2019 (6) TMI 1108 - AAR - GST

Valuation of supply of goods and services - Determination of value of supply of goods on the transactions between the distinct entities - valuation on the basis of cost of production - fluctuation of cost of production - cost of production depending on cost of inputs and input services - distinct entities/distinct persons - HELD THAT - As per the scheme of GST, tax is payable on ad-valorem basis and taxable value is the transaction value i.e. the price actually paid or payable, provided the supplier and recipient are not related and the price is the sole consideration. In the case at hand, the factory, the depots located in different states sharing common PAN but different GST registrations are distinct person as specified in subsection (4) of Section 25 of the GST Act. Under the GST law, various categories of persons such as related persons, distinct persons have been identified as the relation between the supplier and recipient may influence the consideration. In such cases specific rules have been provided. Rule 28 of the GST Rules, has been specified to determine the value of transaction between related persons. As per second proviso to Rule 28, if the recipient is eligible for full input tax credit, the invoice value will be deemed to be open market value. Applicant has informed this authority that they intent to issue invoice inter alia declaring value of supply liable to GST and they further informed that the recipient is eligible to claim full input tax credit. There is no breach by the applicant by changing the method of determination of value of supply by application of Rule 28 instead Rule 30 of the GST Rules. Thus, the applicant can apply Rule 28 of the GST Rules, 2017 to determine the value of supply of goods for supply of goods by one distinct entity (factory/depot) as defined u/s25(4) of the CGST Act to another entity having same PAN (factory/depot).

Summary

Issues Involved:
1. Determination of the value of supply of goods between distinct entities under the CGST Act, 2017.
2. Applicability of Rule 28 versus Rule 30 of the CGST Rules, 2017 for valuation of inter-unit transfers.

Issue-wise Detailed Analysis:

1. Determination of the Value of Supply of Goods Between Distinct Entities:

The applicant, a registered taxable person under the GST Act, is engaged in the manufacture and sale of consumer and industrial paints. The company has multiple factories and depots across India, each registered separately under GST but sharing the same PAN. These entities are considered distinct as per Section 25(4) of the CGST Act, 2017. The applicant seeks to determine if the value of goods supplied between these distinct entities can be based on the cost of production.

The applicant currently values such supplies at 110% of the manufacturing cost as prescribed under Rule 30 of the CGST Rules, 2017. However, they wish to explore the option of valuing these supplies as per the second proviso to Rule 28, which allows the invoice value to be deemed as the open market value if the recipient is eligible for full input tax credit.

2. Applicability of Rule 28 versus Rule 30 of the CGST Rules, 2017:

The applicant contends that since the transactions are between distinct entities under Section 25(4) of the CGST Act, 2017, the valuation should be governed by Rule 28 of the CGST Rules, 2017. Rule 28 specifies that the value of such supplies should be the open market value, or if not available, the value of goods or services of like kind and quality. If these values are not determinable, the value should be determined by applying Rule 30 or Rule 31.

The second proviso to Rule 28 states that if the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed the open market value. The applicant argues that this proviso allows them to declare the cost of inputs/outputs as the open market value.

The concerned officer agreed with the applicant's interpretation, stating that the applicant is eligible to value these goods by applying the terms of the second proviso to Rule 28 of the CGST Rules, 2017. The officer noted that the supplies between the factory and depots qualify as transactions between distinct persons, and Rule 28 is applicable for their valuation.

Observations and Final Ruling:

The Authority for Advance Ruling examined the facts and legal provisions, confirming that the applicant's factories and depots are distinct entities under Section 25(4) of the CGST Act, 2017. The Authority noted that Rule 28 is the specific rule for determining the value of supplies between related persons, including distinct entities under the GST law.

The Authority concluded that the applicant could apply Rule 28 of the CGST Rules, 2017, to determine the value of supply of goods between distinct entities. This includes using the invoice value as the deemed open market value if the recipient is eligible for full input tax credit, as per the second proviso to Rule 28.

Order:

The Authority ruled that the applicant could determine the value of supply of goods between distinct entities (factory/depot) under Section 25(4) of the CGST Act, 2017, by applying Rule 28 of the CGST Rules, 2017. The value declared in the invoice, where the recipient is eligible for full input tax credit, shall be deemed the open market value.