Is GST ITC available on stock transfer from head office to branches where the invoice value is Nil
GST Rules provides separate provisions for valuation of supply between related persons. Let us refer to the same to understand how supply is valued when the supplier and recipient are related entities. We will understand the provisions of law and the ruling of AAAR-WEST BENGAL in the case of GKB Lens Private Limited.
Provision of Law
Rule 28 of the CGST Rules pertains to Valuation of Supply carried out between distinct or related persons (other than through Agent). Value of supply under this rule shall be:-
a. Open market value of such supply
b. if the open market value is not available, be the value of supply of goods or services of like kind and quality
c. if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
1st Proviso to Rule 28
If goods are intended for further supply by the recipient, the value shall, at the option of the supplier, be
= 90% of the price charged for the supply of like kind and quality goods by the recipient to his customer (not being a related person)
2nd Proviso to Rule 28
If recipient is eligible for full input tax credit (ITC), the value declared in the invoice shall be deemed to be the open market value of the goods or services
Will ITC be available according to 2nd Proviso of Rule 28 if, the value of supply on the invoice is zero?
Let us refer to the ruling of AAAR-WEST BENGAL for GKB Lens Private Limited which is discussed as below to understand the same.
Facts of the Case
- The applicant is an importer of Sun Glasses, Frames, Lenses, Contact Lenses, etc, having its Head Office in West Bengal
- The respondent transfers goods (optical lenses, frames for spectacles and accessories) to its branches in other States.
Questions for seeking Advance Ruling:-
- Whether the transfer of goods (optical lenses and frames for spectacles and accessories) from Head Office to its branches in other states, can be done at cost price, by applying the second proviso to Rule 28 of CGST Rules, 2017 (instead of 90 % of MRP as required under the First Proviso to Rule 28 of CGST Rules, 2017?
- What is meant by the expression “where the recipient is eligible for full input tax credit” as used in the second proviso to Rule 28 of CGST Rules, 2017.
Ruling of Authority of Advance Ruling (AAR)
- The applicant has the option of not supplying goods to its branches under the First Proviso of Rule 28 and is eligible to value these goods by applying the terms of the Second Proviso to Rule 28 of GST Act.
- The expression “where the recipient is eligible for full input tax credit“, means that the recipient will be eligible to take full ITC 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.
According to the Assistant Commissioner the wordings of the AAR order created an impression that the recipient would be eligible .for ITC if the supplier paid the tax.AAR should have declared that noITC would be available for supply at Zero Value. Hence, being dissatisfied with the order passed by the AAR, the Assistant Commissioner appealed for the same to the Appellate Authority for Advance Rulings (AAAR).
Proceedings at AAAR
- During the course of the hearing the Respondent submitted a copy of a tax invoice issued by the Head Office, which may be considered as a prototype invoice, as evidence of no tax being charged on supplies made at zero value.
- It was further submitted and stated that the Respondent has no objection to any clarification being added to the aforementioned Advance Ruling regarding the non-admissibility of ITC on goods supplied at zero value.
- From a plain reading of law laid down under section 16 of the GST Act, it is clear that, ITC is available only when the recipient is in possession of a tax invoice or debit note issued by the supplier registered under the GST Act, and in case of a supply between distinct/related persons (Head Office and Branches), the value declared in the invoice shall he deemed to be the open market value of the goods or services supplied.
- It is therefore clear that if the value declared in such invoice is zero no ITC is available to the recipient
- It is seen that the question raised by M/s GKB Lens Pvt. Ltd. was correctly answered by the Authority of Advance Ruling.
- Even though the questions raised by the applicant were correctly answered by the AAR, it may be clarified that no ITC is available to the recipient of goods/service if the value declared by the supplier in the invoice/debit note is zero.
Recipients of supply will be eligible to take full ITC of the amount of tax paid by the supplier as mentioned in the respective invoice. However, no ITC will be available where the value of supply on the invoice is zero.