AAR Update | Inclusion of cost of diesel provided by recipient in the value of transportation service

This is to apprise you regarding the recent ruling rendered by Chhattisgarh Authority for Advance Ruling  (‘AAR’) in the case of Shri Navodit Agarwal, 2019-VIL-117-AAR. In this case, the AAR inter-alia held that the cost of diesel provided by the service recipient to the transportation service provider, will be included in the value of transportation service and liable to GST.

In the instant case, the Applicant was engaged in the provision of transportation services. It entered into  an agreement with its customer (‘recipient’) for transportation of goods on the condition that the recipient  will supply diesel required for such transportation. The consideration for transportation charges  (considering that the fuel will be provided by the recipient) was accordingly agreed. The moot question  was whether cost of diesel which incurred by the recipient will be included in the value of transportation  service for charging GST or not.

The AAR placed reliance on Section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (‘CGST  Act’) as per which any amount that the supplier is liable to pay but is incurred by the recipient in relation to  supply, is to be included in the value of said supply. The AAR held that cost of diesel will be included in  the value of transportation service and thus liable to GST.

NITYA Comments:

The AAR failed to consider that diesel provided by the recipient was in pursuance to the agreement  entered between both the parties. The provision of diesel was a condition of the contract for provision of  transportation service and did not constitute to be an amount incurred by the recipient on behalf of the  supplier. Thus, the present situation is not governed by Section 15(2)(b) of the CGST Act.

This controversy is similar to provision of tools on FOC basis prevalent in automobile and consumer  durables industry. The CBIC vide Circular No.47/21/2018-GST dated June 8, 2018 clarified and  Appellate AAR (‘AAAR’) in the case of Nash Industries (I) Private Limited, 2019-VIL-08-AAAR, held that the value of tool need not be added in the value of components for charging GST where recipient is under an obligation to provide tools. (Please refer to our insight on this in Issue 7 of NITYA’s Insight l Legal Precedent dated April 23, 2019).

In the case of Bhayana Builders (P) Limited, 2018-VIL-08-SC-ST, the Supreme Court was dealing with the issue of inclusion of value of FOC goods in value of service. The Court held that value of FOC goods is not includible in the ‘gross amount charged’ as the customer does not give it as a non-monetary consideration to the supplier for provision of service.

In the instant case, the recipient did not provide diesel to the transporter either at the desire of the transporter or as a consideration for supply. This was done as per the terms of the contract and therefore, diesel was not an additional consideration flowing from the recipient to the transporter. Further, the supplier was never contractually liable to incur such expense, hence, the question of the same being incurred by the recipient on behalf of the supplier does not arise.

Hence, in our view, the AAR is not correct, and the cost of diesel should not have been added in the assessable value in this case.