The Hon’ble AAR Tamil Nadu in the matter of M/s Thirumalai Chemicals Ltd. [Order No. 41/AAR/2020 dated December 18, 2020] has held that in case of valuation of supply between distinct persons, any of the following three methods can be adopted as per Rule 28 of the CGST Rules, 2017 (“CGST Rules”):
Thirumalai Chemicals Ltd. (“the Applicant”) is having its principal place of business in Tamil Nadu and is engaged in business of manufacturing and trading of chemicals. They have units and branches in Gujarat, Maharashtra and Dadra and Nagar Haveli. They are also engaged in stock transfer of the finished products to their depots located in other states, which are distinct units as per Section 25(2) of the CGST Act, 2017 (“CGST Act”). The valuation adopted for stock transfer is made in accordance with the provisions of Rule 28(a) of CGST Rules, which states that the value of supply of goods or services or both between distinct person to be the OMV of such supply i.e., they are adopting the OMV for the stock transfer to the depots.
The distinct units are eligible to full ITC as per second proviso of Rule 28 of the CGST Rules and availing ITC of the stock transfers received from the distinct units at Tamil Nadu. The said stock transfers are then sold by the distinct person from their depots.
Whether the Applicant can adopt and determine the value of supply of goods made to distinct units as per the second proviso to Rule 28 of the CGST Rules?
The Hon’ble AAR Tamil Nadu in Order No. 41/AAR/2020 dated December 18, 2020 has held as under:
It may be noted that AAR Tamil Nadu in Re: Specsmakers Opticians (P.) Ltd. [2019 (27) G.S.T.L. 596] while dealing with the aspect that Valuation rules have to be applied in sequential manner only, held 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 any taxpayer will not ever use Rule 28(a) to(c) of the CGST Rules, in any scenario. Both provisos are to be read together and not independently, i.e., the applicant cannot choose whichever proviso is favourable to them.
However, the above ruling was overruled by AAAR Tamil Nadu (supra) to state that looking at the construction of the said rule, it is evident that when an ‘Open Market Value’ is available, sub-rule (b) and (c) may not be applicable but the same is not the case in respect of the proviso. There is nothing to show that the second proviso is subordinate to the first. It independently deals with a scenario where the recipient is eligible for full input tax credit.
Rule 28 of the CGST Rules:
“Value of supply of goods or services or both between distinct or related persons, other than through an agent.-
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.
Section 15(4) of the CGST Act along with explanation:
“Value of taxable supply
(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.
Explanation.– For the purposes of this Act,––
(a) 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 recognised 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.”
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