Nov. 13, 2020, 8:50 p.m.   madhavgawri1  
Pens of Law students    

I. Introduction

Valuation under indirect tax laws has been subject to interpretative discrepancies eternally. This is of no surprise realizing the fact that the value of goods or services determines the quantum of tax liability. However, with the introduction of the concept of distinct persons under GST, the tax liability of the same entity transferring goods to its own establishments in different states has increased dramatically.

II. Stock Transfers: Transfer Between Distinct Persons

With the introduction of GST, the scope of the levy has been augmented to include even deemed service transactions. Section 7 read with Schedule I of the CGST Act specifically treats "supply of goods or services or both between related persons or between distinct persons made in the course or furtherance of business even without consideration" as "supply" thereby, attracting levy of GST in such cases. Thus, one can infer that stock-transfers of goods from one State to another by an entity attracts levy under GST.

The rationale behind taxing stock transfers is primarily GST being a dual-tax regime with a State component always in-built. But, the legislative reason may not always aid the economic rationale because no money changes hands between the receiving unit and supplying unit of the same company.[i] The plan is to tax the transaction first and get the same captured in the government system and to subsequently relieve the burden through an input tax credit that can be availed by the receiving unit.[ii] Thus, one needs to resort to Rule 28 of the CGST Rules to determine the value of supply in inter-state stock transfers.

III. Value Of Taxable Supply During Stock Transfers: A Case Of Rule 28 Of The CGST Rules, 2017

Recently, a clarification was sought with respect to the valuation of supplies between various depots and factories in the case of Kansai Nerolac Paints Ltd.[iii] wherein the AAR-Maharashtra held that "The supplies to the depots from the factory/manufacturing units or from depot to depot, qualifies as a supply made between distinct persons and provisions to Rule 28 shall apply for the valuation of such supply. And if any dealer is eligible for ITC, the applicant is eligible to value these goods by applying the terms contained in the second proviso to Rule 28. Accordingly, the value declared in the invoice shall be considered as open market value in respect of goods supplied by one distinct entity to another, where the recipient is eligible to claim the full input tax credit." Thus, one can infer from the above ruling that the valuation of supplies between distinct entities can be done on the basis of the value declared in the invoice. However, the major controversy with respect to the second proviso has been discussed in the next part.

IV. The Seed of Conflict: Whether The Second Proviso Is A Continuation Of The First Or The Same Has To Be Read Independently?

Before dealing with the aforesaid question, one needs to know what does the two provisoes to Rule 28 provide for. The first proviso to Rule 28 provides that in situations where the goods are intended for further supply as such by the recipient, then the value of supply (at the option of supplier) will be 90 percent of the price charged by the recipient for the supply of goods of like kind and quality to his unrelated customers. The second proviso to Rule 28 provides that in a situation, where the recipient is eligible for a full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. The second proviso comes as a welcome relief to the suppliers in case of supplies between distinct and related persons as it showcases the liberal face of the input tax credit when such supplies take place.

In this context, a significant observation has been made by the Tamil Nadu Authority for Advance Rulings (TN AAR) in the case of Specs makers Opticians Private Limited.[iv] Herein, the authority observed that "both provisos are to be read together and not independently, i.e. the Applicant cannot choose whichever proviso is favourable to them. The applicable rule would be Rule 28(a) i.e. Open Market Value, on the satisfaction of both the conditions given in the above provisos i.e. the value would be 90 per cent of the price charged for sale to unrelated consumers on the satisfaction of the condition that the receiving branch is eligible for full credit."

This decision of the Authority was premised on the terms “provided further” used in the second proviso which they interpreted to be a continuation of the first proviso. The TN AAR clearly stated that “if the interpretation of applicant is adopted then he can value any amount and transfer the credit to the recipient”. Placing reliance on a literal interpretation, the Authority reasoned that one cannot add or delete words and Law has to be interpreted in its original form regardless of the consequences that emanate from the interpretation. For instance, when ITC is restrained for certain input/input services, one cannot contend that the consequence of the same results in additional cost in the hands of the recipient and hence, ITC would be available.[v]

The above ruling is in stark contrast to the decision of Appellate Authority for Advance Ruling in the case of M/s GKB Lenses Pvt. Ltd.[vi] wherein the applicant wanted clarification on "whether goods supplied to branches in other states can be valued in terms of the cost price under the second proviso to Rule 28 instead of 90% of MRP as required by the First proviso of the same rule." Further, clarification was sought with respect to the phrase "eligible for the full input tax credit." The Advance Ruling Authority held that the applicant is free to apply the second proviso to Rule 28 for valuation of supply of goods to its branches without taking into consideration the first proviso to Rule 28. Further, the Authority observed that the expression "eligible for a full input tax credit" means that the recipient will be eligible to take a full input tax credit of the amount of tax paid by the supplier as mentioned in the respective invoice or any other document valid under section 16(2)(a) of GST Act and needs to comply with Section 16 to 21 as envisaged in Chapter V of the GST Act.[vii]

In light of the above controversy, the author seeks to prove that the second proviso can be read independently of the first proviso in the following manner. In the words of Kapur, J.: “The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception..” Moreover, the word "further", as per the Merriam-Webster dictionary, means "in addition". Thus, one can infer that the second proviso is merely an additional or second exception to the main provision and has no relationship with the first proviso. Additionally, the Calcutta High Court in the case of Ever Bright Plastics Pvt. Ltd. v. Collector of Customs[viii] held that, “The phrase “provided further” in the second proviso, only means that another proviso was being added to sub-section 3 of Section 46. From this, it does not necessarily follow that the second proviso was the continuation of the first proviso.” Thus, one can infer that the second proviso should be read independently of the first proviso rather than being in continuation of the first proviso.

Secondly, if one considers the observation made in Specs makers to be valid, then it would imply that in case the first proviso is applicable for a particular supply, then the said value will have to be considered as deemed open market value as per the second proviso. In such a case, the word "service" used in the second proviso is redundant as the first proviso is applicable only in the case of goods. Hence, the second proviso cannot be interpreted as a continuation of the first proviso as it is a settled principle that "the statute never wastes words."[ix] Thus, one can infer that the two provisos provided in Rule 28 are mutually exclusive and the assessee has the option to choose from either of the two.

V. Conclusion

If the second proviso to Rule 28 which was intended to provide relief to the single establishment with different branches is not read independently of first proviso them it will cancel out the relief provided and will put an additional burden on the taxpayer. Thus, the second proviso, instead of acting as a facilitator, will act as an impediment.

[Keywords]: Stock transfers, valuation, input tax credit, open market value, invoice.

[Profile of the author]: Shubhangi Komal is a 5th year Law student in National University of Study and Research in Law, Ranchi and holds a keen interest in constitutional, criminal, environmental, labour and human rights laws.

[FAQs]: Who are distinct persons?

Ans: the term “distinct persons” derives its meaning from sub-section (4) and (5) of section 25 of the CGST Act, 2017 such that the term covers a person who has obtained or is required to obtain more than one registration either in one state/union territory or more than one state/union territory. It encompasses all the branches or units or offices, etc., belonging to the same person, whether registered or not.

[i] Dr. G. Gokul Kishore, GST – An agenda for reforms – Part 53 – Valuation under GST – Time to exempt intra-company transactions, Tax India Online (September 03, 2019),

[ii] Id.

[iii] [2019] 106 288 (AAR- Maharashtra).

[iv] 2019 (27) GSTL 596 (AAR – GST).

[v] CA Vikram Kataria & Adv. Lavanya PR, Valuation for Inter-Branch Transactions Under GST, Tax Guru (Dec. 10, 2019)

[vi] 2018-TIOL-18-AAAR-GST

[vii] Is GST ITC available on stock transfer from head office to branches where the invoice value is nil, Faceless Compliance

[viii] 1993 (65) E.L.T. 196 (Cal.)

[ix] Visitor Amu v. K.S. Misra, 2007 (8) SCC 594.

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