DISTINCT PERSON

[Mr. M. GOVINDARAJAN]

Distinct person

Distinct persons are persons with different GSTINs belong to one legal entity (single PAN) situated within the same State or in two different States or in a different country.

For example, if A (in Bangalore) has branches in Germany and Maharashtra, the branches in Maharashtra and Germany will both be distinct persons/entities. If A has another component B which is different from A and has obtained a different GST registration, A and B will be distinct entities.

Section 25(4) of the Goods and Services Tax Act, 2017 (‘Act’ for short) provides that 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. 

Registration of Distinct Person

Section 25(5) of the Act provides that where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

When two units of the same business have taken different registration, then they will be considered as a distinct entity/person as per the GST law. The laws relating to filing of returns and other compliance procedures shall apply to both of them separately.

As an exception, business verticals within a State can obtain multiple GST registrations if required business verticals have a risk, returns and functions different from that of the other components considerably.

Explanation1 to section 8(1) of Integrated Goods and Services Tax Act, 2017 (‘IGST Act’ fort short) provides that for the purposes of IGST Act-

• an establishment in India and any other establishment outside India, or
• an establishment in a State and any other establishment outside that State or
• an establishment in a State and any other establishment being a business vertical within the State, shall be treated as establishments of distinct persons.

Supply

The supply stated above is covered under Schedule I of the GST Act and as per this schedule, when a supply is made between distinct persons during the course of business, it is considered as a supply even when there is no consideration. Therefore these transactions are considered as a taxable supply.

Stock transfers made between distinct units, even if without a consideration will be a taxable supply.

Valuation

The supply made between distinct persons shall be a taxable supply and it shall be taxed on a value determined by Rule 2 of the Valuation Rules. As per these rules, the value of the transaction shall be the following:

• Open market value of such supply;
• If open market value is unavailable, value of goods/services of like kind and quality;
• If the above two are not possible, then as per Rule 4 (value shall be equal to 110% of cost of production) or Rule 5 (residual value);
• When recipient is eligible for full input tax credit, then the value declared in the invoice shall be the open market value for such transactions.

Export of service

The service is said to be export of service when the following conditions are satisfied:

1. Supplier of services is located in India;
2. Receiver of services is located outside India;
3. Place of supply is outside India;
4. Payment for such service is received in convertible foreign exchange;
5. Supplier and receiver of service are not merely establishments of a distinct person.

If a unit in India provides services to a branch outside India, it will not be an export of service as the 5^th condition mentioned above does not get satisfied. Since this supply will not be an export, it will also not be a zero-rated supply. Hence the above transaction which was exempt before the GST will now be taxable.

Accounts and records

Every distinct person will have to keep the separate records for their place of business – Section 35(1) of CGST Act, 2017.  Every distinct person will have to go for audit in their respective states.

Issuing invoice

An insurer or a banking company or a financial institution, including a non banking financial company, or a telecom operator, or any other class of supplier of services as may be notified by the Government on the recommendations of the Council, making taxable supplies of services between distinct persons as specified in section 25, may issue the invoice before or at the time such supplier records the same in his books of account or before the expiry of the quarter during which the supply was made.

Advance Ruling

Lions Club and Lion Districts

IN RE: M/S. LIONS CLUB OF POONA KOTHRUD [2019 (11) TMI 477 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA] the Appellate Authority for Advance Ruling ruled that  Lions Club and Lion Districts being Association of Person, is a ‘person’ in terms of the provision under section 2(84) of the Act.  The definition of ‘person’ also includes an individual, which means that the members of the club or association are also a person itself.  Consequently Lions Club as well as its members is to be treated as distinct persons.

Valuation

IN RE: M/S. SPECSMAKERS OPTICIANS PRIVATE LIMITED [2019 (8) TMI 368 - AUTHORITY FOR ADVANCE RULING, TAMILNADU]  the applicant  imports as well as locally procure lenses, frames, sun glasses, contact lenses as well as reading glasses, complete spectacles and are engaged in re-selling them. The applicant has its office in Tamil Nadu at Chennai and also branches outside the State of Tamil Nadu. 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.

Rule 28 of GST rules, 2017 provides three options for determining the value in respect of supplies to distinct persons. The applicant is of the view that the second provision is applicable to its 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 its 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 goods received by the recipient are further sold or supplied to the consumers/ customers based on the market price.

The applicant preferred an application seeking Advance Ruling on the value to be adopted in respect of transfer to branches located outside the State.  The applicant submitted the following before the Authority for Advance Ruling-

• The applicant is trading spectacle frames, lens, sunglasses and accessories which are procured locally or imported. 
• The said goods are transferred as such to their branches in other states who further sell to their customers. 
• The applicant are eligible under second proviso of Rule 28 of Valuation Rules/CGST Rules under which they can declare any value in the invoice of transfer to other related party. 
• The applicant is covered under CGST Rules 28(a) as the open market value is known, but they want to use Proviso 2 and not Proviso 1.

The Authority for Advance Ruling heard the submission of the applicant.  The question before the Authority for Advance Ruling relates to determination of value to be adopted in respect of transfer to branches located outside the State, i.e., to distinct persons of the same PAN. 

The Authority for Advance Rulings found  that the applicant imports as well as locally procure Lenses, Frames, Glasses, Contact Lenses, etc., and is engaged in re-selling them. The applicant has branches outside Tamil Nadu where, the applicant transfers these goods for further selling from these branches. These branches are distinct persons as per section 25(4) of the Act.  In this case the supply between the applicant and the branches is considered as a supply between distinct persons.   The applicant has branches outside the state of Tamil Nadu, hence, both are said to be related as per the explanation to Section 15.  The supply is also to distinct person and therefore the value to be adopted is governed by rules prescribed as per Section 15(4) of CGST Act.

The Authority for Advance Ruling found that for supply between distinct persons, the value shall be the ‘open market value’ of such supply. As per Explanation (a) to Chapter IV of CGST Rules, 2017, ‘Open Market Value’ of a supply of goods 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.  The applicant supplies the said goods to its branches in Tamil Nadu and out of Tamil Nadu.

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. 

The Authority for Advance Ruling, therefore, ruled that the applicant shall adopt the ‘open market value’ as per Rule 28(a) as the same is available for the supplies made to the distinct recipient outside the state. Instead of the available open market value, the applicant can also opt to value the same at 90% 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. If the recipient is eligible for full input tax credit, such a value shall be deemed to be the open market value.

Against the order of the Authority for Advance Ruling the applicant filed an appeal before the Appellate Authority for Advance Ruling. (IN RE: M/S. SPECSMAKERS OPTICIANS PRIVATE LIMITED - 2020 (1) TMI 63 - APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU).

The appellant contended that the appellant will be entitled to adopt any value range for supply of these items to their branches when their branches are entitled to take full credit of the tax paid and such values, therefore, adopted by the appellant are to be treated as open market value for the purposes of CGST Act and Rules.    The claim of the appellant is that when the recipient is eligible for the credit, as per the second proviso to the Rule 28, the invoice value shall be the ‘Open Market Value’ and they need not apply the ‘Open Market Value’ as per the Explanation or to adopt an amount equivalent to 90% of the price charged by the recipient to the unrelated buyer as ruled by the Lower Authority.    Both the provisos are independent catering to different situations.    The appellant further contended that with the intention to avoid blocking of capital/funds, the legislature has provided a situation, where and when the distinct person is eligible to take full input tax credit and is going to make further supply, then, in respect of initial supply, it is not necessary to adopt only open market value and pay higher tax and block such tax amounts.

The Appellate Authority for Advance Ruling found that there is no specific regulation in the said Rules that the rules are to be applied seriatim. A plain reading of this proviso gives an option to the person supplying to distinct or related person and do not mandate that the value of supply should be 90% of the ultimate sale value, even in such a scenario.  The law provides the taxpayer an option to adopt 90% of the price charged as value to be adopted initially (i.e., supply between distinct persons) and in the alternative, in case of full Input tax being available to the recipient as credit, the invoice value is declared as ‘open market value’. 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.

The Appellate Authority for Advance Ruling ruled that when the supply is to the distinct person of the appellant and the recipient is eligible for full input tax credit, the second proviso provides the value declared in the invoice to be the ‘open market value’ for such transaction. Also the second proviso does not restrict its application as in the first proviso, which is to be applied for cases of ‘as such supply’ only. Therefore, the appellants may adopt the value for supply to distinct person as provided under Proviso 2 to Rule 28 of the CGST/TNGST Rules 2017.

IN RE: M/S. KANSAI NEROLAC PAINTS LTD.  [2019 (6) TMI 1108 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA] the applicant is engaged in supply of goods and supply of services.  The applicant is engaged in the manufacture and sale of decorative and industrial paints to its customers, across the States from its factories and depots located all over India.  To reach out to the customers on time and to maintain optimum inventory at depot level, there is always movement of goods from factory to depot and from depot to depot.  The factories and depots of the applicant are duly registered under GST are qualified as distinct entity as per section 25(4) of the CGST Act. 

The applicant sought for advance ruling on whether the value of supply of goods by one distinct entity (factory/depot) as defined under section 25(4) of the CGST Act as amended to another distinct entity (factory/depot) can be determined on the basis of their cost of production.  The cost of production of the applicant depends mainly on cost of output and input services and hence same fluctuates with the price of inputs or input services.

The Authority for Advance Ruling ruled that Rule 28 is specified rule to determine the value of supply in a transaction where supplier and recipient are related.  In terms of second proviso to Rule 28 where recipient is eligible for fulfill input tax credit, the value declared in invoice shall be deemed to be open market value of goods or service.  The applicant may apply Rule 8 to determine the value of the supply of goods by one distinct entity to another distinct entity having same PAN. 

Input tax credit

IN RE: M/S. CUMMINS INDIA LIMITED. [2019 (3) TMI 538 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA], the applicant is manufacturing various products one of which are ‘engines’ manufactured for Railways/Locomotive manufacturers as per the design specifications provided by them and are solely and principally used in railways/locomotive engines.  These subject engines have sole use of main propulsion in railways/locomotives and have no alternate usage.

The applicant sought for an advance ruling on whether availment of input tax credit on common input supplies on behalf of other unit/units registered as distinct person and further allocation of the cost incurred for same to such other units qualified as supply and attracts levy of GST?

The Authority for Advance Ruling ruled that all units or offices of same concern located at different places are distinct persons in terms of section 25 of CGST Act.  In terms of section 7 read with Entry No. 2 of Schedule I to the Act, supply of goods or service or both between the distinct persons is a supply leviable to GST when made for furtherance of business.  Hence the applicant is required to pay GST on such supplies made to their offices/branches having different registration numbers.