Our client is brand owner having own showroom and also has third party showroom, (wherein in Third party showroom is exclusive showroom owned by different proprietary firm/person/entity), in the third party showroom only our client product are been stored and sold, our client has shared some SOP on shop maintenance, staff, offers on products accordingly only third party has to make sales, on sales at third party stores, he gets his agreed commission and balance amount to be remitted to our client, with his commission he has meet out all his stores expenses and his profitability.
The issue is department contention is since Third party showroom follows the SOP and instruction of our client, they are treating Third party as related party transaction under section 15(5)
a) is department contention valid,
b) is there any ruling against the department contention please share
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Sh. Suresh sathyamurthy Ji,
The department's contention is correct. Pl. elaborate your query. How your transactions are effected ? By treating third party as related person, are you facing undervaluation charge from the department ?
If you want any decision/case law in your favour, please elaborate your query. Full facts should be known to the experts for this purpose.
Dear Kasturi Sethi sir
We had sold the sales promotion items like bags, perfumes, watches, etc at nominal price to third party showroom , which in turn the third party has give free of cost to the final consumer as per the sale promotion scheme of our client. secondly our client has reversed ITC on the above sales promotion items since outward is billed at nominal price
now department contention
a) Not adopting proper valuation since it is to related party contravening rule 28
b) ITC reversal is not tenable since, it cannot be considered as gift (not fitting gift definition) as nominal price is charged
c) Since the third party showroom finally has given free of cost as sales promotion, Third party showroom is not eligible for ITC, rule 28 a, b,c to be followed
finally they are demanding for
a) valuation difference between nominal & actual price
b) Rate difference under Mixed supply
Actual transaction is
a) sales promotion scheme implemented through third party exclusive showroom, ITC is also reversed, we quoted recent AAR of Kanahiya reality private limited - 2021 (10) TMI 326 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL, inspite of which department is taking the above stand, please help to substantiate the case.
Shssuresh Sathyamurthy Ji,
AAR is specifically meant for the party who has applied for. AAR has no precedential value. It is binding on the applicant only. AAR has persuasive value but at the same time it cannot be used as persuasive tool. If the decision is anti-revenue and the department feels aggrieved , the department can file with AAAR and vice versa. The AAR decision quoted by you has been decided recently and the department has sufficient time to file appeal with AAAR.
The department's stand is correct on both aspects.
In case promotion item is given at nominal charge ITC would be eligible. If so then even if related party any value charged to be treated as OMV
Also have a look at this article
Looking at your first query and 2nd query , both look different.
Madam Shilpi Jain
Second part and first part has a link. in first part department has raised related party issue, because of which in second part department has raised valuation issue, if first part department is proved otherwise then second party would not arise at all.
Further department contension is since the third party showroom has given sales promotion at free of cost and they are not eligible for ITC hence this rule "where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market" cannot be applied, hence demanding valuation difference as per rule 28.
However these goods are not given free so the recipient showroom is eligible for credit. So even if related, any value can be adopted for transfer of goods to the showroom.
Madam Shilpi Jain
Yes we have also put our point accordingly, but they are taking stand as per circular 92/11/2019-GST and sales promotion at Third party showroom as gift hence ITC not eligible and raising related party & valuation issue.
Circulars are not binding on the taxpayer and if these circulars are not in line with the law then they have no existence as well
Yes, but the department is bound to follow the Board's circulars. In case there is a clash between the Board's circular and the Act and Rules, the Act and Rules will prevail over the circulars.
Shri Suresh Sathyamurthy,
As we do not have copy of agreement between your client (i.e. brand owner) and third party show-room, it is difficult to answer issue raised. But, allow me a try:
I have strong doubts about validity of ground & legal provision which is relied by Dept. to claim your client (brand owner) and third party show-room as 'related party'.
Merely because such show-room is 'exclusive' and some SOP to be followed on shop maintenance, staff, offers on products accordingly only third party has to make sales etc., it does not necessarily make these parties as 'related'.
Just to elaborate: All 2/4 wheeler dealership has similar arrangements with Original Equipment Manufacturers (i.e. OEMs). But, such arrangements by themselves does not make each of such dealers as 'related party' to OEMs.
Hence, we suggest to check term of agreement and other factual aspects to effectively counter Dept's charge.
Sh. Amit Agrawal Ji,
Sir, I agree with your views to the extent that terms and conditions of the agreement will prove determinant factor. In the absence of copy of agreement, we cannot give final, concrete and correct decision.