Any supply from Principal to an agent or otherwise will attract GST and thus either of the parties need to refer to these valuation rules to avoid a dispute with tax administrative authorities.
Who is a Principal?
“Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services, or both.
For example, a dealership store of an automobile company is an excellent example of Principal-Agent relationship.
Who is an Agent?
“Agent” as a person, including a factor, broker, commission agent, arhatia (term used in local markets), del credere agent*, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
*A del credere agency is a type of principal-agent relationship wherein the agent acts not only as a salesperson or broker for the principal but also as a guarantor of credit extended to the buyer.
Rule 29 of GST Rule 2017: Value of supply of goods made or received through an agent:
The value of supply of goods between the principal and his agent shall-
(a) be the open market value of the goods being supplied, or at the option of the supplier, be ninety percent. of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient.
Illustration: A principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of Rs. 5000/- per quintal on the day of the supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of Rs. 4550/- per quintal. The value of the supply made by the principal shall be Rs. 4550/- per quintal or where he exercises the option, the value shall be 90 per cent. of Rs.5000 i.e., Rs. 4500/- per quintal.
(b) where the value of a supply is not determinable under clause (a), the same shall be determined by the application of rule 30 or rule 31 in that order. i.e.
Rule 30: Value of supply based on cost i.e. cost of supply plus 10% mark-up.
Rule 31: Value of supply determined by using reasonable means consistent with principles & general provisions of GST law. (Best Judgement method)