JANUARY 21, 2020

By Dr G Gokul Kishore

GST law is State-specific when it comes to registration and supplies from one State to another are concerned. The unavoidable consequence is taxing supplies within an entity when the supplying unit and recipient unit are in different States. The industry has to bear the cross though certain beneficial provisions have been included. However, the interpretation of such provisions by the department and acceptance of the same by the Advance Rulings Authority have been disappointing so far. Two recent appellate advance rulings have provided some breather and we focus on the same in this 70th part so that the CBIC clarifies various issues surrounding this deeming fiction.

Valuation of supplies between distinct persons

Different establishments of an entity located in different States are considered as distinct persons as per CGST Act. Movement of goods or provision of services between various units of the same business entity in different States is a routine affair. Being intra-company transactions, no amount is actually paid by the receiving unit. As per Schedule I of CGST Act, transactions between distinct persons are treated as 'supply' even when consideration is not involved. Therefore, by such deeming fiction, companies have to bear the tax burden for intra-company supplies like transfer of goods to their own depots or provision of support services to their branch offices in different States. To provide partial relief, Rule 28 of CGST Rules provides for special dispensation of valuation of supplies between such distinct persons.

Rule 28 contains three clauses and two provisos. Clause (a) seeks to take open market value (OMV) of such supplies as the basis for payment of tax by the supplying unit of distinct person. Clause (b) begins with the words "if the open market value is not available". This means, the endeavour to look for value of similar goods or services as per clause (b) will be required only if open market value is not available. Clause (c) also begins with an 'if' and it comes into play only if clause (a) or clause (b) is not applicable. This third clause, in effect, leads to the additional method of cost plus basis for valuation provided in Rule 30 and best judgment method provided in Rule 31.

The first proviso to Rule 28 seeks to provide option to the supplier to take, as basis for valuation for supplies between distinct persons, 90% of the price charged by him for further supply of the goods as received and supplied as such to his unrelated customers. The quantum of 90% is in line with attribution of 10% towards notional profit and is consistent with cost plus method whereby 110% of cost of production/acquisition or provision (in case of services). The second proviso covers the situation of recipient being eligible for full input tax credit in which case the value declared in the invoice by the supplying unit will be deemed to be the open market value. This is founded on the principle of revenue neutrality when the receiving related person is entitled to credit.

The three clauses operate independently and anyone of them is applicable based on the conditions prescribed like "if open market value is not available". First proviso provides an additional optional method but the same will be useful if the receiving unit is engaged in trading i.e. sale of goods 'as such' i.e. as received by it. Second proviso does not provide any method, but it is intended to be a benevolent provision as whatever value is declared in the invoice, the same is deemed to be the open market value. But this is dependent on the recipient being eligible to full ITC.

The statutory scheme, as it appears, is relatively unambiguous for the industry/taxpayer but not for the department or AAR. In a case where the taxpayer sought advance ruling, the AAR held that the applicant was not free to choose the provisos as favourable to them and adoption of open market value was mandatory for supplies to distinct person. The faux pas did not stop here. The authority further bundled the provisos by stating that the applicant can adopt 90% of the price charged by recipient to his customers and such value shall be deemed to be open market value if recipient is eligible for full ITC. This advance ruling is an exemplary example of misinterpretation of provisions and applying them without comprehending the rationale behind the provisions. The result is obvious - this has been set aside by Appellate Authority for Advance Rulings Specsmakers Opticians Pvt. Ltd. - Tamil Nadu AAAR, Ruling dated 13-11-2019 - 2020-TIOL-05-AAAR-GST .

The AAAR held that the valuation provisions or methods are not required to be applied sequentially i.e. hierarchical application of rules has not been prescribed except Rules 30 and 31. It noted that the first proviso provided option to the supplying unit and it was not mandatory. Second proviso extends the benefit of treating declared value as OMV as an alternative to first proviso. The authority was of the view that second proviso was not subordinate to first proviso and they deal with different scenarios. Second proviso is not restricted to 'as such' supplies only, as per the appellate authority. It held that the applicant may adopt second proviso to Rule 28.

This case brings to focus the issue of requirement of training the members of AAR as repeatedly highlighted in this series. This ruling also indicates that not only training is required in interpretation of statutory provisions but also on the basis and intention of various methods of valuation. If two methods of valuation are to be clubbed and applied to a particular transaction i.e. 90% of the resale price is to be treated OMV, then one can only conclude that neither the principles of valuation as contained in Customs Valuation Rules nor Central Excise Valuation Rules have been imbibed nor CGST Rules have been comprehended properly. The taxpayer was compelled to approach the appellate authority which was wholly unnecessary. But at least the Appellate AAR adopted the correct interpretation which spared the taxpayer from invoking writ remedy before High Court.

Payment of value not required for availing ITC by distinct person

GST law has taken into account commercial realities and practices to an extent. Second proviso to Section 16(2) of CGST Act requires payment of value and tax amount by the recipient to the supplier if he wishes to retain input tax credit. Otherwise, the same is liable to be reversed. As no amount is actually paid in intra-company transfers, proviso to Rule 37 of CGST Rules states that value shall be deemed to have been paid in respect of supplies made without consideration as specified in Schedule I. Therefore, for supplies between distinct persons, non-payment of consideration by recipient unit to the supplying unit does not operate as a restriction or bar in availment of credit by the receiving unit, of the tax paid by the supplying unit. What happens if the recipient unit of distinct person opts to pay some consideration by way of book adjustment or otherwise?

When such question was posed, the AAR did not venture into minute interpretation of provisions but held that the benefit conferred by Rule 37 was not available to the taxpayer and ITC will be restricted to the extent of payment of consideration. Presence of a price/value in the invoice was further relied on by the authority. The Appellate AAR did not accept the above and held in favour of the taxpayer. It held that the price shown in the invoice was as per MOU between the supplying and receiving units and proviso to Rule 37 provides for deemed payment in such transactions between distinct persons. Consideration was held as paid either by the customer of the recipient unit directly or by the recipient unit by netting off against payables which was in line with accounting principles Sanghvi Movers Ltd. - Tamil Nadu AAAR, Ruling dated 13-11-2019 - 2020-TIOL-04-AAAR-GST .

Movement of goods from one State to another by distinct persons is taxable and, therefore, tax invoice is mandatory. Once tax invoice is required to be issued, value is to be mentioned compulsorily. Mere mention of value in the invoice does not mean payment of the same is required as the parties may choose to settle invoice amount based on receivables and payables in other transactions. Even otherwise, when Rule 37 has been inserted to specifically cover the commercial scenario where branch or depot in another State does not make any payment to head office or supplying unit, to deny benefit of such rule through ruling manifests not only pro-revenue bias but also lack of proper appreciation of the statutory provisions. The AAR ought to have adopted harmonious construction of the provisions on invoice particulars and Rule 37. Purposive interpretation of Rule 37 was called for but the same was not considered and the taxpayer had to file an appeal before Appellate AAR. Though Appellate AAR concluded in favour of taxpayer, it could have further categorically held in unequivocal terms that proviso to Rule 37 will be applicable in such cases.

A comprehensive circular explaining valuation provisions and methods, periodical training for members of AAR and amending CGST Act to subject such rulings to judicial review by way of appeals before High Courts will streamline the remedy of advance rulings, strengthen the institution of AAR and contribute to jurisprudence on various issues in these early years of GST.

[To be continued…]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 69