Article explains Cross charge related concept and its applicability including valuation related aspects along with the industry wide practice, Need for ISD registration, A comparison between Cross charge and ISD and GST implications relating to the fund transfer outside India.
Whether the activities performed by the employees at the Corporate Office in the course of or in relation to employment, such as accounting, other administrative and IT System Maintenance for the units located in the other locations/ states is liable to GST?
Under the CGST Act, a transaction will attract GST only if it qualifies as a ‘supply’. The term ‘supply’ has been defined to include all forms of supply of goods or services, such as sale, transfer, barter, license, or lease made or agreed to be made for a consideration in the course of or in furtherance of business. The term ‘supply’ also seeks to include within its purview transactions in goods or services between related parties or distinct persons (including the offices of an entity in different states with separate GST registrations), when provided with or without consideration.
As per schedule 1 of CGST Act, any supply between different GST registrations having the same PAN (distinct persons) shall be treated as “supply” even when made without consideration.
The said provision reads as follows:
Schedule 1: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
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.
Further, section 25 of the CGST Act states that “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 for the purposes of this Act.” Further section 25(5) of the Act states that “Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”
It is the combined reading of Schedule 1 and the concept of distinct persons that gives rise to the need to cross charge. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity shall be termed as a supply and shall attract GST. In line with the said provisions, every supply between distinct persons results in cross charge between such entities. Such supply shall be undertaken by issue of tax invoice. Further, the receiver of the supply shall be entitled to GST credit subject to conditions.
Cross charging can be understood in better manner with help of below mentioned example-
XYZ Limited has Head office in Maharashtra, following centralized billing and payment mechanism. XYZ Limited has 2 registrations at Delhi and Karnataka. HO has availed certain audit services on payment of IGST. However, such audit services shall be used at both the locations i.e. Delhi and Karnataka. Thus, when the HO charges for the said audit services to respective locations, it shall be required to supply under an appropriate invoice and cross charge the value of audit services accordingly.
Value of supply of services between Head office and alternate locations
As per the section 15 of CGST Act, value of supply, in case of distinct person, shall be determined as per Rule 28 of CGST Rules which prescribes the methods to determine the value.
Rule 28 of CGST Rules reads as under-
The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
a) be the open market value of such supply;
b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order.
Rule 30 provides for value as 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.
Rule 31 provides value shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter.
Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value of the goods or services.
Based on the above provision, HO shall be required to discharge GST on the following value,
– Open market value of such supply
– Value of supply of like kind or quality
– 110% of cost of acquisition of such goods or cost of provision of such services or
– Any other reasonable means
In most of the cases, recipients of cross charge supply will be able to obtain the credit hence tax authority will not raise any objection due to value declared in the invoice shall be deemed to be open market value of the goods or services as per first proviso to rule 28.
Calculation of cross charge
The basis for cross charging would be very subjective and depends upon the industry practice. However, a standard approach could be taking taxable turnover made by concerned units which is also akin to the manner of distribution of common credits by ISD under CGST Act. Some other basis of cross charge could be the number of employees, space, plant capacity utilization or other reasonable basis depends on the supply being cross charged.
In Case of M/s. Columbia Asia Hospitals Pvt. Ltd, The appellate authority for advance ruling, Karnataka upheld the rulings passed under section 98(4) of the GST Act 2017 vide NO. KAR ADRG 15/2018 dated 27/07/2018 i.e. wherein the activities performed by the employees at IMO providing the services in the course of or in relation to employment such as accounting, administrative and IT system management to their distinct units located at other state is treated as taxable supply as per entry 2 of schedule I appended to Act, read with section 7 of the CGST Act 2017.
“The services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant, will not be termed as ’employee-employer relationship’ and will therefore not fall within the purview of entry 1 to Schedule III.
A distinct person has an independent identity under GST law. its procedures and compliances are applicable to every distinct person as an independent registered person. The liability to GST on the supplies made by a distinct person is to be discharged by the said distinct person as a registered person and the liability cannot be shifted to another distinct person on the grounds that they are part of the same entity. Further any act of commission or omission by any distinct person attracts penal action on the said distinct person. When viewed in this background, the employees stationed at the location of a particular establishment of a distinct person are deemed to be rendering their services only to that establishment of a distinct person and not to any other distinct person even though all distinct persons are of the same business entity. Such services of employees, when rendered in the course of their employment are not considered as a ‘supply of service’ in terms of entry I to Schedule III. However, when the services of employees are benefiting other distinct persons, then such services of employees will be considered as a ‘supply of service’ by one distinct person to another. It is in this perspective that the entry 1 to Schedule III should be viewed and understood. The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, in the instant case, the services of the employees at the IMO in so far as they are benefiting the other registered units of the Appellant are to be considered as a ‘supply of service’ by one distinct person to another and by virtue of the entry 2 of Schedule I, supply of services between distinct persons even if without consideration is a “supply” within the scope of Section 7 and is liable to GST.”
“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.
From the above definition, following inferences can be drawn-
i. It is an office of supplier and not the actual supplier of goods or services.
ii. ISD shall deal with only input services and not with goods including capital goods.
iii. ISD shall receive tax invoices for taxable supplies and distribute the tax charged on such invoice to appropriate supplier having the same Permanent Account Number (PAN).
iv. ISD must issue an appropriate document to distribute the ITC.
Manner of distribution of ITC
As we understand, ISD can distribute the tax charged in inward supplies received by it, to the appropriate supplier. GST law has prescribed the specific manner for distribution of such taxes which an ISD must adhere to. Section 20 of CGST Act deals with the manner of distribution of such credit by ISD which reads as under-
20. (1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
Further, the provisions of ISD are made mutatis mutandis applicable to IGST provisions by virtue of section 20 of Integrated Goods and Services Tax, Act 2017 (“IGST Act”). The respective State Goods and Services Tax Acts also contain the provisions of ISD which are akin to provisions of CGST Act.
Section 20(2) of CGST Act provide for conditions to be complied with while distributing the credit by ISD which reads as under-
i. The credit can be distributed to recipient with documents having particulars as prescribed under the law.
ii. The credit distributed shall not exceed the total credit available for distribution.
Note: In case of excess distribution of credit to one or more recipients, such excess amount shall be recovered from such recipients along with interest.
iii. Distribution to one recipient
Where credit of input services is attributable to one recipient, same shall be distributed to that recipient only.
iv. Distribution to one or more recipients
Where credit of input services is attributable to more than one recipient then such credit shall be distributed among such recipients on pro-rata basis taking turnover in a state or turnover in a union territory of such recipient during the last financial year as base.
v. Calculation of ratio:
Ratio for distribution of credit shall depend on the preceding year’s turnover of locations to which credit is to be distributed in case some / all recipients do not have turnover during the previous period, turnover of the last quarter for which such turnover is available.
It may further be noted that ISD cannot keep any credit in its own books. Thus, in case ISD has availed credit which is ineligible under the GST provisions, ISD shall be required to reverse the credit or may transfer the credit and the recipient shall be required to reverse the ineligible credit.
Let us understand the difference between the concept of an ISD and the cross charge mechanism. The Head office may be using the services of a third party in the course of its activities on which GST is paid. In terms of Section 16(1) of the CGST Act, “Every registered person shall, …… be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business…” The ‘registered person’ in this Section refers to the person registered under Section 25 and not to the legal entity. Therefore the ITC of the GST paid on the receipt of services or goods from a third party by the head office can be availed by the head office. If there are certain services commonly used by all the distinct persons, then the ITC can be distributed to all the units by the ISD route. There is a fundamental difference between the concept of ISD and that of cross charge. In the ISD concept, only ITC on input services which are attributable to other distinct entities are distributable. However, in a cross charge mechanism, all expenses incurred by a distinct person for the purpose of carrying out activities the outcome of which benefits other distinct persons is required to be cross charged.
In the case of cross charge, there is an element of service rendered by the person who cross charges his other units even though they belong to the same legal entity. On the other hand, in the case of ISD, there is no element of service at all, but a mere distribution of credit Further, certain expenses like Salary of head office staff, rent paid on the immovable property, housekeeping services, etc incurred in maintaining and operating the head office will not be distributable under the ISD route, rather they are required to be allocated to the other units only by way of cross charge. The ISD mechanism is purely for the purpose of distributing the CGST/SGST/IGST tax on the receipt of input services by the office of the supplier of taxable goods or services or both having the same PAN. The ISD mechanism is subject to certain conditions laid down in Section 20 of the CGST Act. As per the ISD provisions, the office of the supplier of taxable goods or services or both receives tax invoices for input services which are used by all their units having the same PAN. The ITC on such invoices is distributed to the other units having the same PAN. Examples are audit services, consultancy for one or more branches and advertisement.
The common expenses may be either distributed via ISD or may be charged via cross charge like audit charges and consultancy. However, for supplies made between distinct taxable persons, cross charge is the only option like activities performed by the employees at the Corporate Office in the course of or in relation to employment, such as accounting, other administrative and IT System Maintenance for the units located in the other locations/ states.
In case the location makes a supply of goods and services then it is mandatory to take registration and there by cross charge.
In case the location does not provide any services, but only has been billed to that location, then ISD needs to be obtained.
Where the reimbursement is towards taxable supply of goods or services by a provider outside India to a recipient in the country, the latter is required to pay GST on such supplies if the place of supply is deemed to be within India.
Recipient on payment of GST under reverse charge on fulfillment of the prescribed conditions will be eligible to claim input tax credit, to be set off against its output tax liability.