Recent advance rulings on supplies between distinct persons
Sanghvi Movers Limited
- The applicant was sending cranes from Head Office (HO) to branches. HO and branches entered into a MOU wherein branches had to pay rent to HO and HO paid GST on such rental charges. The branches had to charge upkeep charges from HO. The branches were entitled to adjust the amount of upkeep charges receivable from HO from rental charges payable to HO and pay net amount to HO.
- The applicant questioned whether branches were entitled for credit of GST charged by HO.
- The applicant pointed out that proviso to Rule 37 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) provides that restriction of payment to supplier within 180 days will not apply to supplies between distinct persons made without consideration as per Schedule I of the Central Goods and Services Tax Act, 2017 (‘CGST Act’).
- The AAR held that book adjustment is not equivalent to payment and since branches did not pay full amount to HO, branches will not be entitled to avail credit in terms of proviso to Section 16(4) of the CGST Act.
- In response to applicant’s argument that proviso to Rule 37 of the CGST Rules provides an exception, the AAR held that the exception has been provided only where the transaction is without consideration. In this case, since MOU provided for payment of amount between branches and HO, the transaction involves consideration and the exception will not apply.
This AAR dealt with unique facts where actual payment was agreed to be made between HO and branches. To that extent, the consideration existed and AAR was correct that proviso to Rule 37 of the CGST Rules will not apply. To that extent, the ruling will have limited applicability since the taxpayers do not usually have payment mechanisms for inter-unit transactions.
In our view, the reasoning of AAR that book adjustment should not be treated as payment is incorrect. It is important to note that the West Bengal AAR in the case of Senco Gold Limited, 2019-VIL-133-AAR allowed ITC where payment was made through book adjustment (For detailed analysis, please refer our update- ‘NITYA’s Insight | Legal Precedent’s Series | Issue- 9’ dated June 21, 2019).
Specsmakers Opticians Private Limited
- The applicant was stock-transferring goods from one location to another. For determining assessable value of such transactions, Rule 28 of the CGST Rules is relevant. The said Rule has following two provisos:
- First proviso – Where such goods are sold as such by the recipient, value shall be 90% of the price charged by the recipient;
- Second proviso – Where the recipient is eligible to avail full credit, invoice value shall be the open market value [which has been prescribed as assessable value under Rue 28(a)]
- The applicant’s question was whether it can determine assessable value under either of the two provisos or not.
- The AAR held that if the applicant is given an option to determine the value under second proviso, it will make the first proviso redundant. Further, under second proviso, the applicant can use a value higher or lower than open market value which can result in utilization or accumulation of credit at supplier location.
- Basis above, the AAR held that the provisos should be read sequentially and the taxpayer does not have an option to choose the proviso favorable to them.
The ruling is incorrect as it imposes a condition of chronological following of the provisos under Rule 28 whereas such a condition is absent in the Rule itself. It is a settled principle that the where legislature provides options to the taxpayer, the taxpayer is at liberty to choose the option beneficial to it. The AAR also did not consider the ruling in case of GKB Lens Private Limited, 2018-VIL-49-AAR, wherein the West Bengal AAR held that the supplier has an option to choose either of two provisos of Rule 28 of the CGST Rules.
Basis this, the authorities may contend that the taxpayers should undertake valuation under main Rule 28(a) and not resort to provisos only when it is not possible to determine value under the main Rule. This will lead to disputes which were never intended by the law.