A recipient’s direct payment can still enter the supplier’s value
Under section 15(2)(b), value includes an amount the supplier is liable to pay in relation to the supply, incurred instead by the recipient, where it is not already included in the price paid or payable. Therefore, paying a third party directly does not automatically keep the amount outside the supplier’s taxable value. Establish the supplier’s liability, the connection with the supply and whether the amount is already counted.
Framework and scope checked on 24 October 2026
The primary text is CGST Act section 15(2)(b), in ICAI’s April 2026 bare-law compilation. This article addresses the recipient-paid-supplier-obligation addition. It assumes the underlying supply, valuation method and stated price have otherwise been validated. It does not determine the commodity or service rate, special valuation methods, place of supply or input-tax-credit entitlement.
The clause is not a rule that every customer purchase belongs in the vendor’s value. A recipient can incur its own independent obligation. Read the actual contract, purchase order, delivery terms and evidence of who was liable. A document label such as free issue, reimbursement or customer support does not resolve that legal question.
Test liability before following cash
Ask who would have had to pay the expense if the recipient had not intervened. Retain the supplier obligation and the evidence of payment by the recipient. A post-facto internal allocation is weaker than a contemporaneous contract and third-party invoice trail. If the contract genuinely places the obligation on the recipient, that fact must be analysed rather than overwritten by a broad “all costs are value” assumption.
Free-issued material and project support require the same care. The fact that the item helps the supplier perform does not alone prove that the supplier was liable to purchase it. Conversely, supplier-liable packing or another obligation discharged by the recipient may require the addition even when the cash never passes through the supplier’s bank account.
Reconcile the gross price and any direct settlement
Distinguish a gross price already including the relevant cost from a reduced price that excludes an amount borne separately by the recipient. Where the same obligation is included in the agreed gross amount, adding it again would overstate value. Link the invoice, payable, direct payment and settlement to show that the amount enters the working once.
The recipient’s own input-tax-credit analysis is separate. A third-party invoice in its name does not itself establish or defeat the supplier’s section 15(2)(b) addition, and the supplier-value working does not automatically create credit for the recipient. Review tax components and the correct includible amount independently; the figures below stipulate the validated amount to be tested.
Control scope changes and partial payments
Where only part of a third-party charge discharges a supplier liability, allocate the supported part. Keep distinct recipient obligations outside this particular addition without claiming that no other valuation provision could apply. Reassess contract changes, revised costs or cancellations under their applicable rules instead of carrying forward an old allocation indefinitely.
These illustrations calculate taxable-value bridges only. They do not use a hypothetical GST percentage as a claim about the actual rate. They also do not prescribe the treatment of every free-supply arrangement or import a pure-agent rule into the opposite fact pattern: the present question is the supplier’s liability paid by the recipient.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: A supplier obligation paid separately
Assume price paid to the supplier is ₹100,000 and the recipient separately incurs ₹10,000 of a supplier-liable cost relating to that supply, not already included. Value under the stated facts = ₹110,000. Supplier bank receipts of ₹100,000 alone would miss the ₹10,000 addition.
Illustrative example 2: An independent recipient obligation
Assume the supplier price is ₹100,000 and the recipient pays ₹15,000 for its own separate obligation, with the contract and facts establishing that the supplier was not liable for it. Under this particular clause, the tested addition is zero; the stated supplier value remains ₹100,000, subject to other applicable provisions.
Illustrative example 3: Gross price already includes the direct settlement
The validated gross price is ₹110,000. By agreement, ₹10,000 is paid directly to discharge a supplier obligation and ₹100,000 is paid to the supplier. Total consideration already reflected is ₹110,000. Adding the same ₹10,000 again would incorrectly produce ₹120,000.
Illustrative example 4: Allocate the supported part
A recipient-paid third-party amount is ₹30,000. Reliable documents establish ₹18,000 as the supplier’s liability for the supply and ₹12,000 as the recipient’s independent obligation. If the supplier price excludes both, the addition under this clause is ₹18,000, not automatically the full ₹30,000.
Illustrative example 5: Several omitted obligations need a complete bridge
Assume supplier price ₹200,000 excludes two validated supplier obligations paid by the recipient: ₹8,000 and ₹12,000. The addition is ₹20,000 and value becomes ₹220,000. Tracking only the larger payment would omit ₹8,000.
Illustrative example 6: Only the excluded residual is added
Assume a validated supplier-liable amount of ₹25,000 paid by the recipient. Of this, ₹10,000 is already included in the stated ₹100,000 price and ₹15,000 is not. The additional amount under the stated facts is ₹15,000, producing ₹115,000 value, not ₹125,000.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Identify the supply and applicable valuation method | Supply contract and valuation note. |
| 2 | Identify the third-party expense | Invoice and expense description. |
| 3 | Establish who was legally liable | Contract, order and responsibility evidence. |
| 4 | Link supplier liability to the supply | Deliverables and performance records. |
| 5 | Confirm the recipient incurred the amount | Payment and settlement evidence. |
| 6 | Test what is already included in price | Gross-to-net invoice reconciliation. |
| 7 | Allocate mixed obligations | Supported supplier/recipient split. |
| 8 | Calculate only the omitted supplier-liable amount | Independent value bridge. |
| 9 | Review rate and ITC separately | Classification and credit memoranda. |
| 10 | Retain changes and final reconciliation | Revised terms, corrections and ledger trail. |
Sixteen practitioner FAQs
1. Does direct third-party payment automatically exclude the amount?
No. Test the supplier’s liability and whether it is already in price.
2. Does every customer expense belong in supplier value?
No. An independent recipient obligation requires its own analysis.
3. Which legal provision is central here?
Section 15(2)(b) of the CGST Act.
4. Is a helpful input necessarily a supplier obligation?
No. Benefit to performance and liability to pay are different facts.
5. Can free-issued materials be decided by their label?
No. Read the actual allocation of contractual responsibility.
6. What prevents double counting?
Reconcile gross price, direct settlement and omitted amounts.
7. Does the supplier’s bank receipt prove the full value?
Not necessarily; the recipient may have discharged an omitted supplier obligation.
8. Can one third-party bill contain two types of obligation?
Yes. Retain a supported split.
9. Does the addition always equal the full third-party invoice?
No. Establish the relevant includible amount and avoid duplicates.
10. Does the article prescribe a tax rate?
No. Its examples calculate value only.
11. Does this working automatically determine the recipient’s ITC?
No. Apply the credit requirements separately.
12. Can a later internal cost-centre entry replace contract evidence?
It is not a substitute for establishing actual liability and the supply connection.
13. Is this the same as claiming a pure-agent exclusion?
No. The present test concerns an amount owed by the supplier and incurred by the recipient.
14. What if the contract changes who must pay?
Reassess the actual legal and commercial facts before reusing the previous value bridge.
15. Can a zero addition under this clause settle every valuation issue?
No. Check other applicable provisions and any special valuation method.
16. What should the final schedule show?
The supplier liability, recipient payment, amount already included and supported residual addition.
Conclusion
Follow the actual liability and the agreed price, then add only the supported amount not already included. Keep supplier valuation and recipient credit analysis separate.