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 is to be treated as a supply even if made without consideration in terms of Para 2 of Schedule I.
In terms of Section 25(4) “A person who 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.”
Branch offices of a company registered in different states, shall in respect of each such registration be treated as a distinct person.
Transaction of stock transfers from one branch to another is defined to be a taxable supply under section 7(1)(c) read with Schedule I.
It implies that, in a case where a Head office makes a stock transfer to the Branch offices located in other states, the same is to be treated as a supply even if made without consideration. Accordingly, the HO is required to discharge output tax liability on the said supply and the BO is entitled to Input tax credit on the same.
Valuation of the said supply between distinct persons is governed by Rule 28.
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.
Open market value is the full value in money payable by an unrelated person where price is the sole consideration to obtain such a supply.
“Supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both. [Explanation to clause (b) of Rule 35 of CGST Rules, 2017] This rule should not be applied if the circumstances are vastly different between the supply being valued and the one being used for comparison.
Where cost is used as a base for determining the value of supply and when any of the more specific methods prescribed are unavailable for specific reasons, Rule 30 may be applied. It provides that the value will be ‘cost plus 10%’.
Where the value cannot be determined by any other method, Rule 31 authorizes the use of ‘Reasonable means’ to arrive at the value. It is important to consider that these reasonable means must be commensurate with the principles of section 15.
In terms of 2nd proviso to Rule 28 “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”
Thus, prima facie it appears that valuation at any nominal amount appears to be permissible in terms of the 2nd proviso to the said rule.
Intention of the Rule is to be interpreted in line with the parent section. [Section 15(5)] Delegated legislation or subordinate legislation (Rules) cannot dilute the scope or application of the parent legislation (Act). Rules cannot undo what was set out to be achieved by the section. Procedural law cannot override substantive law. Rules cannot override the Act.
If there is any conflict between a statute and a subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over the subordinate legislation and the bye-law if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with. The same was upheld by the Supreme Court in the case of Babaji Kondaji Garad etc. Vs The Nasik Merchants Co-operative Bank Ltd, Nasik & Ors etc [1983 (10) TMI 270 – Supreme Court]
Rules are meant only for the purpose of carrying out the provisions of the Act and they cannot take away what is mandated by the Act or whittle down its effect. The same was upheld by the Supreme Court in the case of Commissioner of Income Tax, Madras Vs. S. Chenniappa Mudaliar [1969 (2) TMI 10 – Supreme Court]
From a harmonious construction of the 2nd proviso to Rule 28 with the definition of “supply” and the principles enshrined in Section 15, it appears to be appropriate to construe “the value declared in the invoice” under the said proviso can in no way be short of the Open Market Value of the stocks transferred between the branches inter se. Section 15 clearly provides the boundaries within which every exercise of valuation must operate.
Thus, 2nd proviso to Rule 28 cannot be construed or interpreted to be an escape option to tax payers to declare any value in the invoice as the open market value for discharging output tax liabilities on stock transfers. Doing so, would result in a complete disharmony between the rule and the section which would have never been the intention of the legislature. It is accordingly advisable to adopt a reasonably justifiable method of valuation in accordance with the hierarchy provided in Rule 28 to avoid any potential litigations.
Also, in terms of 2nd proviso to section 16(2)(d) of the CGST Act, 2017 “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.”
Rule 37(1) has been notified on the strength of 2nd proviso to section 16(2)(d).
On a plain reading of the 2nd proviso to section 16(2)(d) with Rule 37(1), it prima facie appears that, distinct persons have to reverse ITC on stock transfers if in case payment has not been made to the supplier within a period of 180 days from the date of invoice by the supplier.
It would be relevant to note that section 15 of the CGST Act deals with valuation of supplies and provides for adjustment in the value of supply in case if the transacting parties are distinct or related persons by recourse to the Rule 28. Such adjustment to the transaction price is being made for only GST purposes (to arrive at the tax payable) but commercially, such amount is neither recorded in the books of account as payable nor is paid by the transacting parties.
Accordingly, in all such cases where additions are made to the value of supply, the recipient should technically not be denied input tax credit since practically payment is not made to the extent of such additions.
In line with such an intention, 1st proviso to Rule 37 provides that value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16 and accordingly no amount would be liable for reversal on account of non-payment of consideration to the supplier within a period of 180 days.
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