Information regarding adoption of value of transfer to branch outside state

Thirumalai Chemicals Limited

M/s. Thirumalai Chemicals Limited, having their principal place of business at No.25A,Sipcot Industrial Complex, Sipcot, Ranipet- 632 403 (hereinafter called the Applicant) are registered under GST with GSTIN 33AAACT2015M1ZM. They are engaged in the business of manufacture and trading of chemicals. The applicant has preferred an application seeking advance ruling on the following questions:

1. The value to be adopted in respect of transfer to branches located outside the state.

2. whether the value of such supplies can be determined in terms of the second provision to rule 28 in respect of supplies made to distinct units in accordance with clause (4) & (5) of section 25 of the CGST rules, 2017.

The Applicant has submitted the copy of application in Form GST ARA – 01 and also submitted a copy of Challan evidencing payment of application fees of Rs.5,000/-each under sub-rule (1) of Rule 104 of CGST rules 2017 and SGST Rules 2017.

The applicant has stated that they are engaged in the business of manufacture and trading of Chemicals. They are the largest producers in the world for Phthalic Anhydride, Malic Acid and Fumaric Acid. Apart from this, they have revenues from Sales of power from wind operated generators & income from letting out of storage facility. Apart from the units in Tamilnadu, they have units & branches located in Gujarat, Maharastra and Dadra & Nagar Haveli. Apart from the domestic and export sales they are also engaged in Stock transfer of their finished products to their units (depots) located in other states, who are distinct units as per Section 25 of the Act and to their agents in other States.

At present, stock transfers from Ranipet are made to warehouses (depots) situated in Gujarat & Maharashtra being distinct entities. To reach out to the customers on time and to maintain optimum inventory at depot level, there is always movement of goods from factory to depot under the concept of stock transfers. Further, Rule 28 of GST Rules 2017 deals with valuation of a supply when it is made between distinct or related persons. They have stated that at present the valuation adopted for stock transfer to their distinct entities in other states are made in accordance with the provisions of Rule 28(a) of the CGST Rules, which says that the value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- (a) be the open market value of such supply; i.e., they are adopting the `Open market value’ as provided under Rule 28(a) of CGST Rules, 2017. The distinct units are eligible to full input tax credit as per second proviso of Rule 28 of Central Goods and Services Tax Rules, 2017 and are availing input tax credit of the stock transfers received from the distinct unit at Tamilnadu. Further, the said stock transfers are sold by the distinct person from their depots.

The applicant has stated that apart from the depot, there is a factory at Gujarat and is incorporated as an additional place of business in the GST registration certificate of Gujarat. The factory is yet to commence the commercial production. The factory at Gujarat has acquired lot of machineries, equipment & inputs for its operation and due to which lot of input tax credit has been accumulated at the unit at Gujarat. Apart from this, there are input tax credit available due to payment of warehouse charges. The factory is yet to become operational and as such there is no sales resulting in outward GST liability. The applicant has also submitted that they have their Registered office at Maharashtra (Mumbai) and input tax credit accumulated at the Maharashtra office remain unutilized due to the fact that apart from the input tax credit availed based on stock transfer, there is accumulation of input tax credit due to receipts of inputs such as bank charges, RCM charges, consultancy charges etc., at the office.

Apart from this, there are input tax credit available due to payment of warehouse charges. The applicant has submitted a sampling data displaying the input tax credit availed by way of stock transfer and other purchases & expenses, wherein the percentage of excess input tax credit on stock transfer receipt to outward liability on sales at the depots as well the overall excess input tax credit available after adjusting the outward liability expressed in terms of both figures and percentage. They have stated that from the data it could be observed that the Stock transfer input tax credit availed during 2018-19 was in excess by 1.07% & 0.19% as compared to the outward liability discharged in Maharashtra & Gujarat, respectively and also there are accumulated input tax credit availed from other purchases and expenses at the respective places of business in Maharashtra & Gujarat. In view of the sampling data, the applicant’s observation is that the amount of input tax credit with respect to Integrated Goods and Service Tax availed from Stock transfer receipt is more than sufficient to discharge the outward liability at the time of sales made at the depots. The above trend would be almost similar in other periods also and as such the accumulated and unutilized input tax credit continues to be on the higher scale. Except for sale of stock transfer receipts, no other sales are in place in Maharashtra & Gujarat. Hence, the inflow of input tax credit continues to surpass the outflow GST liability.

This expresses the distinct person’s inability for maximum utilization of input tax credit. In view of this, they need to revisit the existing pricing pattern adopted for stock transfers. The revised strategy is adopting a reduced or zero valuation for stock transfers fully in compliance with the provisions of Rule 28 of CGST Rules, 2017 without any deviations, wherein the outflow of GST liability would be either reduced or Zero and in turn the inflow of input tax credit on stock transfer receipts at depots would be greatly reduced or would be Zero. This would prompt the depots to focus their attention on the alternative source of accumulated input tax credit available which in turn would result in their maximum utilization. Further, they have stated that Going forward there would be maximum utilization of the entire input tax credit available which would result in unblocking of the accumulated and unutilized input tax credits, releasing of blocked capital and funds and ease of doing business.

Appellate Authority for Advance Ruling ,Tamil Nadu in the case of Specsmakers Opticians Private Limited Vide AAAR order No.09/2019, Dated 13.11.2019 has examined the above Rule 28 and its provisos, in Para 7.3 of the said order. The same is extracted as under:

”We find that there is no specific regulation in the said Rules, that the rules are to be applied seriatim. Further 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’.
A plain reading of this proviso gives an option to the person supplying to distinct or related person and do not mandate that the value of supply should be goods of the ultimate sale value, even in such a scenario. Proviso 2 states that when the tax paid is available as full input tax credit, then the invoice value is the 
‘Open Market Value’. 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”.

From the above, it is evident that the Value in respect of supply between distinct persons can be

1. The available Open Market Value;

2. In cases of ‘as such’ supply by the recipient, the supplier has an option to value the supply at 90% of the ultimate sale value;

3. When the recipient is eligible for full Input Tax credit, the ‘Invoice value’ is deemed to be the ‘Open Market Value’

In the case at hand, the applicant supplies to their distinct persons, for which presently they adopt the approximate sale value of the distinct person. The distinct person undertakes supply to their ultimate-unrelated customer ‘as such’ and the value adopted is that on the Purchase Order issued to such distinct persons by the ultimate customer. Also, the distinct units are eligible to avail full Input Tax credit of the tax paid by the applicant. Therefore, following the judicial discipline, we hold that the value to be adopted by the applicant can be arrived at following the methodology of either of the three methods.

10. In view of the above, we rule as under:

The applicant can adopt any one of the following three methods provided under Rule 28 of the CGST/ TNGST Rules 2017 read with Section 15 of the CGST/TNGST Act 2017to arrive at the value in respect of supply to distinct persons

a. Open Market Value as is presently being adopted by them;

b. 90% of the ultimate sale value as raised by the distinct persons to the un-related ultimate customers based on the Purchase Orders in cases of ‘as such’ supplies;

c. The distinct persons being eligible for full Input Tax credit of Taxes paid by the applicant, the ‘Invoice value’ is the deemed ‘Open Market Value’.


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