In re Thirumalai Chemicals Limited (GST AAR Tamil Nadu)
Q. The value to be adopted in respect of transfer to branches located outside the state?
Ans: The applicant can adopt any one of the following three methods provided under Rule 28 of the CGST/ TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017to arrive at the value in respect of supply to distinct persons
a. Open Market Value as is presently being adopted by them;
b. 90% of the ultimate sale value as raised by the distinct persons to the un-related ultimate customers based on the Purchase Orders in cases of ‘as such’ supplies;
c. The distinct persons being eligible for full Input Tax credit of Taxes paid by the applicant, the ‘Invoice value’ is the deemed ‘Open Market Value’
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, TAMIL NADU
Note: Any appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated.
At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.
M/s. Thirumalai Chemicals Limited, having their principal place of business at No.25A,Sipcot Industrial Complex, Sipcot, Ranipet- 632 403 (hereinafter called the Applicant) are registered under GST with GSTIN 33AAACT2015M1ZM. They are engaged in the business of manufacture and trading of chemicals. The applicant has preferred an application seeking advance ruling on the following questions:
1. The value to be adopted in respect of transfer to branches located outside the state.
2. whether the value of such supplies can be determined in terms of the second provision to rule 28 in respect of supplies made to distinct units in accordance with clause (4) & (5) of section 25 of the CGST rules, 2017?
The Applicant has submitted the copy of application in Form GST ARA – 01 and also submitted a copy of Challan evidencing payment of application fees of Rs.5,000/-each under sub-rule (1) of Rule 104 of CGST rules 2017 and SGST Rules 2017.
2.1 The applicant has stated that they are engaged in the business of manufacture and trading of Chemicals. They are the largest producers in the world for Phthalic Anhydride, Malic Acid and Fumaric Acid. Apart from this, they have revenues from Sales of power from wind operated generators & income from letting out of storage facility. Apart from the units in Tamilnadu, they have units & branches located in Gujarat, Maharastra and Dadra & Nagar Haveli. Apart from the domestic and export sales they are also engaged in Stock transfer of their finished products to their units (depots) located in other states, who are distinct units as per Section 25 of the Act and to their agents in other States. At present, stock transfers from Ranipet are made to warehouses (depots) situated in Gujarat & Maharashtra being distinct entities. To reach out to the customers on time and to maintain optimum inventory at depot level, there is always movement of goods from factory to depot under the concept of stock transfers. Further, Rule 28 of GST Rules 2017 deals with valuation of a supply when it is made between distinct or related persons. They have stated that at present the valuation adopted for stock transfer to their distinct entities in other states are made in accordance with the provisions of Rule 28(a) of the CGST Rules, which says that the value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- (a) be the open market value of such supply; i.e., they are adopting the `Open market value’ as provided under Rule 28(a) of CGST Rules, 2017. The distinct units are eligible to full input tax credit as per second proviso of Rule 28 of Central Goods and Services Tax Rules, 2017 and are availing input tax credit of the stock transfers received from the distinct unit at Tamilnadu. Further, the said stock transfers are sold by the distinct person from their depots.
2.2 The applicant has stated that apart from the depot, there is a factory at Gujarat and is incorporated as an additional place of business in the GST registration certificate of Gujarat. The factory is yet to commence the commercial production. The factory at Gujarat has acquired lot of machineries, equipment & inputs for its operation and due to which lot of input tax credit has been accumulated at the unit at Gujarat. Apart from this, there are input tax credit available due to payment of warehouse charges. The factory is yet to become operational and as such there is no sales resulting in outward GST liability. The applicant has also submitted that they have their Registered office at Maharashtra (Mumbai) and input tax credit accumulated at the Maharashtra office remain unutilized due to the fact that apart from the input tax credit availed based on stock transfer, there is accumulation of input tax credit due to receipts of inputs such as bank charges, RCM charges, consultancy charges etc., at the office. Apart from this, there are input tax credit available due to payment of warehouse charges. The applicant has submitted a sampling data displaying the input tax credit availed by way of stock transfer and other purchases & expenses, wherein the percentage of excess input tax credit on stock transfer receipt to outward liability on sales at the depots as well the overall excess input tax credit available after adjusting the outward liability expressed in terms of both figures and percentage. They have stated that from the data it could be observed that the Stock transfer input tax credit availed during 2018-19 was in excess by 1.07% & 0.19% as compared to the outward liability discharged in Maharashtra & Gujarat, respectively and also there are accumulated input tax credit availed from other purchases and expenses at the respective places of business in Maharashtra & Gujarat. In view of the sampling data, the applicant’s observation is that the amount of input tax credit with respect to Integrated Goods and Service Tax availed from Stock transfer receipt is more than sufficient to discharge the outward liability at the time of sales made at the depots. The above trend would be almost similar in other periods also and as such the accumulated and unutilized input tax credit continues to be on the higher scale. Except for sale of stock transfer receipts, no other sales are in place in Maharashtra & Gujarat. Hence, the inflow of input tax credit continues to surpass the outflow GST liability. This expresses the distinct person’s inability for maximum utilization of input tax credit. In view of this, they need to revisit the existing pricing pattern adopted for stock transfers. The revised strategy is adopting a reduced or zero valuation for stock transfers fully in compliance with the provisions of Rule 28 of CGST Rules, 2017 without any deviations, wherein the outflow of GST liability would be either reduced or Zero and in turn the inflow of input tax credit on stock transfer receipts at depots would be greatly reduced or would be Zero. This would prompt the depots to focus their attention on the alternative source of accumulated input tax credit available which in turn would result in their maximum utilization. Further, they have stated that Going forward there would be maximum utilization of the entire input tax credit available which would result in unblocking of the accumulated and unutilized input tax credits, releasing of blocked capital and funds and ease of doing business.
2.3 On the issue for determination, the Applicant has stated that in the instant case, since the Tamilnadu unit is a distinct person, they are required to discharge the CGST/SGST/IGST as applicable while supplying/stock transferring the goods to their distinct units outside the State. They have referred to Rule 28 of GST Rules, 2017 and its proviso. They are of the view that the second proviso is applicable to their case, i.e., where the recipient is eligible for full input tax credit, the value declared in the invoice shall deemed to be the open market value of the goods or services. As input tax credit is not available unless there is an invoice or document of like nature [Section 16(2)(a)], the above proviso must be interpreted with reference to specific invoices. Hence all Invoices or documents of like nature under Section 16 of GST Act, of goods for further retail sale or for use in the business transferred to branches considered as distinct persons being located in States other than TamilNadu, are valid documents eligible for Input Tax Credit. If the second proviso is applied it is sufficient that they pay tax at the time of supply of goods from the state of Tamil Nadu on the value declared in the tax invoice while dispatching the supplies to other States. The goods received by the recipient are further sold or supplied to the consumers/customers based on the market price. At that time, the Applicant’s distinct unit outside the Tamil Nadu State pays the applicable tax under GST provisions on the basis of the actual sales value to the customers at which these are supplied to them. The Applicant has further stated that if the transfer of goods from the State of Tamil Nadu is also to take place on the basis of market value, then though the unit outside the State will be eligible to claim input tax credit on such stock transfer receipts, the amount of input tax credit of stock transfers availed shall only be used for set off when the stocks are sold by the distinct units. In fact, there may remain an excess amount of input tax credit of stock transfer received & other input tax credit availed after setting the same toward the discharge of GST liability in respect of sales done at depots. Rule 28(a) provides that, the value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall be the open market value of such supply; With regard to the second proviso, when full input tax credit is available, it is provided that the value declared in the invoice is to be treated as open market value of the goods or services. In other words, there is no requirement that these provisos should be applied only sequentially. They are provided to take care of different situations and taking into account the fact that the open market value is specifically defined in Chapter IV of CGST Rules, 2017, the value declared in the invoices in respect of cases where the recipient is eligible to take full input tax credit will be the value relevant for payment of tax when the goods are transferred to the branch. It is only with the intention to avoid blocking of capital/funds, the legislature has provided a situation, where when the distinct person is eligible to take full input tax credit and is going to make further supply, then, in respect of initial supply, it is not necessary to adopt only open market value and pay higher tax and block such tax amounts. In such a situation, till the credit is used by distinct unit, the credit amount will remain accumulated. On the other hand, when full credit is taken at a lower value and further supply is made at a higher value at the point of supply, the distinct unit will utilize the credit and also pay additional tax based on the open market value at the time of making further supply. They have also stated that there is nothing to show that the second provision is subordinate to the first provision of Rule 28. It independently deals with a scenario where the recipient is eligible for full input tax credit. Also, the second proviso does not restrict its application as in the first proviso, which is to be applied for cases of ‘as such supply’. Therefore, the Applicant is of the opinion that they may adopt the value for supply to distinct person as provided under proviso 2 to Rule 28 of the CGST/TNGST Rules, 2017. Further, there is no specific regulation in the said Rules, that the Rules are to be applied seriatim. In case of full Input tax being available to the recipient as credit, the invoice value is declared as ‘Open market value.
2.4 The Applicant has submitted that, they will be entitled to adopt any value range for supply of these items to their branches when their branches are entitled to take full credit of the tax paid and such values, therefore, adopted by the Applicant are to be treated as open market value for the purpose of CGST Act and Rules. Also they have stated that that they propose to adopt a lesser price or Zero price as it may warrant for their stock transfer to their distinct units (depots) situated in different states to offset the accumulated input tax credit, which will pave way to avoid unnecessary blocking of capital/funds to the organization which in turn will ensure the smooth functioning of the business. Further due to the fact that lesser price being adopted in stock transfer would result in lesser accumulation of credit at the place of the stock transferor. However, these credit in turn would be utilized for their supplies to other unrelated customers by the Applicant. They have placed reliance on the following case laws to substantiate their contentions:
> APPELLATE AUTHORITY ADVANCE RULING No. AAAR/09/2019(AR),
> DATED 13th November 2019 in IN RE : SPECSMAKERS OPTICIANS
> PRIVATE LIMITED
> In Re : Gkb Lens Pvt. Ltd. – 2018 (13) G.S.T.L. 343 (A.A.R. – GST)
> In Re : Gkb Lens Pvt. Ltd – 2018 (17) G.S.T.L. 698 (App. A.A.R. – GST)
> In Re: Kansai Nerolac Paints Ltd.- 2019 (26) G.S.T.L. 257 (A.A.R. – GST)
They have submitted that they wish to determine & adopt the value of supply of goods (Stock transfer to their distinct persons) as per second proviso to Rule 28 of CGST Rules, 2017, and apply the same by replacing the existing method of valuation of goods, i.e., open market value as prescribed under Rule 28(a) of CGST Rules 2017 and has sought to clarify the same.
3.1 Due to the prevailing PANDEMIC situation and in order not to delay the proceedings, the applicant was addressed through the Email Address mentioned in the application to seek their willingness to participate in a virtual Personal Hearing in Digital media vide e-mail dated 31.07.2020. The applicant consented and the hearing for admission of the application was held on 20.08.2020. Shri. K.V.Srinivasamurthy, authorised representative participated in the hearing and reiterated the submissions made along with the application. The representative referred to the decision of the Tamilnadu Appellate authority for Advance Ruling in the case of M/s Specsmakers and claimed their case is similar in acts. The applicant was asked to furnish the details of the finished products stock transferred from Ranipet with Invoices; current method of valuation adopted with related documentation; the list of recipients of these products from Maharashtra and Gujarat with sample invoices.
3.2 The applicant vide their letter dated 27.08.2020 submitted the following: A random selection of Sample invoices(copies) for a period of three months ranging from December 2019 to February 2020 pertaining to stock transfer from Ranipet to Gujarat Distinct person; Sales by the Gujarat Distinct person; stock transfer from Ranipet to Maharashtra Distinct person; Sales by Maharashtra distinct person
> Comparative Chart of Average price between Stock Transfer price & Sale Price based on the above sample data – (In percent)
