Movement of Capital goods between distinct person not supply

The AAAR, Maharashtra, in matter of M/s Chep India Private Limited [Order No. MAH/AAAR/DS-RM/02/2023-24 dated June 05, 2023] held that the transaction between two GSTINs of same person would be considered as lease transaction and accordingly taxable as supply of services in terms of Section 7 of the Central Goods and Services Tax Act, 2017 ("the CGST Act").

Facts

M/s. Chep India Private Ltd.  ("the Appellant") is engaged in the business of leasing of pallets, crates and containers ("Equipments") and multiple GST registrations all over India including in the state of Maharashtra, Karnataka and Tamil Nadu.

The Maharashtra unit owns the equipment and entered into leasing agreement with the customers and other units located across all over India. 

Thereafter Maharashtra unit leases the equipment to Karnataka units based on their demand requirement by executing Memorandum of Understanding ("MOU") under the cover of the delivery challan and raises periodical invoices on Karnataka unit for lease charges (‘Transaction 1’).

The Karnataka unit further leases such equipment to end customers for consideration through and would be charging lease charges from its customers based on the period for which the equipment was used by the customer.

In case if such equipment is required by another unit of the Appellant say, Tamil Nadu, instead of sending such equipment back to Maharashtra, Karnataka unit undertakes to transport of such equipment directly to Tamil Nadu unit upon instructions from Maharashtra unit (‘Transaction 2’). 

Upon receipt of equipment by Tamil Nadu unit, Maharashtra unit raises invoice to Tamil Nadu unit for lease amount, while Karnataka unit raises invoice to Maharashtra unit for facilitation of movement of equipment to Tamil Nadu unit.

The Appellant filed an advance ruling seeking whether leasing of equipment by Maharashtra unit to other unit would be considered as lease transaction, and if yes what would be the valuation of such services.

The AAR, Maharashtra vide Advance Ruling No. GST-ARA-82/2020-21/B-111 dated December 01, 2022 ruled that the leasing of equipment by Maharashtra unit to other unit would be considered as lease transaction since both units i.e. Maharashtra unit and other units are distinct person as per Section 25 of the CGST Act. In respect of valuation the AAR ruled that, the lease charges which would be charged by the other branch to the ultimate customer would be the value of supply for branch transfer.

Aggrieved by the second question, the Appellant filed an appeal before the AAAR, Maharashtra seeking the valuation of lease transaction between the distinct persons.

Issue

Whether movement of the equipment between distinct person would be considered as supply and what would be value of leasing services undertaken between distinct person for charging GST?

Held

The AAAR, Maharashtra, in Order No. MAH/AAAR/DS-RM/02/2023-24 held as under:

• Observed that, there is no dispute that lease transaction between Maharashtra unit and Karnataka unit would be considered as supply in terms of Section 7 of the CGST Act.
• Clarified that, the Karnataka unit is in the possession of the goods and Maharashtra unit is the owner of the goods, the movement undertaken by Karnataka unit (a lessee) to Tamil Nadu unit cannot be termed as supply in terms of Section 7 of the CGST Act.
• In respect of valuation the court noted that, the transaction value i.e. the price actually paid cannot be treated as the value of supply since, the supply is undertaken between the related persons i.e., the branches of the same company. 
• Relied on the case of M/s BG Shirke Construction Technology Pvt. Ltd. [Advance Ruling No. GST-ARA- 42/2019-20/21-22/B-56] wherein AAR, Maharashtra ruled that in case where the recipient is distinct person, and the recipient is eligible for full input tax credit the valuation may be done as per second proviso to Rule 28 of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules").
• Held that, Karnataka unit (recipient of leasing service) is eligible for full input tax credit of the lease transaction and hence the value declared in the invoice would be the value of goods or services or both as per second proviso to Rule 28 of the CGST Rules.