receive a commodity at a reasonable price and to compensate the supplier for supplying the commodity at a subsidized price. In other words, a subsidy is a payment made to make up the difference in price, when a commodity is supplied to someone at a subsidized rate. For an amount to be considered as subsidy, the price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded by the supplier. 4.14. In order to subject the component of subsidy to tax, there should be a direct link between the subsidy and the goods or services at issue. The price payable by the purchas....
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.... component of such ex gratia payment is further distinguishable by the fact that there is no obligation on part of the payee to make the payment. In other words, the supply would happen, irrespective of whether the premium is paid or not. Therefore, Fair Trade Premium is not a consideration/additional consideration or subsidy liable for GST but is an ex gratia payment that is outside the scope of GST law. 4.16. The applicant submits that in the regime prior to GST, the issue of whether the component of Fair Trade Premium is to be added to the turnover of applicant organization had come up for consideration before the Deputy Commissioner, Appeals, KVAT in the context of VAT Assessments for the period 2011-12 to 2014-15. The issue has been decided in favour of the applicant by Order dated 24,07.2019, holding that the component of Fair Trade Premium is not forming part of the turnover of the applicant. The Appellate authority had categorically observed that Fair Trade Premium cannot be treated as a balance of sale consideration for the reason that as per the settled position of law dealing with payment by way of reimbursement of balance price, it is applicable only in the case wher....
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....ssions in the application. 7. Discussion and Findings 7.1. The issue was examined in detail. The application is admissible under subsection (2) of Section 97 of the Act. The questions to be clarified are as follows:- i) Whether the applicant is liable to pay GST on the component of fair trade premium? ii) Whether fair trade premium comes under the concept of consideration or additional consideration in connection with the supply of goods effected by the applicant? iii) Whether the fair trade premium is an ex gratia payment that is not liable to GST? 7.2. To determine the above issues the definition of the term 'Consideration' and the provisions governing the value of supply under the CGST Act is to be looked into. Section 2(31) of the CGST Act defines consideration as follows: '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 Governmen....
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.... (a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and (b) after the supply has been. effected, if",- (i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices: and (ii) input tax credit as is attributable to the discount on the basis of document issued .by the supplier has been reversed by the recipient of the supply. (4) Where the value of the supply of goods or services or both cannot be determined under sub - section (1), the same shall be determined in such manner as may be prescribed.' 7.4, As per Section 15(1) of the CGST Act, the value of a supply of goods or services or both shall be the transaction value, which is explained as the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Sub-sections (2) and (3) of Section 15 list out the inclusions and exclusions to the value of supply. The stages of the transaction a....