VALUATION METHOD TO BE ADOPTED IN RESPECT OF SUPPLIES TO DISTINCT PERSONS

[Mr. M. GOVINDARAJAN]

Distinct Person

Section 25(4) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) defines the expression ‘distinct person’. The said section 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.

Value of supply

Section 15(1) of the Act provides that 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.

Section 15(4) of the Act provides that 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.  section 15(5) provides that notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.

The explanation to section 15(5) clarified that the persons shall be deemed to ‘related person’, if-

•  such persons are officers or directors of one another’s businesses;
• such persons are legally recognized partners in business;
• such persons are employer and employee;
• 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;
• one of them directly or indirectly controls the other;
• both of them are directly or indirectly controlled by a third person;
• together they directly or indirectly control a third person; or
•  they are members of the same family;

The term “person” also includes legal persons.  The 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.

Rule 28 of Goods and Services Tax Rules, 2017 (‘Rule’ for short) provides the procedure for the determination of the value of supply of goods or services or both between distinct persons or related persons other than through agents.  Rule 28 provides that 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-

1. be the open market value of such supply;
2.  if the open market value is not available, be the value of supply of goods or services of like kind and quality;
3.  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.

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.   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.

In re ‘Specmakers Opticians Private Limited’ – 2019 (8) TMI 368 – AAR, Tamil Nadu, 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,  held 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 ‘Specmakers Opticians Private Limited’ – 2020 (1) TMI 63 – AAAR, Tamil Nadu). 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 ninety percent 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 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 held 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