2020 (1) TMI 63 - AAAR - GST

Valuation - determination of value to be adopted in respect of supply to distinct persons of the appellant in the course of business - supply of goods i.e. Lenses, Frames, Sun Glasses, Contact Lenses as well as Reading Glasses, Complete spectacles by the applicant to distinct persons being branches outside the state of Tamil Nadu shall be the open market value of such supplies - HELD THAT - In the case at hand, it is accepted by the appellant and the Lower Authority, that the sub-rule (b) and (c) cannot be used for the reason that Open market value is available. 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. The appellant s view is that both the provisos are independent catering to different situations. It is also stated by the appellant 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. 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 - 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. 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. 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 Tamilnadu 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.

Summary

Issues Involved:
1. Determination of value for supply of goods to distinct persons under GST.
2. Application of Rule 28 of CGST/TNGST Rules 2017.
3. Interpretation of provisos to Rule 28.
4. Eligibility to adopt invoice value as open market value.

Issue-wise Detailed Analysis:

1. Determination of Value for Supply of Goods to Distinct Persons under GST:
The appellant is engaged in the business of spectacle frames, sun glass lenses, contact lenses, and reading lenses, which are procured locally and through imports. These goods are transferred to branches outside Tamil Nadu for subsequent supply to customers. Under GST Law, such transfers are considered as supply between distinct persons, requiring appropriate tax payment. The appellant sought to determine the value to be adopted for these transfers under Rule 28 of CGST Rules, 2017.

2. Application of Rule 28 of CGST/TNGST Rules 2017:
Rule 28 provides various options for determining the value of supply between distinct persons. The original authority ruled that the value should be the open market value as per Rule 28(a) and Explanation (a) to Chapter IV of CGST/TNGST Rules 2017, read with Section 15 of the CGST/TNGST Act 2017. Alternatively, the appellant could adopt 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, as per the proviso to Rule 28.

3. Interpretation of Provisos to Rule 28:
The appellant argued that the provisos to Rule 28 cater to different situations and should not be applied sequentially. The first proviso applies when goods are intended for further supply as such by the recipient, allowing the supplier to adopt ninety percent of the price charged by the recipient to his customer. The second proviso applies when the recipient is eligible for full input tax credit, allowing the invoice value to be treated as the open market value. The appellant contended that these provisos should be read independently and not sequentially.

4. Eligibility to Adopt Invoice Value as Open Market Value:
The appellant claimed that when the recipient is eligible for full input tax credit, the invoice value should be deemed the open market value, as per the second proviso to Rule 28. The lower authority's interpretation that the provisos should be read together and not independently was challenged. The appellant argued that adopting a higher value for the initial supply would lead to unnecessary blocking of capital and funds.

Discussion and Ruling:
The appellate authority examined Rule 28 and its provisos, concluding that the rule does not mandate sequential application of the provisos. The second proviso, which allows the invoice value to be treated as the open market value when the recipient is eligible for full input tax credit, is independent and not subordinate to the first proviso. Therefore, the appellant is entitled to adopt the invoice value as the open market value for supplies to distinct persons when the recipient is eligible for full input tax credit.

Conclusion:
The appellate authority set aside the original ruling and held that the appellant is eligible to adopt the value as per the second proviso to Rule 28 of the CGST/TNGST Rules 2017. This means that the invoice value can be treated as the open market value for the supply of goods from Tamil Nadu to branches in other states, provided the recipient is eligible for full input tax credit.