2024 (10) TMI 265 - AAR - GST

Classification of the applicant's business activities under Rule 32(5) of the CGST Rules, 2017 - person dealing in buying and selling of second hand goods where tax is to be paid on the difference between the selling and purchase price or not - transaction of purchases of old / second hand gold jewellery / ornaments or diamond jewellery / ornaments from individuals who are not dealers / registered under GST - supply of goods or supply of services - reverse charge mechanism - applicant is liable to pay GST on the goods received from the buyer or not. HELD THAT - In terms of sub-section (1) of section 9 of the GST Act, tax on intra-State supplies of goods or services or both is levied on the value determined under section 15 of the Act ibid. Further, as per sub-section (1) of section 15 of the GST Act, 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. However, in respect of second-hand goods, a person dealing is such goods is allowed to pay tax on the margin i.e. the difference between the value at which the goods are supplied and the price at which the goods are purchased subject to certain restrictions. In the instant case, the applicant has submitted that he purchases second-hand gold or diamond jewelleries from unregistered individuals and thereafter repairs or reshapes these items by melting the old jewelleries and transforming those into new pieces, such as changing a gold bangle into a bracelet or an earring into a locket. There can be no denying that the item namely bangle is different from a bracelet. Similarly, when an earring is melted to convert it into a locket, it loses it s nature and characteristics to emerge as a new commodity. The process is nothing but manufacturing as per clause (72) of section 2 of the GST act which states that, manufacture means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term manufacturer shall be construed accordingly. In the instant case, the purchased gold is used as a raw material or input to make a new commodity. In White Gold Bullion (P.) Ltd 2023 (5) TMI 747 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA it is observed by the Advance Ruling Authority that when the applicant melts the gold jewellery into gold lumps, the nature of goods changes in as much as the characteristics of the articles and the classification changes. Since the processing done by the applicant changes the nature of goods, they do not satisfy the second condition mentioned supra at para 10.2 and hence not eligible to avail the benefits of Rule 32 (5) of CGST Rules, 2017 . Where the applicant uses the purchased old / second hand jewelleries/ornaments as a raw material or input for manufacturing a new article is not entitled to pay GST on the margin value, i.e. difference between the sale price and purchase price as stipulated in Rule 32 (5) of CGST Rules, 2017. Hence, in this scenario, applicant cannot avail of the benefit of provisions stated under sub-rule (5) of rule 32 of CGST rules, 2017 - in cases where the applicant, after making purchases of old / second-hand jewelleries/ornaments, carries out the process of melting it to manufacture a new/different ornament, the applicant cannot adopt the valuation method as prescribed in rule 32 (5). However, where the old gold ornaments/jewellery are purchased and subsequently supplied after minor processing that does not change the nature of the ornaments so purchased, the applicant can pay tax on the value as determined under rule 32 (5). Thus, rule 32 (5) is available only when a registered person dealing with buying and selling of second hand goods only. In other words where the registered person deals with different business activities such as engage in supply of services, manufacturing or selling new articles apart from dealing with buying and selling of second hand goods cannot avail the benefit of rule 32 (5). In such a case GST is payable at applicable rate on actual value of the commodity and not on margin value.

Summary

Issues Involved:

1. Classification of the applicant's business activities under Rule 32(5) of the CGST Rules, 2017.
2. Applicability of reverse charge mechanism on purchases from unregistered individuals.
3. Classification of transactions as supply of goods or services.
4. Applicable tax rates for the transactions.
5. GST liability on goods received from the buyer.

Detailed Analysis:

Issue 1: Classification under Rule 32(5) of the CGST Rules, 2017

The applicant sought to determine whether their activities fall under the category of dealing in second-hand goods, where tax is paid on the margin between selling and purchase price as per Rule 32(5). The ruling clarified that the applicant can use this valuation method only when the old gold ornaments/jewellery are purchased and supplied after minor processing that does not change their nature. If the applicant melts and manufactures new ornaments from old jewellery, this constitutes manufacturing, and the valuation method under Rule 32(5) cannot be adopted.

Issue 2: Applicability of Reverse Charge Mechanism

The applicant questioned whether the purchase of old/second-hand jewellery from unregistered individuals constitutes a supply of goods or services, and whether they are liable to pay tax on a reverse charge basis. The ruling determined that the applicant is not liable to pay tax under the reverse charge mechanism for such transactions.

Issue 3: Classification as Supply of Goods or Services

The ruling provided a nuanced classification based on the processing involved:
- If the applicant purchases old jewellery and supplies it after minor processing without changing its nature, it is treated as a supply of goods.
- If the applicant converts the old jewellery into a new item, it is still treated as a supply of goods.
- If the applicant supplies the processed or newly converted item to the same person, it is treated as a supply of services.

Issue 4: Applicable Tax Rates

The ruling indicated that the classification of transactions as a supply of goods or services determines the applicable tax rate:
- Supply of goods is chargeable at 3% under HSN: 7108/7113.
- Supply of services is chargeable at 5% under SAC: 9988.

Issue 5: GST Liability on Goods Received from the Buyer

The ruling reaffirmed that the applicant is not liable to pay GST on goods received from the buyer, aligning with the response to the reverse charge mechanism query.

In summary, the ruling provided clarity on the classification of transactions, applicable tax rates, and the non-applicability of the reverse charge mechanism for the applicant's business activities involving the purchase and processing of second-hand jewellery.