During the pre-GST era, for inter-State stock transfers the major concern of the Industry was with regard to additional cost of CST and the compliance burden of submission of statutory forms. However, there was no concept of deemed service between branches located in two different States and hence there was no requirement to pay Service Tax on such activities. With the introduction of GST, by virtue of Schedule I, the scope of levy has been enhanced to cover even deemed service transactions.
The scope of supply enumerated under Section 7 of the CGST Act, 2017 covers within its ambit the term “transfers” and further Schedule I specifically covers within its scope the supply made between related or distinct persons even if made without a consideration.
The term distinct person derives its meaning from section 25 of the CGST Act, 2017 which would cover the branches or units or offices, etc., belonging to the same person, whether registered or not.
It is clear from the literal interpretation of the provisions that stock transfer / services between branches covered under two different GSTINs attracts levy under GST, the challenge comes with the valuation for such transfers.
Section 15 of the CGST Rules, 2017 prescribes the valuation to be adopted, wherein the supplier and recipient of the supply are not related, and price is the sole consideration for such supply. Sub section (4) & (5) of section 15 of the CGST Act,2017 provides that in any other case the valuation shall be determined in such manner as may be prescribed and the prescription is in rules.
The basic objective of the valuation rules in such cases, appears to address the concerns of over/under invoicing, in order to avoid tax loss to the Revenue. For instance, an input is transferred by Branch A in Chennai to Branch B in Delhi for further manufacture, wherein the input is taxable, and the final product is exempted. In such a scenario, the issuing branch could try to possibly reduce the price to minimise the impact of tax cost at the receiving branch. In order to avoid such tax planning, the valuation for such transactions are governed under specific rules under the CGST Rules,2017.
Chapter IV of the CGST Rules, 2017 covers rule 27 to 35 which deals with the valuation procedure to be adopted for every case where the parties are related. Rule 28 specifically deals with determining value of supply between distinct or related persons. Rule 28 reads as follows:
“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.
The term Open Market Value is defined by virtue of Explanation provided under Chapter IV of the CGST Rules, 2017 as follows:
“open market value of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made”
C. Where is the Confusion?
The doubt arises by virtue of the provisos given under Rule 28 in order to determine the “Open Market Value”
A question arises as to whether the second proviso is a continuation of the first, or the same has to be read independently. In this context the TN AAR in the case of Specs makers Opticians Private Limited [2019 (27) G.S.T.L. 596 (A.A.R. – GST)], had ruled that
“both provisos are to be read together and not independently, i.e. the Applicant cannot choose whichever proviso is favourable to them. Applicable rule would be R.28(a) i.e. Open Market Value, on satisfaction of both the conditions given in the above provisos i.e. the value would be 90% of the price charged for sale to unrelated consumers on satisfaction of the condition that the receiving branch is eligible for full credit.”
The Authority gave the above ruling based on the words “provided further” used in the second proviso, which they interpreted to be a continuation of the first proviso.
The AAR TN states that if the interpretation of applicant is adopted then he can value any amount and transfer the credit to the recipient. Law has to be interpreted as it is and cannot add or delete words. Law cannot be interpreted based on the consequences that emanate from the interpretation. For instance, when ITC is restricted for certain input/input services, we cannot argue that the consequence of the same results in additional cost in the hands of the recipient and hence ITC would be available.
However, in an earlier contrary ruling by the AAAR in the case of GKB lenses Pvt Ltd [2018-TIOL-18-AAAR-GST] which upheld the order of the AAR, which held that
“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 Second proviso to Rule 28 of the CGST Rules, 2017”.
D. What the Statute actually provides for
1. Reference to Judicial Precedents
In this context we would like to refer the order of the Hon’ble High Court of Calcutta in the case of Ever Bright Plastics Pvt. Ltd. v. Collector of Customs [1993 (65) E.L.T. 196 (Cal.)] wherein it was argued that the word “further” indicates something in addition to what had been provided to the first proviso and if any permission was required for the cases covered by the first proviso, then such permission would also be required in the second category of cases the HC ruled that
“The phrase ‘provided further’ in the second proviso, only means that another proviso was being added to sub-section (3) of Section 46. From this, it does not necessarily follow that the second proviso was the continuation of the first proviso.”
2. Reference to Existing Provision of CGST Act,2017
In addition, we can also refer to the existing provision under the CGST Act,2017 which contains more than one proviso. For instance, section 16 of the CGST Act, 2017 contains two provisos in a similar fashion as provided under rule 28 of the CGST Rules, 2017 which is as under:
Provided that where the goods against an invoice are received in lots or installments, the registered person shall be entitled to take credit upon receipt of the last lot or installment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
If the view mentioned in the case of Specks maker ibid is adopted, the above 2nd proviso (of credit reversal in case of late payment to vendor) would be interpreted to be applicable only in case of supplies in lots and not in case of other supplies.
However, we are aware that the Government does not intend to interpret it so. It is thus abundantly clear that both provisos are independent and cover two different aspects related to input tax credit. That being the case, similarly worded provisions in a statute cannot be interpreted differently. Thus, it is clear that the two provisos in rule 28 of the CGST Rules,2017 are mutually exclusive and the assessee has the option to choose either of the two.
3. Provisos redundant for a Service Transaction
If the view in the case of Specs makers Opticians ibid is considered to be correct i.e. in case the first proviso is applicable for a particular supply, then the said value will have to be adopted which will be considered as deemed OMV as per the 2nd proviso, then the word ‘service’ used in the 2nd proviso is redundant as the 1st proviso is applicable only in case of goods and thereby the 2nd proviso cannot be considered to be in continuation of the 1st one as it is a settled principle that the statue never wastes words as held by the Supreme Court in the case of Visitor Amu v. K.S.Misra [2007 (8) SCC 594].
Also, in view of the authors, even going by the intention of the valuation rules where the recipient is eligible for full ITC (revenue neutral issue), the benefit of opting for either of the provisos should be available.
Special thanks to CA Shilpi Jain for vetting the article