VALUATION AND INPUT TAX CREDIT: ADVANCE RULING SET ASIDE BY AAAR

[Dr. Sanjiv Agarwal]

The issue of valuation of goods on transfer of goods by a registered person to its branches which were situated in other states (other than Tamilnadu) in terms of valuation provisions of section 15 of CGST Act, 2017 and Rule 28 of CGST Rules, 2017 came up for determination before the Authority of Advance Ruling (AAR), Tamilnadu. The issue of eligibility of input tax credit was also raised.

In the instant advance ruling, the Tamil Nadu based company was engaged in trading of spectacle frames, lens, sunglasses and accessories which are procured locally or imported. The goods were transferred as such to branches situated in other States for further selling to their customers. It sought advance ruling to determine the value to be adopted in respect of transfer to branches outside the state.

The Authority for Advance Ruling ruled that the value in respect of 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 that is available as per of Rule 28(a) and Explanation (a) to Chapter IV of CGST/TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017. Where the goods are intended for further supply as such by the recipient, the applicant has the option to adopt an amount equivalent to ninety per cent 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 as the value of such supplies to the distinct recipient as per proviso to Rule (28) and Explanations (a) and (b) to Chapter IV of CGST/TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act, 2017. [IN RE: M/S. SPECSMAKERS OPTICIANS PRIVATE LIMITED - 2019 (8) TMI 368 - AUTHORITY FOR ADVANCE RULING, TAMILNADU; ].

Being aggrieved by the said ruling, the assesee preferred an appeal u/s 100 of CGST Act, 2017 before the Appellate Authority for Advance Ruling on the following grounds:

• The Authority has observed that once Rule 28(a) is applicable, Rule 28(b) or (c) cannot be used by the appellant for determining the value of the supply of goods between distinct persons. The appellant do not have any dispute with this stand and it is not their case that valuation as per Rule 28(b) or (c) is to be considered. The appellant are concerned only with the application of provisos contained in Rule 28 to the facts and circumstances of their case.
• The Authority has observed that recipients (branches) in other states further supply such goods to their customers without any further value addition, i.e. they are supplied as such. The appellant submit that they have not made any specific averment to that effect in their application. While sun glasses are further supplied as such, spectacle frames are fixed with lenses depending, upon customers requirements and then, supplied. Thus, it is the case of the appellant that under both these situations, their branch offices located outside the State arc entitled for full input tax credit for such supply received by them.
• Rule 28 contains two provisos and each proviso is to take care of a particular situation. The first proviso is applicable in a case where the goods are intended for further supply as such by the recipient. The second proviso is applicable to a situation where the recipient is eligible for full input tax credit.
• The first proviso refers 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. The second proviso refers to a situation where any value declared in the invoice is to be treated as open market value when recipient is eligible for full input tax credit. Thus, these two provisos cater to different situations and lower authority erred in holding that they have to be only sequentially applied.
• With regard to the second proviso, when full input tax credit is available, it is provided that the value declared in the invoice is to be treated as open market value of the goods or services. In other words, there is no requirement that these provisos should be applied only sequentially. They arc provided to take care of different situations and taking into account the fact that the open market value is specifically defined in Chapter IV or CGST Rules, 2017, the value declared in the invoices in respect of cases where the recipient is eligible to take full input tax credit will be the value relevant for payment of tax when the goods are transferred to the branch.
• The supplier may adopt the value higher than the open market value, will lead to accumulation of input tax credit and that is not the intention of taxation based on value addition. At best, these are only surmises and secondly, when the first supply is made, the appellants cannot choose to adopt a value higher than the open market value only for the purpose of enabling their branch offices to get more credit. Since at the first instance, if a higher value has to be adopted they have to pay higher tax, such a course is unwarranted as well as unnecessary. Thus, the observations in paragraph 4.5 made by the lower authority are misplaced.
• It is only 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. In such a situation, till the credit is used by branch offices, the credit amount will remain accumulated. On the other hand, when full credit is taken at a lower value and further supply is made at a higher value at the point of supply, the branch offices will utilize the credit and also pay additional tax based on the open market: value at the time of making further supply.
• The appellant is entitled to adopt any value range for supply of these items to their branches when their branches are entitled to take full credit of the tax paid and such values, therefore, adopted by the appellant are to be treated as open market value for the purposes of CGST Act and Rules.

The AAAR, Tamilnadu observed that it has been accepted by the appellant and AAR, 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 AAR.

Further, there is no specific regulation in the said Rules, that the rules are to be applied seriatim. 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.

It was thus held that 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 as much as the recipient distinct person is eligible for full Input Tax credit as required under the said proviso. It held that 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 Rules 2017.

The AAAR, Tamilnadu thus set aside advance ruling and held that 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. [IN RE: M/S. SPECSMAKERS OPTICIANS PRIVATE LIMITED - 2020 (1) TMI 63 - APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU]