As per Section 9(1) of CGST ACT 2017 ‘There shall be levied a tax called the central goods and services tax on all intra –state supplies of goods or services both ,except on supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.
So for the purpose of levying GST on supply of goods or services, value is to be determined as per Section 15 of CGST Act 2017 which states as below:-
“The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply”.
So “Transaction Value” is the basis for Valuation for supply of goods and/or services under the GST Regime for the levy of tax i.e GST so first we have to determine the transaction value. ‘Transaction Value’ is the price actually paid or payable for supply of goods and/or services.
This is subject to conditions as mentioned below
If any of the above condition is not satisfied, then valuation is to be determined as per Valuation Rules (Rule 27-35)given in CGST Rules 2017 dealing with valuation.
As per Section 7 of CGST ACT 2017 the expression “supply” includes–– all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
The definition does not include the word “by a person to a person “which was in case of service tax meaning hereby even self-supplies will be chargeable to tax .
As per Schedule 1 of CGST Act 2017 following “Transactions will be treated as Supply under GST Even If Made Without Consideration”
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
As per Section 25 (4) of CGST ACT 2017 “ If a person has obtained or is required to obtain more than one registration, whether in one state or union territory or more than one state or union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act”.
As per Explanation to Section 15 of CGST ACT 2017
Persons shall be deemed to be “related persons” if––
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognized partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
(b) the term “person” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
So in case of supply between related person or distinct person when made in course or furtherance of business will be taxable even made without consideration as per above explanations
Rule 28 deals with the value of supply of goods or services or both between distinct persons or related persons other than through agent. It states 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;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to 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
Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.
XYZ limited of Madhya Pradesh is in the business of selling spectacles and has multiple branches all over India. As branches are located in different states they have got their separate GST registration under the same PAN number as per the concept of distinct person.
XYZ limited makes sale directly to its customers as well as through its branches. XYZ Ltd supplies spectacles to its branches and raise tax invoice and charges tax on the same as per applicable rate.
Value adopted by XYZ Ltd for supply of spectacles is the same as adopted for sale to unrelated customers considering it to be the open market value of supply as per Rule 28(a) of CGST Rules 2017.
But this results in unnecessary blockage of working capital for XYZ limited as it takes a considerable amount of time for its branches to clear the stock and till that time credit is not utilized.
So XYZ ltd wants to transfer the spectacles at much lesser price then open market value by directly invoking second proviso of Rule 28 which states that “Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services “and as the spectacles are taxable goods and branches are eligible for full input tax credit XYZ Ltd thinks that he can do the same as it is in accordance with the rules above.
Question is can XYZ Ltd do it and will revenue accept the valuation on this basis?
Similar kind of question was raised by M/s GKB LENS private before the WEST Bengal Authority for Advanced Ruling .The facts of the case were:-
♦ The Applicant was stated to be a Re-seller and Importer of Sun Glasses, Frames, Lenses, Contact Lenses, etc. having Head Office in West Bengal. Goods, namely, Optical Lenses and Frames for Spectacles and Accessories which were transferred from the Head Office in West Bengal to its branches in other states. Advance Ruling was sought on whether such goods supplied to the branches in states other than West Bengal can be valued in terms of the Cost Price under the Second Proviso to Rule 28 of CGST Rules, 2017, instead of 90% of MRP as required under the First Proviso of the same Rule.
♦Also clarification was sought by the Applicant regarding the phrase “Eligible for full input tax credit”, especially in the context of the fact that apart from the trading goods, the Head Office also supplies to these branches non-trading stock like printing &stationery, office equipment, etc. The Applicant states that these non-trading stock are transferred at zero value
The decision of advance ruling authority on matters raised by the applicant was :-
♦ The Applicant has the option of not supplying goods to its branches under the First Proviso of Rule 28 and is eligible to value these goods by applying the terms of the Second Proviso to Rule 28 of GST Act.
♦ The expression “where the recipient is eligible for full input tax credit”, as used in the Second Proviso to Rule 28 of CGST Rules, 2017, means that the recipient will be eligible to take full input tax credit of the amount of tax paid by the suppler as mentioned in the respective invoice or any other document valid under Section 16(2)(a) of GST Act.
So as per this Ruling in our case study M/s XYZ Ltd can value goods at even lesser price as per Ruling above.
However in another matter of M/s. Specsmakers Opticians Private limited the decision given by Advance Ruling Authorities is not in sync with the above mentioned advanced ruling .The brief facts of the case were:-
♦ The Applicant M/s Specsmakers locally procure Lenses, Frames, Sun Glasses, Contact Lenses as well as Reading Glasses, Complete spectacles and are engaged in re-selling them. They have their office in Tamil Nadu at Chennai. They also have branches outside the state of Tamil Nadu and the goods imported and re-sold by the applicant are also transferred to their branches located outside the State for subsequent supply to ultimate customers.
♦ In the present case as the branches are distinct persons, they are required to discharge the CGST/SGST/IGST as applicable while supplying the goods to their branches outside the State. Rule 28 of GST rules, 2017, provides three options for determining the value in respect of supplies to distinct/ related persons. These options are governed by two provisions. The applicant is of the view that the second provision 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.
♦ Hence, in their view 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 by taking into account the cost price in the tax invoice while dispatching the supplies to other states.
The decision of advance ruling authority on matter raised by the applicant was
♦ The value in respect of supply of goods i.e. Lenses, Frames, Sun Glasses, Contact Lenses as well as Reading Glasses, Complete spectacles by the applicant to distinct persons being branches outside the state of Tamil Nadu shall be the open market value of such supplies that is available as per of Rule 28(a) and Explanation (a) to Chapter IV of CGST/TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017.
♦ Where the goods are intended for further supply as such by the recipient, the applicant has the option to adopt an amount equivalent to 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 as the value of such supplies to the distinct recipient as per proviso to Rule 28 and Explanation (a) and (b) to Chapter IV of CGST/TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017.
Other important things which were also stated by authorities in this advance ruling was :-
♦ The applicant contends that he can skip Rule (a) and also not exercise the option at the proviso to Rule 28 and go directly to the further proviso. The applicant states that he may include any value while invoicing to the recipient as the recipient is eligible for full input tax credit as per the further proviso to Rule 28.If that were the case, the applicant may use a value much higher than the open market value to pass on input tax credit to his branch office outside the state or he may use a much lower value than even his cost price, which will lead to accumulation of input tax credit for the applicant, which is not the intention of a taxation based on value addition.
♦ Further, if a taxpayer can skip all the provisions under Rule 28(a) to (c), in spite of them being specifically mentioned as the value which “shall” be adopted, then in no scenario will any taxpayer ever use Rule 28(a) to (c). Both provisos are to be read together and not independently, i.e. the applicant cannot choose whichever proviso is favorable to them.
So the decision of two advance rulings decision are not consistent to each other and though the applicability of advance ruling is binding only on the applicant and on jurisdictional tax authorities in respect of the applicant it still holds a significant importance as its coming from jurisdictional authorities.
♦ Authorities clarification in the second advanced ruling in the matter of M/s. Specsmakers Opticians Private limited where they stated that, if a taxpayer can skip all the provisions under Rule 28(a) to (c), in spite of them being specifically mentioned as the value which “shall” be adopted, then in no scenario will any taxpayer ever use Rule 28(a) to (c). Both provisos are to be read together and not independently, i.e. the applicant cannot choose whichever proviso is favorable to them seems to be on reasonable and logical grounds because every tax payer in that case will jump directly to proviso (2) of Rule 28 which does not seems to be the intention of law as well.
♦ However, next question which arises is that in what circumstances the second proviso will be applicable which states that “Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services”.
♦ Also it is written that where the recipient is eligible for full input tax credit whether the same is talking about credit relating to specific invoice/invoices or whether it means that the recipient is eligible to take full input tax credit in respect of all supplies made to recipient assuming that he is not making any exempt outwards supply from the taxable input because if recipient is making taxable as well as exempt supply using the taxable inputs/capital goods in that case he has to reverse the credit to the extent of Inputs/Inputs services/Capital goods used as per Rule 42 or Rule 43 and will not be eligible for full input tax credit as stated in the proviso.
Suitable clarifications may be issued by the Government in this matter in order to avoid litigations in future .