VALUATION OF INTER-UNIT SUPPLIES

[Dr. Sanjiv Agarwal]

Valuation of supplies is GST regime is governed by section 15 of the CGST Act, 2017 read with rule 28 of the CGST Rules, 2017
. On what should be the valuation of supplies by one person to its other branches in other states came up for interpretation before the Authority for Advance Ruling (AAR), West Bengal.

Advance Ruling

In Re: GKB Lens Pvt. Ltd. 2018 (6) TMI 72 - AUTHORITY FOR ADVANCE RULING - WEST BENGAL ;  , the Applicant was a Re-seller and Importer of sun glasses, frames, lenses, contact lenses, etc. having Head Office in West Bengal. Goods, namely, optical lenses and frames for spectacles and accessories, were transferred from the Head Office in West Bengal to its branches in other states.

The advance ruling was sought on

(a) whether the transfer of goods (optical lenses and frames for spectacles and accessories) from Head Office in West Bengal to its branches in other states, can be done at cost price, by applying the second proviso to Rule 28 of CGST Rules, 2017 (instead of 90 % of MRP as required under the First Proviso to Rule 28 of CGST Rules, 2017, and

(b) what is meant by the expression “where the recipient is eligible for full input tax credit” as used in the second proviso to Rule 28 of CGST Rules, 2017.

The Authority of Advance Ruling (AAR) ruled that the Applicant has the option of not supplying goods to its branches under the First Proviso of Rule 28 and is  eligible to value these goods by applying the terms of the Second Proviso  to Rule 28 of CGST Rules, 2017. The expression "where the recipient is eligible for full input tax credit", as used in the second proviso to Rule 28 of CGST Rules, 2017, means that the recipient will be eligible to take full input tax credit of the amount of tax paid by the suppler as mentioned in the respective invoice or any other document valid under Section 16(2)(a) of GST Act.

Appellate Ruling

Being aggrieved, an appeal was preferred before the Appellate Authority for Advance Ruling (AAAR) for review of availability of input tax credit on stock transfer from the head office to its branches in other states at a ‘zero value’ basis as there remained a clarity to be provided on this issue.

The AAAR also perused the copy of tax invoice issued by head office as an evidence of no tax being charged on supplies made at zero value. It was observed that from section 16 of the GST Act, it is clear that, inter alia, input tax credit is available only when the recipient is in possession of a tax invoice or debit note issued by the supplier registered under the GST Act, and in case of a supply between distinct and/or related persons, as between Head Office and branches, the value declared in the invoice shall be deemed to be the open market value of the goods or services supplied. It was, therefore, clear that if the value declared in such invoice is zero,  no input tax credit is available to the recipient.

Though the AAR had correctly replied to the query, the AAAR clarified that no input tax credit is available to the recipient of goods/service if the value declared by the supplier in the invoice/debit note is zero.

The ruling was modified to the extent that to the original ruling, it would be added that “No input tax credit, however, would be available for supply of goods / services at zero value.”  [In Re: GKB Lens Pvt. Ltd. 2018 (9) TMI 1768 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL ; ].

Conclusion

It has thus been concluded that no input tax credit is available to recipient of goods / services if the value declared by the supply in tax invoice / debit note is ‘zero’, i.e., on zero value supplies, question of input tax credit does not apply.