Supply between related persons (Rule 28)
A supply between related persons or between distinct persons (with same PAN) is prima facie not fulfilling the requirements of section 15 to admit the transaction value for quantification of GST. In such cases, the value of supply will be:
(i) Open market value – please refer to previous discussion;
For example, a trader in computers gifts one of the laptops worth ` 50,000 to his relative during Diwali. Since the open market value of this is available, it needs to be taken for the purpose of charging GST.
(ii) Value of supply of ‘like kind and quality’ – please refer to previous discussion; For example, a Holding company provides a capital equipment whose open market value is not available to its subsidiary company which is not registered under GST. A similar capital equipment in terms of characteristics, quality, reputation etc. is available in the market at ` 10,00,000. This value of ` 10,00,000 will be adopted for the purpose of valuation.
(iii) Value determined by rule 30 or rule 31 – please refer to subsequent discussion.
The proviso to this rule is of significance where it is the recipient, who are entitled to full credit, the value declared in the invoice is deemed to be OMV. In other words, in a case of supply eligible by this rule – related parties or distinct persons – the supplier is entitled to unquestioned admittance of ‘any price’ that may be charged. This provision appears to accommodate internal preferences of the parties where the tax paid is revenue neutral. However, caution is advised in taking recourse of this proviso and charging a price lower than cost.
In the case of inter-branch supply of services, valuation of these supplies will involve additional tax due to costs such as salary, amortization, etc. which do not involve any input tax credit. For example, if a Head Office incurs certain entity-level expenses that are common to all registered taxable persons in other States, it is not permissible for the HO to retain the whole of these common credits due to the limitation in the language of section 16(1) – used by him in his business – although a portion of this credit may still be available. Previously, such HOs were registered as ISD under service tax but this may not be the case in GST. Please refer to discussion in section 20 for some analysis of these issues. Now, surely the HO is not ‘merely an office receiving invoice for services’ but is actually the ‘seat of management and control’ performing very significant services that are supplied to all branches. HOs ought not to continue as ISD but recognize the nature of the supply of services to all branches. And on this basis, apply these Rules for quantifying tax to be discharged. The proviso in this rule does not authorize payment of tax on cost because the value to be determined under this rule is OMV or else like-kind-and-quality or else rule 30 / 31 value. Hence, HO may be required to invoice for its services appropriately and not distribute credit as ISD. Valuation at nominal amount, appears to be permissible by second proviso to this rule. The eagerness to value stock transfers at nominal value misleads one to rely on the condition – recipient eligible for full input tax credit – appears to play culprit. It must be recalled that a transaction of stock transfers from one branch to another being defined to be a taxable supply under section 7(1)(c) read with schedule I deserves to be subjected to the rightful amount of tax based on the rightful value of this supply. This rule cannot undo what was set out to be a achieved by the section. In order to read this second proviso harmoniously with the definition of supply, it appears to be appropriate to construe ‘the value declared in the invoice’ under the second proviso to be thing short of the OMV of the stocks transferred between the branches inter se. This OMV could very well be the cost incurred by the supplier branch. But if the urge to apply nominal value to such supplies continues, by the words ‘value declared in the invoice’, the one declaring the value on the invoice cannot do so by affixing a nominal value which would be completely in disharmony between the rule and the section. A quick reference to rule 32 makes it clear that section 15 provides the boundaries within which every exercise of valuation must operate.
For example, an entity has four branches in Delhi, Mumbai, Kolkata and Bangalore. There is a head office of that entity in Hyderabad. The HO in Hyderabad recruits certain key management personnel for its branches. Here, it will be considered as if the manpower recruitment services are provided by the HO to its branches. For the valuation purposes, one needs to go through the hierarchy provided in Rule 28. As mentioned above, a nominal value for the purpose of billing should not be taken. There should be a reasonably justifiable method of valuation as explained above.