GST: Valuation in case of supply to a distinct person as decided in the case of M/s. Specsmakers Opticians Pvt Ltd.

[Ganeshan Kalyani]

IN RE: M/S. SPECSMAKERS OPTICIANS PRIVATE LIMITED [2019 (8) TMI 368 - AUTHORITY FOR ADVANCE RULING, TAMILNADU]

The appellant M/s. Specsmakers Opticians Pvt Ltd a registered taxpayer under Tamil Nadu Goods & Services Tax Act 2017 / Central Goods & Services Tax Act 2017 has filed an Appeal with Appellate Authority for Advance Ruling, Tamil Nadu against the advance ruling passed on 24.06.2019 by Authority for Advance Ruling, Tamil Nadu.

The appellant is engaged in the business activities in respect of spectacle frames, sun glass lenses, contact lenses as well as reading lenses. They procure these items locally as well as by way of import. The appellant have their main office in the State of Tamil Nadu and have branches in various States outside Tamil Nadu. The goods procured / imported are transferred to various branches for subsequent supply to customers by those branches.

Under GST Law, supply to branches outside the State is considered as supply between distinct persons and accordingly, appropriate tax is to be paid. The appellant are required to adopt value as per Rule 28 of CGST Rules, 2017. Rule 28 provides for various options. Since the branches of the appellant located in various other States are eligible to take full Input tax credit in respect of supplies made to them, the appellant wanted to adopt price as per the second proviso to Rule 28 for payment of tax for such transfers. The appellant sought the authority for advance ruling to determine the value to be adopted in respect of transfer to branches located outside the State.

The appellant stated that, when full input tax credit is available, it is provided that the value declared in the invoice is to be treated as open market value of the goods or services. In other words, there is no requirement that the provisos to rule 28 should be applied only sequentially. They are provided to take care of different situations and taking into account the fact that the open market value is specifically defined in Chapter IV or CGST Rules, 2017, the value declared in the invoices in respect of cases where the recipient is eligible to take full input tax credit will be the value relevant for payment of tax when the goods are transferred to the branch.

Rule 28 of the CGST/TNGST Rules 2017 and the Explanation to Chapter IV of the rules are reproduced as under:

28. 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.

Explanation. -For the purposes of the provisions of this Chapter, the expressions-

(a) “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;

(b) “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.

The Authority for Advance Ruling has ruled as under :

            "...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 favourable to them. Therefore 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.”

The appellant filed appeal before Appellate Authority for Advance ruling against the order passed by the Appellate authority, Tamil Nadu. The Appellate authority find that there is no specific regulation in the said Rules, that the rules are to be applied seriatim. Further 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 provisos.

Proviso 1 entitles the appellant to value at 90% of the ultimate sale value to the unrelated customer at the initial supply at his option in cases of ‘as such supply’. 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.

Proviso 2 states that when the tax paid is available as full input tax credit, then the invoice value is the ‘Open Market Value’. Considering the constructions of the rule as above, we find that 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.

Applying the above, to the specific facts and circumstances of the case at hand, we hold 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.

Accordingly, we set aside the ruling of the Original Advance Ruling Authority and rule as under

RULING

The appellant is eligible to adopt the value as per Second Proviso to Rule 28 of the CGST/TNGST Rules 2017, at the time of supply of goods from the State of Tamil Nadu in the terms of the scenario discussed, in as much as the recipient distinct person is eligible for full Input Tax credit as required under the said proviso.