Valuation of supply between distinct or related persons

Facts in Hand:

Applicant ('GKB Lens Pvt. Ltd.') is an importer and seller of Optical Lenses and Frames for Spectacles and Accessories, etc ('goods') having head office in West Bengal. These goods are transferred to branches in other States. Applicant wishes to understand valuation for the purpose of charging GST on such transfer of goods.

Question on which ruling was required?

Applicant wishes to obtain advance ruling as to whether such supplies of goods can be valued in terms of second proviso (i.e. any value declared in the invoice) instead of taking 90% of price charged by the recipient (i.e. branches) from its customers as provided in first proviso to rule 28. Further whether such valuation is applicable on supply of non-trading stock such as printing & stationary, office equipment, etc.

Legal provisions:

Rule 28 of CGST Rules: Value of supply of goods or services or both between distinct or related persons, other than through an agent- 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:

Provided that 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:

Provided further that 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.

Ruling:

1. Second proviso can be applied disregarding first proviso for all the goods whether to be supplied 'as such' or for 'use in business' (i.e. non trading stock).

2. Full ITC is eligible implies that Sections 16 to 21 as given in Chapter V of the GST Act needs to be complied with. There should be a valid invoice. Further, it need to be seen in the context section 17(1) i.e. whether supplies are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Author's Analysis:

1. Head office in 'West Bengal' and Branches in 'other States' have common PAN. Head office and Branches are considered to be distinct person as per section 25(4) of GST Act.

2. As per clause 2 of schedule I to GST Act, supply of goods or services or both between distinct persons or related persons is treated to be 'taxable supply' even when made without consideration.

3. Section 15(5) provides that value of supplies between distinct persons or related persons shall be as per valuation rules.

4. Valuation rule no. 28 provides for the valuation for supplies between distinct persons or related persons as follows:

1. Open Market Value ('OMV');
2. If OMV not available then supply of like kind and quality;
3. If both are not available then value as determined by application of rule 30 (cost method basis) and rule 31 (residual method basis).

5. It is to be noted that 'OMV' or 'supply of like kind and quality' are not defined under GST Act and therefore, understanding needs to be taken from erstwhile law and judicial precedents (An example has been discussed below).

6. Further, first proviso provides that where 'goods' are intended to be supplied 'as such' by the recipient, then supplier has option to take amount as 90% of the price charged on supply of like kind and quality by recipient branches to its unrelated customers.

a. This proviso is applicable only in case of 'goods which are supplied as such'.

b. For ex: X1 transferred 2 units of laptops (1 of HP and 1 of Dell) having common market, similar configurations to X2. Out of these, X2 further sales out (as such only) HP laptop to related customer for Rs.15K and Dell laptop to unrelated customer for Rs.20K.

• In this case, value of transfer of laptops from X1 to X2 shall at the option of the X1 be taken to be 90% of Rs.40K i.e. Rs.36K.
• It is to be noted that 90% has to be taken of 'supply of like kind and quality'. Therefore 1 to 1 relation between output and input goods is not required. HP and Dell laptops since having common market, similar configurations can be treated to be supply of like and quality.

7. Further, second proviso provides that where the recipient is eligible full input tax credit (ITC) then value declared in the invoice shall be deemed to be the OMV.

a. Qualifying requirement of section 16 to 21 and rules made thereunder (if any) needs to be satisfied.

b. Applicable in either supply of goods or services or both.

c. This proviso is applicable for goods for further supply 'as such' or for 'use in business' (for ex: printing & stationary, etc.).

d. Condition of 'full ITC' is to be checked for the purpose of eligibility (Context of ruling in this regard is not very clear).

i. Where the ITC is not available to recipient branches due to the reason that credit is blocked (i.e. not eligible) as per section 17(5), it seems that this proviso can't be applied.

ii. Where reversals are made as per section 17(1) due to non-business purposes or 17(2) due to exempt supplies, benefit of proviso can be taken since reversals occur due to post-transaction events and credit is eligible at the time when supply are made to recipient branches.

8. Now coming to the answer, it is clear that second proviso can be applied disregarding first proviso. Therefore it is not necessary that first proviso i.e. 90% of price charged by recipient branches to its customers needs to be taken as value. Value can be taken as stated in the invoice provided full ITC is eligible as per first proviso since the same is deemed to be OMV.

9. Conclusion:

1. The ruling goes with the spirit of the law.
2. Any of the provisos at the option of the supplier can be applied.
3. Therefore, value, as provided in the invoice, is considered to be OMV provided full ITC is eligible to the recipient. Further, it does not matter that goods or services or both are to be supplied 'as such' or are to be 'used in the business' so as to be covered by the first proviso.

The author can also be reached at ca.shivashish@gmail.com

No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish Karnani. The information provided is not a substitute for legal and other professional advice and meant only for academic discussions.