The taxability of transactions between the distinct GSTIN’s and the methodology of distribution of ITC between the Head office (HO) and the Branch office (BO) has been the subject matter of dispute since the inception of the GST law.
Contrary rulings such as in the matter of Columbia Asia Hospitals, wherein it was ruled that the cost of an employee located at the HO will have to be cross charged to other BO’s, had led to wider ramifications on the mass of the Country. Particularly, where the Credit was not available to the BO’s. Accordingly, there was need of clarifications on various aspects surrounding the issue, which came post the 50th GST Council Meeting vide Circular 199/11/2023-GST, issued on 17th July 2023. The Circular ibid. clarified as below:
Case I: Services Procured from a 3rd Party.
||Whether HO can avail ITC of common inputs attributable to “a HO & BO’s” or “one or more BO’s” and issue a cross charge invoice to the branch offices, on the basis of which the said BO’s would avail the ITC for the same?
It is mandatory to have an ISD mechanism for distribution of such common inputs?
- The HO would have an option to distribute such ITC either through cross charge or ISD mechanism.
- Further, the present provisions do not mandate the usage of ISD mechanism.
- In case, ISD is opted, then ISD registration is mandatorily required in terms of Section 24 (viii) of the CGST Act.
- In both the above mechanism, i.e., ISD and Cross Charge, the ITC could be distributed or transferred only if such services are attributable to the concerned BO’s.
Case II: Internally Generated Services – Where Full ITC is available to the BO’s
||In case of internally generated services whether the invoice is mandatorily required to be generated by the HO to the BO?
If yes, whether the cost of all components including the salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BO’s?
- In case where Full ITC is eligible, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services, irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice. [Rule 28 of CGST Rules].
- In case, no invoice is issued by the HO – the value of such services may be deemed to be declared as Nil by HO to BO and may be deemed as open market value in terms of Rule 28 ibid.
Case III: Internally Generated Services – Full ITC is not available to the BO’s.
||In case where full ITC is not available, whether the cost of all components including the salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BO’s?
- Employee Cost/ Salary cost is not mandatorily required to be included while computing the taxable value of supply of such services.
Key Take Aways from the above Scenarios
- The taxpayers could very well follow the methodology of ISD, Cross Charge or both, at their option and the law currently does not mandate ISD mechanism for distribution of common ITC. The above clarifications are in line with the FAQ’s issued by the CBIC for banking sector etc.
- There is no challenge in availment of common ITC by the HO, as the bill to – ship to model allows, availment of ITC by the bill to party, by deeming it as a recipient of service. [Refer Section 16(2)(b) of the CGST Act].
- However, invoice could be issued/ ITC could be distributed to the recipient BO’s, if such common expenses are attributable to them.
- CBIC elucidates Rule 28 as a dispute avoiding mechanism in case of revenue neutral situations, where full ITC is available. Further, in such situations, even if no invoice is issued, the value would be accepted as “NIL”. These may lead to closure of bulk of cases, which would have been otherwise travelled to High Courts.
- The AAAR in the matter of Columbia Asia supra, has been overruled, as it is now accepted that, employee cost etc. are not required to be added within the valuation, even if full ITC is not available. This might have come from the analogy that; the employees are common towards the organization and their services are not confined to a particular GSTIN.
Some finer aspects: (for the past period)
Internally Generated Services:
- Cross charge done including employee costs and BO is not eligible for ITC: HO may issue credit notes subject to time limit for issuance of credit notes. Where the time limit has already expired for credit note, refund can be filed by BO subject to satisfaction of condition of unjust enrichment.
- Cross charge done including employee costs and BO was eligible full ITC: If no ITC is accumulated with BO, no action needed. If ITC is accumulated at BO, evaluate the options mentioned in (a) above.
- Cross charge done including third party services along with internally generated services: no action to be taken as the HO has included the third party generated services in cross charge.
- No specific internally generated services but cross charge done: This could possibly be cases where ITC was transferred through cross charge route though the services availed not attributable to any BO. Same may not be permitted under the law. (Refer Orrisa High Court in the matter of JSW Steels limited).
- Internally generated services provided to BO outside India – The services may not get covered in the export of services as no specific consideration received. Also, such services are covered under exemption through Notification No. 15/2018 Integrated Tax. Hence, no need of cross charge. However, considering that the exemption is granted through an exemption notification, the ITC may require to be reversed by HO.
- Internally generated services received from HO located outside India: The benefit of Nil value invoicing may be exercised by recipient BO where ITC is eligible. Where ITC is not eligible, internally generated services excluding employee costs may be covered in the cross charge.
- Internally generated services by one BO to another BO or to head office:
Though the circular covers services provided by HO to BO, however, the same concepts could be used for the services provided by one BO to another BO or to head office.
- Internally generated services provided to related parties where related party is entitled to ITC: The circular specifically deals with the internally generated services provided to distinct persons within same PAN. There is no reference to services provided to the related parties. However, considering that identical provisions (Schedule I, section 15 (4), Rule 28) are dealing with transaction between distinct persons or related persons, the benefit of this circular could also be contemplated for the transaction with related parties without consideration.
- Internally generated services provided to related parties where related party is not entitled to ITC: The benefit given for the employee cost in case of distinct person may not be available in case of related party transactions as the benefit of employer-employee relationship under schedule III may not be claimed in such cases. The value of employee costs have also to be taken into account for supply to related persons.
Third party procured services:
- ITC has been distributed through ISD and/or cross charge and recipient is eligible for full ITC: Any of the option followed by the taxpayer has been held to be valid. Hence, no specific actions to be taken. There could be possibility that amount of GST passed on to BO could differ between ISD and cross charge routes (because of manner of distribution). However, in view of full ITC eligibility to the recipient BO, there is no specific ramification of the same so long as any of the option has been chosen.
- ITC has been distributed through cross charge and recipient is not eligible for full ITC: The valuation rule requires that the cross charge to be based on market value/similar services/110% of cost of provision of services. Hence, if the third party procured services have not been distributed through ISD route, the valuation taken for cross charge should be as per above valuation methodologies.
- ITC on third party services pertaining to BO (proportionately or fully) availed at HO but no cross charge or ISD distribution done: ITC may not be eligible at HO as such services may not be said to be in the furtherance of business of HO exclusively. Also, the benefit of NIL value invoicing may not be eligible for third party procured services. Hence, such ITC is prone to denial of ITC. HO could consider raising invoice to BO for the cross charge for such services for the past period to get the benefit of ITC u/s 16 (1) read with 16(2)(b)(ii). Appropriate interest may be paid. Recipient BO may avail ITC based on such invoice by HO.
Way Forward (for future period)
The GST Council during its 50th meeting had also recommended that the amendments would be done in due course to make ISD mechanism as a mandatory one for distribution of ITC. However, the same would only be done for third party procurements, including those taxable under the RCM.
Therefore, in future, though both the methodologies i.e., ISD v. Cross Charge would go hand in hand, however, the scope of Cross Charge would get restricted to internally generated services only. All the third-party service procurements would get distributed through the ISD route, to the respective BO’s. Further, for goods the methodology of stock transfer would continue on as is basis.
In a nutshell, the circular ibid. had unveiled multiple gifts for the industry, wherein larger issues such as the scope of proviso to Rule 28 and includability of employee costs has been clarified. This may help the mass industry to resolve their disputes in this area though some issues remain still unaddressed.
The views expressed are personal view of authors. The authors could be reached at firstname.lastname@example.org and email@example.com for inputs.