Blog No. 78: Having offices in more than one State? – CBIC issues clarification regarding cross charge and distribution of ITC in respect of common services

GST Council has examined the much debated issues of cross-charge and distribution of ITC in respect of common input services (like advertisement services, marketing services, audit services etc.) by one office of an organization to another office of that organization in another State. This issue has been clarified through the Circular No. 199/11/2023-GST dated 17^th July 2017.

 

To know more, read in detail about the update on this circular below:

 

Let us consider a business entity which has Head Office (HO) in State-I and Branch offices (BOs) in other States; HO procures input services from a third party (like advertisement services, marketing services, audit services etc.) which is used by entire entity and also provides some services on its own to branch offices (referred to as internally generated services).

 

 

Issue I:

Whether HO can avail the input tax credit (ITC) in respect of common input services procured from a third party but attributable to both HO and BOs? Whether the BOs can avail the ITC, if tax invoice has been issued by the HO u/s 31 of the CGST Act, 2017? Whether it is mandatory for the HO to follow the Input Service Distributor (ISD) mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and BOs or exclusively to one or more BOs.

Clarifications

 

1. HO has an option to distribute ITC in respect of common input services by following ISD mechanism laid down under section 20 of CGST Act read with Rule 39 of the Central Goods and Services Tax Rules, 2017.

1.1           If this option is opted, HO is required to get itself registered mandatorily as an ISD in accordance with Section 24(viii) of the CGST Act.

1.2           This option can be availed only when these services are attributable to the BO or have actually been provided to them.

2. HO can also issue tax invoices under section 31 of CGST Act and the BOs can then avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.

2.1          For issuing tax invoices to BO, it must be ensured that services have actually been provided to the concerned BOs.

3. However, it is not mandatory for the HO to distribute such input tax credit by ISD mechanism as per the present provisions of the CGST Act and CGST Rules.

 

 

Issue II:

In case of internally generated services, whether the cost of salary of the HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BOs when full input tax credit is not available to the concerned BOs.

Clarification

 

4. In the above case, HO is not mandatorily required to include the cost of salary in determining value of such services.

 

Issue III:

Whether the HO is mandatorily required to issue invoice to BOs under section 31 of CGST Act for internally generated services, and/ or whether the cost of all components including 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 BOs when full input tax credit is available to the concerned BOs.

Clarification

 

5. As per the second proviso to rule 28 of the CGST Rules, 2017, the value of the said supply of services declared in the invoice by HO to BOs shall be deemed to be open market value of such services when recipient BO is eligible for full input tax credit.
6. Therefore, even if cost of various components like salary has not been included, the same shall be considered as open market value, as the recipient is entitled to full input tax credit.
7. In case HO has not issued a tax invoice to the BO in respect of any particular services, then 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 second proviso to rule 28 of CGST Rules.

Paksh Remarks

 

8. Amendments are expected in CGST Act providing for mandatory ISD registration.
9. Where full input tax credit is not available to the recipients like restaurant services, providing some exempt supplies etc., then the valuation has to be done on the basis of cost of providing such services wherein salary cost is not to be considered.
10. Where full input tax credit is available to the recipients, then the valuation has to be done on the basis second proviso to Rule 28 of the CGST Rules. Even NIL valuation can be adopted by the company in such cases.
11. This clarification has also cleared the air over interpretation of second proviso to Rule 28 of the CGST Rules and re-inforces the concept of deemed valuation in law. Relying on this Circular, even the stock transfer can be made at any lower valuations as per the management decision.