1. Subject of cross charge (applicable on transactions between separate registrations of a single person) has been vigorously debated since the implementation of GST. In the present article we seek to communicate our views on the said subject.
2. Sec. 7 of the CGST Act, 2017, which deals with the scope of supply covers within its ambit under Sec. 7(1)(c), all the activities specified in Schedule I made or agreed to be made without a consideration. Entry No. 2 of the said Schedule I is relevant and hence reproduced below:
[See Section 7]
Activities To Be Treated As Supply Even If Made Without Consideration
Entry No. 2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”
3. As per Sec. 25(4) of the said Act, a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons. Above referred entry no. 2 thus not only covers supply of goods between such distinct persons but also supply of services.
4. With this background let us now appreciate the different types of transactions which may take place between two distinct persons.
Supply of Goods
5. This is by far the simplest transaction of all. It covers supply of goods by a manufacturing unit having a separate registration to branches, separately registered, across India. Such supply will be taxable. As far as valuation is concerned, second proviso to Rule 28 of the CGST Rules, 2017 provides that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value. Hence such supply need not require any mark-up to the cost so as to arrive at an open market value if full ITC is available to the recipient. The value declared in the invoice shall be deemed to have been accepted in such cases.
6. It may also be noted that second proviso to Rule 28 comes into play only if “full ITC” is available to the recipient. Hence question here is whether such criteria needs to be seen at the invoice level or registration level. In our view such criteria needs to be examined at the invoice level and hence if full ITC is available in respect of goods or services reflected on the particular invoice is concerned, said invoice value shall be deemed to be accepted.
7. Interesting issue here is when let us say samples are being sent to the branch. Sec. 17(5)(h) of the CGST Act, 2017 restricts ITC in respect of goods disposed by way of free samples. It must be remembered that Sec. 17(5) of the said Act does not provide for “reversal” of ITC but clearly states that for given goods or services, ITC “shall not be available”. Hence in case of samples, one may take a view that the branch cannot be said to be entitled to “full ITC”. Thus the second proviso to Rule 28 will not come to the rescue and valuation of such supply has to be done based on either open market value or the value of goods of like kind and quality or by applying Rule 30 (i.e. 110% of cost) or Rule 31 (residual method) in that order.
8. However, it may be noted that not all kinds of provision of goods to the branches are covered under Entry No. 2 (supra). This is because Entry No. 2 only covers “supply of goods between distinct persons” and not “provision of goods between distinct persons”. Distribution of samples is not regarded as a “supply” under Sec. 7(1)(a) of the CGST Act, 2017 since the same is not a sale for a consideration. It is for this reason that the ITC is restricted u/s 17(5)(h) of the said Act. Hence a view can be taken that since distribution of samples is not a “supply” if directly done by the manufacturing unit, sending such samples to the branches for further distribution cannot be regarded as a “supply” between distinct persons. Surely it is provision of goods to the branches but not in the nature of “supply”.
9. Can supply of goods to a distinct person be regarded as a supply of services ?? Let us consider a scenario wherein capital goods are sent by the Head Office to a branch. Said goods are sent only for a particular duration and shall return after the end of such duration. Can such transaction be regarded as “supply of services” instead of “supply of goods” ??
10. Answer seems to be yes as transactions between distinct persons can be of supply of goods as well as services. Hence transaction of sending such capital goods can be considered as a supply of the right to use such goods which is regarded as a service. Accordingly the valuation can be done.
Supply Of Services – Employee Driven
11. It is possible that the employees working at the Head Office may carry out work for branches sitting at such Head Office. It is also possible that the goods are supplied from the factory but the servicing of the goods supplied is carried out by the employees located at the branches. It is also possible that the employees at the branches carry out liasoning work and procure orders. Goods against such orders are directly dispatched to the customer from the factory.
12. In all the above referred cases, can it be said that the services have been provided by one distinct person to another ??
13. Before we answer this question it is important to reproduce Entry No. 1 of Schedule III to the CGST Act, 2017. Said Schedule contains list of activities or transactions which are not regarded as supply.
[See Section 7]
Activities Or Transactions Which Shall Be Treated Neither As A Supply Of Goods Nor A Supply Of Services
Entry No. 1 Services by an employee to the employer in the course of or in relation to his employment.”
14. Above entry clearly provides that any services provided by an employee to the employer in the course of or in relation to his employment shall not be regarded as a “supply”.
15. It is important to pay attention to the word “employer”. Is branch of a company not an employer when it directs an employee sitting at the Head Office to do some work ? Is such activity not in the course of or in relation to his employment ? Of course such activity done by a person sitting at the Head Office is in relation to his employment. Such person cannot be regarded as being employed only by the Head Office and not the branches. Head office and the branches are covered within the phrase “employer” and hence irrespective of where the employee is based, any service performed by such employee for an employer (whether Head Office or the Branches) cannot be regarded as a supply chargeable to tax. Hence we of the view that such services shall not be covered under Entry No. 2 to Schedule – I.
Supply Of Services – Third Parties
16. It is possible that the Head Office avails the services of third parties (e.g. auditor) the benefits of which is received by all the places of business. At this juncture it is worthwhile to consider the definition of “recipient” as provided u/s 2(93) of the CGST Act, 2017. As per the said definition “recipient” is the person who is liable to pay the consideration. Since invoice for common services are in the name of let us say, Head Office, such Head Office will be considered as the recipient of referred services. Now we can have two scenarios, one is where the invoice received is a tax invoice (i.e. tax has been levied) and another is where the invoice received is not a tax invoice (i.e. concerned supplier is not registered).
17. In the first scenario where Head Office has indeed received the tax invoice for common services, such Head Office will avail ITC thereof since the same is the recipient in view of Sec. 2(93). However since the benefit of such common service has been received by the branches, it would tantamount to supply of services “received” by the Head Office to such branches. In such scenario, is one required to do a cross charge for such common expenses ??
18. Readers will recollect that there is also a concept of “Input Service Distributor (“ISD”)” under GST (see Sec. 20 of the CGST Act, 2017). ISD is defined u/s 2(61) of the said Act as under:
“Sec. 2(61) “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office”
19. Thus the concept of ISD covers within its ambit all such common expenses in respect of services on which ITC has been claimed at one place whereas benefit of the same has been received at other places. Hence in our example ITC on the auditing services can also be distributed through the mechanism of ISD. Amongst cross charge or ISD, which shall prevail ?
20. It must be noted that the cross charge flows from Sec. 7(1)(c) read with Entry No. 2 to Schedule – I which contains the scope of supply. Sec. 9(1) creates levy on “supply”. Thus charging provisions shall override ITC distribution provisions. Hence in our view the mechanism of cross charge shall prevail in the present case and hence one can attribute such costs to other registered places by way of a cross charge.
21. Under the second scenario, Head Office has not received any tax invoice but a simple invoice since the concerned supplier is not registered (e.g. rent). The benefits of such service is indeed enjoyed by all the locations since Head Office does common work. Such cases in our opinion are also covered under cross charge and since Head Office is the recipient for such inward services, such Head Office will have to issue a tax invoice on other locations.
22. As far as valuation is concerned, second proviso to Rule 28 will come to the rescue if full ITC is available to the recipient. Hence the invoice value shall be deemed to be accepted. In other cases, determination of open market value or cost will be required to arrive at the value of supply.
23. Author does agree that varied views have been expressed on the subject and the view expressed in the present article is a personal opinion. It will thus be appreciated by the Trade & Industry if Government comes out with appropriate clarifications on the same. This will save needless litigation.