2021 (1) TMI 697 - AAR - GST

Valuation of transfer - transfer to branches located outside the state - whether the value of such supplies can be determined in terms of the second provision to rule 28 in respect of supplies made to distinct units in accordance with clause (4) (5) of section 25 of the CGST rules, 2017? - HELD THAT - The applicant has stated that the distinct units have excess accumulated credits owing to various reasons and therefore they propose to change their valuation being adopted presently, which is the 'Open Market Value' as per Rule 28(a) of the CGST Rules 2017 to that provided under the second proviso to Rule 28 of the CGST Rules 2017. The question before us is to decide whether the method of valuation prescribed under the Second proviso is applicable to the supply to distinct persons of the applicant. We do not comment/give any opinion on the submissions of the applicant on the available excess ITC at their distinct units for want of jurisdiction and also considering that the issue raised before us is only on the value to be adopted for the supply which do not have any relation to the credit accumulation at the recipient end but for the fact that the recipient is eligible to avail the entire credit of tax paid by the applicant. In the case at hand, the applicant and the distinct persons outside the state of Tamil Nadu are different legal persons hence, both are said to be related as per the explanation to Section 15. Therefore the value to be adopted is governed by rules prescribed as per Section 15(4) of CGST Act. Rule 28 of CGST Rules, 2017 provides the value to be adopted when the supply is between distinct persons - In the case at hand, the applicant supplies to their distinct persons, for which presently they adopt the approximate sale value of the distinct person. The distinct person undertakes supply to their ultimate-unrelated customer 'as such' and the value adopted is that on the Purchase Order issued to such distinct persons by the ultimate customer. Also, the distinct units are eligible to avail full Input Tax credit of the tax paid by the applicant. Therefore, following the judicial discipline, we hold that the value to be adopted by the applicant can be arrived at following the methodology of either of the three methods.

Summary

Issues Involved:
1. The value to be adopted in respect of transfer to branches located outside the state.
2. Whether the value of such supplies can be determined in terms of the second provision to Rule 28 in respect of supplies made to distinct units in accordance with clause (4) & (5) of Section 25 of the CGST Rules, 2017.

Detailed Analysis:

1. The Value to be Adopted in Respect of Transfer to Branches Located Outside the State:
The applicant, engaged in the manufacture and trading of chemicals, transfers stock to distinct units (depots) outside Tamil Nadu. Currently, these transfers are valued based on the "Open Market Value" as per Rule 28(a) of the CGST Rules, 2017. The distinct units in other states, such as Gujarat and Maharashtra, avail full input tax credit (ITC) on these stock transfers. The applicant proposes to adopt a reduced or zero valuation for stock transfers to avoid the accumulation of unutilized ITC at the distinct units, thereby ensuring maximum utilization of the available ITC and avoiding unnecessary blocking of capital/funds.

2. Whether the Value of Such Supplies Can Be Determined in Terms of the Second Provision to Rule 28:
The applicant argues that the second proviso to Rule 28 of the CGST Rules, 2017 allows the value declared in the invoice to be deemed the "Open Market Value" when the recipient is eligible for full ITC. This interpretation would enable the applicant to adopt a lower value for stock transfers, reducing the outflow of GST liability and the inflow of ITC at the depots. The applicant supports this view by citing various case laws and interpretations of the term "proviso."

Authority's Examination and Ruling:
The Authority examined the statutory provisions under Section 15 of the CGST Act, 2017, and Rule 28 of the CGST Rules, 2017. The value of supply between distinct persons, as per Rule 28, can be:
- The open market value of such supply.
- The value of supply of goods or services of like kind and quality if the open market value is not available.
- The value determined by the application of Rule 30 or Rule 31 if the value is not determinable under the above clauses.

The two provisos to Rule 28 state:
1. When goods are intended for further supply as such by the recipient, the value can be 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer.
2. When the recipient is eligible for full ITC, the value declared in the invoice is deemed the open market value.

The Authority referenced the Appellate Authority for Advance Ruling in the case of Specsmakers Opticians Private Limited, which clarified that the rules are not to be applied sequentially. The second proviso independently allows the invoice value to be deemed the open market value when the recipient is eligible for full ITC.

Conclusion:
The Authority ruled that the applicant can adopt any of the following three methods under Rule 28 of the CGST/TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017 for valuing supplies to distinct persons:
a. Open Market Value as presently adopted.
b. 90% of the ultimate sale value as raised by the distinct persons to unrelated ultimate customers in cases of 'as such' supplies.
c. The invoice value, deemed the open market value, when the distinct persons are eligible for full ITC of taxes paid by the applicant.

Ruling:
The applicant is permitted to adopt any one of the three methods provided under Rule 28 of the CGST/TNGST Rules 2017 to determine the value of supplies to distinct persons.