diff --git a/erpnext/accounts/doctype/pricing_rule/pricing_rule.py b/erpnext/accounts/doctype/pricing_rule/pricing_rule.py
index 924e1081307..e13fcb96df2 100644
--- a/erpnext/accounts/doctype/pricing_rule/pricing_rule.py
+++ b/erpnext/accounts/doctype/pricing_rule/pricing_rule.py
@@ -248,7 +248,7 @@ def get_pricing_rule_for_item(args, price_list_rate=0, doc=None, for_validate=Fa
 				if pricing_rule.price_or_product_discount == "Price":
 					apply_price_discount_rule(pricing_rule, item_details, args)
 				else:
-					get_product_discount_rule(pricing_rule, item_details, doc)
+					get_product_discount_rule(pricing_rule, item_details, args, doc)
 
 		item_details.has_pricing_rule = 1
 
diff --git a/erpnext/accounts/doctype/pricing_rule/test_pricing_rule.py b/erpnext/accounts/doctype/pricing_rule/test_pricing_rule.py
index 9c1fef69fac..2da71dfd0e0 100644
--- a/erpnext/accounts/doctype/pricing_rule/test_pricing_rule.py
+++ b/erpnext/accounts/doctype/pricing_rule/test_pricing_rule.py
@@ -326,6 +326,66 @@ class TestPricingRule(unittest.TestCase):
 		self.assertEquals(item.discount_amount, 110)
 		self.assertEquals(item.rate, 990)
 
+	def test_pricing_rule_for_product_discount_on_same_item(self):
+		frappe.delete_doc_if_exists('Pricing Rule', '_Test Pricing Rule')
+		test_record = {
+			"doctype": "Pricing Rule",
+			"title": "_Test Pricing Rule",
+			"apply_on": "Item Code",
+			"currency": "USD",
+			"items": [{
+				"item_code": "_Test Item",
+			}],
+			"selling": 1,
+			"rate_or_discount": "Discount Percentage",
+			"rate": 0,
+			"min_qty": 0,
+			"max_qty": 7,
+			"discount_percentage": 17.5,
+			"price_or_product_discount": "Product",
+			"same_item": 1,
+			"free_qty": 1,
+			"company": "_Test Company"
+		}
+		frappe.get_doc(test_record.copy()).insert()
+
+		# With pricing rule
+		so = make_sales_order(item_code="_Test Item", qty=1)
+		so.load_from_db()
+		self.assertEqual(so.items[1].is_free_item, 1)
+		self.assertEqual(so.items[1].item_code, "_Test Item")
+
+
+	def test_pricing_rule_for_product_discount_on_different_item(self):
+		frappe.delete_doc_if_exists('Pricing Rule', '_Test Pricing Rule')
+		test_record = {
+			"doctype": "Pricing Rule",
+			"title": "_Test Pricing Rule",
+			"apply_on": "Item Code",
+			"currency": "USD",
+			"items": [{
+				"item_code": "_Test Item",
+			}],
+			"selling": 1,
+			"rate_or_discount": "Discount Percentage",
+			"rate": 0,
+			"min_qty": 0,
+			"max_qty": 7,
+			"discount_percentage": 17.5,
+			"price_or_product_discount": "Product",
+			"same_item": 0,
+			"free_item": "_Test Item 2",
+			"free_qty": 1,
+			"company": "_Test Company"
+		}
+		frappe.get_doc(test_record.copy()).insert()
+
+		# With pricing rule
+		so = make_sales_order(item_code="_Test Item", qty=1)
+		so.load_from_db()
+		self.assertEqual(so.items[1].is_free_item, 1)
+		self.assertEqual(so.items[1].item_code, "_Test Item 2")
+
 def make_pricing_rule(**args):
 	args = frappe._dict(args)
 
diff --git a/erpnext/accounts/doctype/pricing_rule/utils.py b/erpnext/accounts/doctype/pricing_rule/utils.py
index e475563c77c..a2bb2ee927d 100644
--- a/erpnext/accounts/doctype/pricing_rule/utils.py
+++ b/erpnext/accounts/doctype/pricing_rule/utils.py
@@ -435,7 +435,7 @@ def apply_pricing_rule_on_transaction(doc):
 				doc.calculate_taxes_and_totals()
 			elif d.price_or_product_discount == 'Product':
 				item_details = frappe._dict({'parenttype': doc.doctype})
-				get_product_discount_rule(d, item_details, doc)
+				get_product_discount_rule(d, item_details, doc=doc)
 				apply_pricing_rule_for_free_items(doc, item_details.free_item_data)
 				doc.set_missing_values()
 
@@ -443,9 +443,10 @@ def get_applied_pricing_rules(item_row):
 	return (item_row.get("pricing_rules").split(',')
 		if item_row.get("pricing_rules") else [])
 
-def get_product_discount_rule(pricing_rule, item_details, doc=None):
-	free_item = (pricing_rule.free_item
-		if not pricing_rule.same_item or pricing_rule.apply_on == 'Transaction' else item_details.item_code)
+def get_product_discount_rule(pricing_rule, item_details, args=None, doc=None):
+	free_item = pricing_rule.free_item
+	if pricing_rule.same_item:
+		free_item = item_details.item_code or args.item_code
 
 	if not free_item:
 		frappe.throw(_("Free item not set in the pricing rule {0}")