Under GST Laws, the registration being State specific[1], a single entity may obtain multiple GST registrations in various States using, the same Permanent Account Number (PAN). Therefore, a deeming fiction has been created under Section 25(4) of the Central Goods and Services Tax Act, 2017, (‘CGST Act, 2017') as per which, two registrations (GSTIN’s) of the single entity shall be treated as ‘distinct persons’. Consequently, supplies between such distinct persons would be taxable, even if made without any consideration[2].
In this context, the article seeks to analyse the GST implications on leasing of capital goods between such distinct persons, in light of the ruling of the Appellate Authority of Advance Ruling (‘AAAR’) in Re: Chep India Private Limited [2023-VIL-25-AAAR Maharashtra].
Summary of the ruling
In the instant case, CHEP India Private Limited (‘CIPL’) engaged in the business of leasing of pallets, crates and containers (‘equipment’), sought to operate under a business model where such equipment owned by the Maharashtra GSTIN of the entity would be provided on lease to other GSTINs by executing MoU’s. For such supply, Maharashtra GSTIN raises periodical invoices on Karnataka GSTIN for lease charges (‘Transaction 1’) and thereafter, Karnataka GSTIN may further provide such equipment to its end customers for consideration. In case such equipment may be required by another GSTIN, say, Tamil Nadu (‘ TN GSTIN’), instead of sending such equipment back to Maharashtra, Karnataka GSTIN undertakes to transport such equipment directly to TN upon instructions from Maharashtra GSTIN (‘Transaction 2’). Upon receipt of equipment by TN, Maharashtra GSTIN charges the TN GSTIN for lease amount, while Karnataka GSTIN charges Maharashtra GSTIN for the facilitation of movement to TN GSTIN.
With this background, CIPL Maharashtra sought an advance ruling[3] regarding the taxability of both the aforementioned transactions, valuation to be adopted if taxable and documents to be issued, which was thereafter appealed to the AAAR where:
- The AAAR concurred with the ruling of the Authority of Advance Ruling (‘AAR') that Transaction 1 between Maharashtra GSTIN and Karnataka GSTIN would amount to a ‘supply of services’ since there is no transfer of title, also noting that this position was not challenged.
- The AAR ruling which stated that value of Transaction 1 would be the same as value charged by Karnataka GSTIN to its end customer was modified. The AAAR held that the value of services between such distinct persons would be the value as stated in the invoice as per the second proviso to Rule 28 of the Central Goods and Services Tax Rules (‘CGST Rules, 2017’), concurring with a ruling provided to CIPL by the Karnataka AAR.[4]
- Contrary to the position adopted by the AAR, the AAAR addressed the implications on Transaction 2 stating that the movement of goods from Karnataka GSTIN to TN GSTIN would be a mere movement of goods not amounting to a supply since the Karnataka GSTIN is merely a bailee, without having ownership of such goods. It was also held that the supply of services of leasing of equipment would be from the Maharashtra GSTIN to TNGSTIN, with Karnataka GSTIN acting as an agent of Maharashtra GSTIN providing facilitation services for such Transaction of leasing of equipment by ensuring movement of the goods, which is leviable to GST.
The analysis regarding nature of supply between two GSTINs is clearly established under the provisions of the CGST Act, 2017 and therefore, the issues that may be further examined to ascertain the implications of such ruling are regarding valuation, mere movement of goods not amounting to supply and documentation in case of such transactions.
Valuation
While due consideration was not given to the second proviso of Rule 28 of the CGST Rules, 2017 to ascertain valuation in the AAR ruling, the AAAR concurred with existing rulings[5], including that of the Karnataka AAR in CIPL’s own case regarding a similar transaction.
It is also pertinent to refer to the recent Circular[6] on supplies between distinct persons categorised as ‘internally generated services’ by the Central Board of Indirect Taxes and Customs (‘Board’) in which it was clarified that where full Input Tax Credit (‘ITC’) is available to the recipient branch, the value of such supply would be the invoice value, in accordance with the second proviso to Rule 28 of the CGST Rules, 2017. Further, in cases where no invoice is raised and full ITC is available, the value of services may be deemed to be declared as ‘Nil’.
In light of such clarification, taxpayers may re-evaluate the value of leasing and facilitation services between two GSTINs in the absence of an agreement/MoU between the GSTINs/branches.
Mere movement of goods not amounting to supply
The ruling has provided clarity in respect of transactions involving mere movement of goods upon ascertaining which GSTIN actually owns and has title to such goods. In this regard, it may be emphasized, as also reiterated by the Karnataka AAR[7], while goods belong to entities as a whole under general laws due to which all branches of such entity will have ownership of the goods, a deeming fiction has been created specifically applicable under GST laws to consider each branch as a distinct person.
Maharashtra AAAR ruling on the outward supply by Karnataka GSTIN
In the aforesaid ruling, Maharashtra AAAR has ruled that Karnataka GSTIN is providing facilitation services to Maharashtra GSTIN, wherein, the appellant in this case is recipient of such services.
The divergent interpretation of the authorities may be noted wherein, while the Maharashtra AAAR and Karnataka AAR ruled on transactions occurring outside the jurisdiction of the respective States, the AAR refused to do so, due to lack of jurisdiction. Upon a perusal of Sections 96 and 99 of the CGST Act, 2017 specifying that an AAR and AAAR respectively, are constituted under the State GST Acts and will be authority only in respect of that particular State, the applicability of such ruling in respect of transactions in a different state may be challenged based on lack of jurisdiction. Further, considering that the Maharashtra GSTIN in the instant case is the ‘recipient’ of agency services and that rulings are to be obtained by a supplier regarding transactions being undertaken or sought to be undertaken[8], an inconsistency in the position of the authorities in this regard might lead to ambiguity regarding applicability of such rulings.
Documentation
Regarding documentation, reference may be made to Rule 55 and Rule 138 of the CGST Rules, 2017 which provides for the issuance and generation of documents like delivery challan and e-way bill respectively, in case of transactions involving the movement of goods. Therefore, taxpayers may need to check the requirement of generating/issuing and maintaining such documents considering that the underlying supplies in such transactions will be in the nature of ‘services’ and not ‘goods’ itself.
Parting remarks
The AAAR ruling brings out the proposition that mere possession of goods by the other GSTIN does not automatically result in the ‘supply of goods’ but rather, is a supply of services. To substantiate the same without any dispute, taxpayers are to ensure that appropriate documentation is to be maintained both in respect of the supply between the two GSTINs, and also, for the actual movement of such goods.
Further, it may also be reiterated and emphasized that the value of transactions of this nature are to be ascertained based on the provisions under GST laws along with the recently issued Circular mentioned above.
[The authors are Partner, Principal Associate and Associate, respectively, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru]
[1] Section 22(1) of the CGST Act, 2017
[2] Entry 2 of Schedule I read with Section 7(1) (c) of the CGST Act, 2017
[3] CHEP India Pvt Ltd reported at 2022-VIL-309- AAR Maharashtra
[4] CHEP India Pvt Ltd reported at 2021- VIL- 269-AAR Karnataka
[5] Kansai Nerolac Paints Ltd reported at 2019-VIL 167-AAR Maharashtra; Specs Makers Opticians Pvt Ltd reported at 2019-VIL-233-AAAR Tamil Nadu
[6] Circular No. 199/11/2023-GST dated 17.07.2023
[7] CHEP India Pvt Ltd reported at 2021- VIL- 269-AAR Karnataka
[8] Section 95(a) of the CGST Act, 2017
