Draft MOU cum Business Arrangement Document for cross charge under GST
Draft Memorandum of Understanding (MOU) cum Business Arrangement Document for cross charge under GST law
Under GST law there is a mandatory requirement for cross charge in terms of Section 7 read with I Schedule of the GST law in the following cases:
- Common services/procurements by head office/corporate office on behalf of branch offices (distinct persons) and
- Support services rendered by branch offices to head office/corporate office (distinct persons)
Below sample format of a Memorandum of Understanding cum Business Arrangement Document for execution inter-se between head office/corporate office and branch offices can be used in such cases.
MEMORANDUM OF UNDERSTANDING CUM BUSINESS ARRANGEMENT DOCUMENT
This Memorandum of Understanding (MoU) cum business arrangement document is drawn on the ………. day of …………. 2023.
XYZ ltd. (hereinafter to as ‘XYZ’ or ‘Company’) has multiple places of business across India and each such place of business (has a separate registration under Central Goods and Services Tax Act, 2017 and relevant State Goods and Services Tax Act, 2017 (hereinafter referred to as ‘GST law’). It is relevant to note that these GSTINs are treated as separate taxable persons for the purpose of GST law. It is further relevant to note that supply of any service (including facilitation, arrangement, management) between the GSTINs inter-se operating under a single PAN are liable to GST in terms of Section 7 read with schedule I of the GST law even if there is no consideration.
XYZ service contracts with client/customers are entered and executed from head office with GSTIN ………………... XYZ follow centralised billing and accounting system and all the sales invoicing is done from head office. No direct service or sales contracts with customers/clients are being executed from other GSTINs. Other GSTINs provide business/back office support services to the head office.
Further, XYZ executes/enters into contracts for various common procurements/inward supplies at the head office for the company as a whole (including for the business operations of other GSTINs).
Details of other GSTINs operating in different States of the company are as follows:
| GSTIN | Location of POB | State |
| ………………………. | Mumbai | Maharashtra |
| ………………….. | Hyderabad | Telangana |
| ………………….. | Bangalore | Karnataka |
| ………………….. | Noida | Uttar Pradesh |
| ………………….. | Kolkata | West Bengal |
WHEREAS:
A. XYZ is setting up a framework of cross-charge/allocation of common expenses in respect of various procurements/inward supplies undertaken and executed at the head office for the business operations of other GSTINs as mentioned supra (for the sake of ‘brevity’ referred to as ‘Framework 1’).
B. Similarly, XYZ is also setting up a framework for invoicing/billing in respect of support services rendered by other GSTINs to the head office as mentioned supra (for the sake of ‘brevity’ referred to as ‘Framework 2’).
C. In pursuance of the aforesaid, the XYZ herein wish to execute this Memorandum of Understanding (hereinafter referred to as ‘MoU’) cum hereinafter to as Business Arrangement Document (‘BAD’) to record the terms of their mutual understanding for the implementation of the above-referred frameworks in the best possible model which is in acquiescence with the GST law.
NOW THEREFORE THE XYZ RECORDS MUTUAL UNDERSTANDING AS BELOW:
Basis and process for Framework 1:
1.1 The head office will allocate/cross-charge common expenses in respect of various procurements/inward supplies undertaken and executed at the head office for the business operations Illustrative list of such procurements/inward supplies are as follows (<more such procurements can be added>):
a. Auditor Services,
b. Director sitting fees,
c. Administration charges,
1.2 Such allocation/cross-charge of common expenses shall be in compliance with the following conditions and processes: –
a) That the framework would be worked upon on a quarterly basis.
b) The expenses will be allocated/cross charged by way of a tax invoice raised on other GSTINs containing the details prescribed in Rule 46 of the CGST Rules, 2017 read with relevant State GST Rules, 2017 (hereinafter referred to as ‘GST law’).
1.3 Such allocation/cross charge to all the other GSTINs shall be on a pro-rata turnover basis/headcount basis. Turnover shall mean to be aggregate turnover as defined in GST law. The basis for such cross charge/allocation shall be in compliance with the parameters laid down in Section 20 of the GST law to the extent possible.
Basis and process for Framework 2:
2.1 The other GSTINs as referred to above renders the following business/back office support services in respect of service contracts entered and executed by directly head office with client/customers (<list of services can be amended as per actual facts>):
a. Undertaking design and development activities relating to software/games as per the defined prescription/criteria/details,
b. Undertaking testing of software/games,
c. Undertaking changes/modifications in the existing software/games,
d. To operate as a back-office support center,
e. Undertaking such other activities as may be decided from time to time.
2.2 That the framework would be worked upon on a quarterly basis.
2.3 That the tax invoice raised by other GSTINs on the head office would be for the business support services and duly containing with the details prescribed in Rule 46 of the GST law.
2.4 That the basis for computation of value of business support service would be cost of the expenses incurred by respective GSTIN including the cost allocated by the head office by ensuing framework 1.
Other common terms relevant for both frameworks:
1. It would be ensured that tax invoice (and debit note wherever needed) is reported and filed in returns/statements in compliance with the GST law.
2. That the Tax invoice would be raised in a timely manner which is in due compliance with Section 31 read with Section 13. It is relevant to note that the services in both frameworks qualify to be a continuous supply of services.
3. That the purpose of execution of this MOU cum BAD is to ensure the computation of appropriate cost and turnover at the GSTIN level which complies with GST law and any other law for the time being in force.
4. That this MOU cum BAD is to be undertaken by all the GSTINs on a mutual understanding and trust basis. There is no endeavour or purpose to test the legal validity of this MOU cum BAD.
5. If any part of this MOU cum BAD cannot be executed due to any reason including due to force majeure, the remaining part of this MOU cum BAD will be in effect in full force.
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