1. Introduction
Section 7(1)(c) of the CGST Act states that ‘supply’ includes the activities specified in Schedule I, made or agreed to be made without a consideration;
As per entry 2 of the Schedule I, 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 is to be treated as ‘Supply’.
Thus, Section 7(1) (c) read with Schedule I of the CGST Act considers transactions between distinct persons as supplies even when such transactions do not involve supply. Accordingly, stock transfer of goods between branches being a transaction between distinct persons comes within the ambit of the GST Laws. Similarly, services between branches would also attract GST liability.
2. Need of Cross Charge
In cause of Multi Locational entities i.e. entity registered in more than one state the Head Office handles certain operations such as accounting, administrative work and maintenance of IT systems in respect of all the units in India also incurs certain expenditure in the course of its operation which includes rent paid on immovable property and other equipment’s, travel expenses, consultancy services, communication expenses etc. Since the Head office operations are for the benefit of the all units of the company in India; the expenses incurred in operating the Head office are allocated to other registered units for the purpose of determining the profit of each cost center.
Accordingly, the GST paid on expenses such as rent paid on Immovable property and other equipment’s, travel expenses, consultancy services, communication expenses etc. which were incurred towards services used by the Head office are availed by the Head office and subsequently, Head office charges the IGST on the expenses proportionately attributable to the other units which were located in another state, treating the same as taxable supplies.
3. Cross Charge v/s Input Service distributor
Cross charge is for supply of services from one unit to another in terms of common functions undertaken by such Branch or Branches. Thus, it is an allocation of common functions to different branches and it may or may not involve ITC.
However, Input Service Distributor is defined in Section 2(61) of the CGST Act to mean an Office of the supplier of goods or services or both which receives tax invoices issued under Section 31 of the said Act towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of GST on the said services to another branch of the same legal person.
4. Analysis
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 registered unit can be availed by the that registered unit only. 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. ISD is the concept which is used merely “for distributing the credit of invoice of input services relating to services received by another branch but invoice of which is received by the ISD”, whereas Cross charge is the concept for “accumulation of ITC scattered at different location to a central location”.
Thus, the concept of cross charge being broader concept enables the assesse to use the ITC effectively, where the location that receives goods and services in its own capacity uses such resources for provision of common support functions of the entity and thus, supply such support functions to other units.
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.
Just like Cross charge, ISD nowhere necessitates cost apportionment pertaining to credit between the units.
A choice of ISD or cross charge is material from the perspective of maintenance of books of accounts as well as reconciliation thereof.
Certain services i.e. renting of immovable property, telephone/communication services, etc. incurred by the head office which are primarily used for the operations of the head office itself; that such services do not have any direct nexus with other registered units, due to this reason alone, the head office which is working for the entity as a whole must adopt the Cross-charge mechanism for allocating the other expenses on the basis of proportionate turnover instead of following the Input Service Distributor (Isd) method.
The next question that emerges is what and how should the value of cross supplies made by the head office to their branch offices be established.
For this purpose, Section 15(4) of the CGST Act read with Rule 28 of the CGST Rules comes into play in terms of which, the value of the supply of goods or services or both between distinct persons as specified in Section 25(4) of the Act shall be:
a) 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 determined by the application of Rule 30 or 31, in that order.
Where, Rule 30 of the CGST Rules states that where the value of a supply of goods or services or both is not determinable by any of the Rule 27 to 29, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such service.
Rule 31 of the CGST Rules provides that where the value of a supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of Section 15. Provided that in the case of supply of services, the supplier may opt for this rule ignoring Rule 30.
Whether the term ‘aggregate turnover’ includes stock transfers/ cross charges effected between branches located in two different states?
Section 2(6) of the CGST/ SGST Act defines aggregate turnover to include ‘inter-state supplies of persons having the same PAN’. Thus, stock transfers/ cross charges/ services provided from a branch located in one state to a branch located in another state would be included in the aggregate turnover of the branch supplying the goods/ services.
5. Conclusion
During the GST audit of the Multi Locational Entity care must also be taken that transactions are rightly bifurcated between the inter-branch supply of services i.e. cross-charge of services, they are often treated as ISD supplies and credit is distributed with same HSN. There may be serious non-compliances if such interchange occurs especially involving head office or registered office and other Branches. For understanding the concept of ISD thoroughly you can also refer my article “ISD: Office of supplier of goods or services or both’ under GST” .
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Note: The views expressed are personal and contents of this document are solely for informational purpose. The information in article has been drawn primarily from the www.cbec.gov.in and other sources. While every effort has been made to keep the information stated in this article error free.
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Great article and points written very Correctly