Determining Value of Goods in Related Entities: CGST Act & Rules Ruling

The Authority for Advance Ruling confirmed that the applicant's distinct entities could determine the value of goods supplied between them under Section 25(4) of the CGST Act, 2017, by applying Rule 28 of the CGST Rules, 2017. The ruling allowed the invoice value to be deemed as the open market value if the recipient is eligible for full input tax credit, as per the second proviso to Rule 28.

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Issues Involved:
1. Determination of the value of supply of goods between distinct entities under the CGST Act, 2017.
2. Applicability of Rule 28 versus Rule 30 of the CGST Rules, 2017 for valuation of inter-unit transfers.

Issue-wise Detailed Analysis:

1. Determination of the Value of Supply of Goods Between Distinct Entities:

The applicant, a registered taxable person under the GST Act, is engaged in the manufacture and sale of consumer and industrial paints. The company has multiple factories and depots across India, each registered separately under GST but sharing the same PAN. These entities are considered distinct as per Section 25(4) of the CGST Act, 2017. The applicant seeks to determine if the value of goods supplied between these distinct entities can be based on the cost of production.

The applicant currently values such supplies at 110% of the manufacturing cost as prescribed under Rule 30 of the CGST Rules, 2017. However, they wish to explore the option of valuing these supplies as per the second proviso to Rule 28, which allows the invoice value to be deemed as the open market value if the recipient is eligible for full input tax credit.

2. Applicability of Rule 28 versus Rule 30 of the CGST Rules, 2017:

The applicant contends that since the transactions are between distinct entities under Section 25(4) of the CGST Act, 2017, the valuation should be governed by Rule 28 of the CGST Rules, 2017. Rule 28 specifies that the value of such supplies should be the open market value, or if not available, the value of goods or services of like kind and quality. If these values are not determinable, the value should be determined by applying Rule 30 or Rule 31.

The second proviso to Rule 28 states that if the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed the open market value. The applicant argues that this proviso allows them to declare the cost of inputs/outputs as the open market value.

The concerned officer agreed with the applicant's interpretation, stating that the applicant is eligible to value these goods by applying the terms of the second proviso to Rule 28 of the CGST Rules, 2017. The officer noted that the supplies between the factory and depots qualify as transactions between distinct persons, and Rule 28 is applicable for their valuation.

Observations and Final Ruling:

The Authority for Advance Ruling examined the facts and legal provisions, confirming that the applicant's factories and depots are distinct entities under Section 25(4) of the CGST Act, 2017. The Authority noted that Rule 28 is the specific rule for determining the value of supplies between related persons, including distinct entities under the GST law.

The Authority concluded that the applicant could apply Rule 28 of the CGST Rules, 2017, to determine the value of supply of goods between distinct entities. This includes using the invoice value as the deemed open market value if the recipient is eligible for full input tax credit, as per the second proviso to Rule 28.

Order:

The Authority ruled that the applicant could determine the value of supply of goods between distinct entities (factory/depot) under Section 25(4) of the CGST Act, 2017, by applying Rule 28 of the CGST Rules, 2017. The value declared in the invoice, where the recipient is eligible for full input tax credit, shall be deemed the open market value.

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