Appellate AAR ruling on valuation for transaction between distinct persons

Recently, the Appellate AAR (Tamil Nadu) in the case of Specsmakers Opticians Private Limited , has held that the taxpayers can adopt the value, in case of transaction between distinct persons, as per the second proviso to Rule 28 of the CGST Rules. 

Brief summary of the ruling

In the case here, Specsmakers Opticians is a trader of lenses, frames, sunglasses, etc. which it imports as well as procure locally. The goods imported are resold by Specsmakers Opticians and are also transferred to their branches located outside the State for subsequent supply to ultimate customers. In this case, as the branches are distinct persons, Specsmakers Opticians discharges applicable GST while supplying the goods to their branches outside the State.

Since the branches were eligible for full ITC, Specsmakers Opticians was of the view that the said goods can be valued as per the second proviso to Rule 28 of the CGST Rules i.e. value declared on the invoice would be deemed to be Open Market Value (‘OMV’). Accordingly, Specsmakers Opticians had sought an advance ruling from the AAR (Tamil Nadu) in order to determine the value to be adopted in such cases.

It may be noted that Rule 28 of the CGST Rules, provides three options, viz open market value (OMV), value of like goods if OMV not available, value as determined by Rules 30 or 31, for determining the value in respect of supplies to distinct persons. These options are further governed by the following two provisos:

The AAR (Tamil Nadu) [(2019) 27 GSTL 596] held that the second proviso has to be read along with the first proviso and that it cannot be read independently. This order restricts the taxpayers from exercising the second proviso and makes the second proviso otiose. It is contradictory to the order issued by the Appellate AAR (West Bengal) in case of GKB Lens Pvt. Ltd. [(2018) 17 GSTL 698].

Specsmakers Opticians aggrieved by an order of the AAR, filed an appeal before the Appellate AAR and argued as under:

• The two provisos under Rule 28 of the CGST Rules deal with specific situations. There is no requirement that the provisos should be applied sequentially;
  
• The intention of the legislature was to only avoid blocking of funds by introducing second proviso; and
• Reliance was placed on the decision of Appellate AAR in the case of GKB Lens Pvt. Ltd. (supra).

After considering the various provisions/rules of GST law, the Appellate AAR observed as under:

• There is no specific regulation in CGST Rules, that the rules are to be applied seriatim;
  
• The first proviso to Rule 28 does not mandate and it is at the option of the supplier, to take the value as 90% of the sale value of goods of like kind and quality;
• The second proviso is an alternative, whereby the invoice value can be taken as OMV;
• The second proviso is not subordinate to the first proviso. It independently deals with a situation where the recipient is eligible for full ITC.

Based on the above, the Appellate AAR held that Specsmakers Opticians can adopt the value as per the second proviso to Rule 28 of the CGST Rules. 

This ruling provides a correct interpretation of law, since the second proviso to Rule 28 would otherwise become redundant where the OMV is available. 

¹Order in Appeal No. AAAR/09/2019 dated 13 Nov. 2019

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