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Valuation of Supply: Made or Received between Principal and Agent

Under GST any supply made or received by an agent to the principal or vice-versa is taxable. In this article, we will discuss how to determine the value of the supply of goods made or received via an agent

What do yo understad by Principal and Agent relationship?

Before getting into the depth of the valuation rules regarding the supply made or received between principal and agent, we need to know who is a principal and who is an agent according to the GST.

As per GST, the principal is a person on whose behalf an agent supplies or receives any goods or/and services. The best example of a principal-agent relationship is a dealership store of a cell-phone company. However, as per GST, an agent is a person who receives or supplies any goods or/and services on behalf of another person. An agent may include a broker, commission agent, an auctioneer or any other mercantile agent.

Value of Supply of Goods Made or Received via an Agent

1. Here is the valuation rule to determine the correct tax liability for any supply made or received between the principal and agent or vice versa:

  • Open Market Value of the product or service supplied or received, or;
  • at the option of the supplier, 90% of the price charged for the similar type and quality of the goods supplied by the recipient to his unrelated customer.

Let us understand this with an example

Mr. A a principal supplies cellphone to his agent (Mr. B).

Mr. B supplies a cellphone of a similar type and quality for 10,000 INR per box on the day of supply. However, Mr. C, another independent supplier is supplying similar cellphone at the price of 8,500 INR per box.

So, in this case, the value of the supply carried out by the principal Mr. A must be 8,500 INR per box (Open Market Value) or at the option of the supplier, 90% of 10,000 INR that will amount to 9,000 INR.

2. In case if the taxable value cannot be ascertained using the above method than the following method shall be used sequentially,

  • Value of supply based on cost, that is, cost of supply plus 10 percent profit margin
  • Value of supply based on the best judgment method. In simple words, ascertaining the value of supply using reasonable means consistent with the general provisions of the GST.

However, it shall be noted that in the case when the services are supplied by a pure agent to the recipient then in such case it shall be excluded from the value of supply but after fulfilling certain conditions. To understand this better let us take an example:

Mr. X a pure agent to Mr. Y handles all the legal work related to the company incorporation of Mr. X. However other than the service fee, Mr. X also charges the registration fee and approval fee from Mr. Y to pay to the ROC (Registrar of Companies). In such a case, Mr. X is merely acting as a pure agent and recovery of such expenses made by him/her shall not be included in the value of supply made by Mr. X to Mr. Y.