With respect to the recommendations of the 50th Goods and Services Tax (GST) Council, the Central Board of Indirect Taxes and Customs (CBIC) has issued circular No. 199/11/2023-GST on 17th July 2023, clarifying the taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons.
Suppose we have a business entity with its Head Office (HO) situated in State-1 and several branch offices (BOs) located in different states. The HO acquires certain input services, such as security services, from an external security agency to cater to the entire organization. Additionally, the HO provides other services internally to the branch offices (referred to as internally generated services).
The issues that may arise with regard to taxability of supply of services between distinct
persons in terms of sub-section (4) of section 25 of the CGST Act are being clarified.
1. It was clarified that in respect of common input services procured by the HO from a third party but attributable to both HO and BOs or exclusively to one or more BOs, HO has an option to distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017.
However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such input tax credit by ISD mechanism. HO can also issue tax invoices under section 31 of CGST Act to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs and the BOs can then avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.
In case, the HO distributes or wishes to distribute ITC to BOs in respect of such common input services through the ISD mechanism as per the provisions of section 20 of CGST Act read with rule 39 of the CGST Rules, HO is required to get itself registered mandatorily as an ISD in accordance with Section 24(viii) of the CGST Act.
Further, such distribution of the ITC in respect a common input services procured from a third party can be made by the HO to a BO through ISD mechanism only if the said input services are attributable to the said BO or have actually been provided to the said BO. Similarly, the HO can issue tax invoices under section 31 of CGST Act to the concerned BOs, in respect of any input services, procured by HO from a third party for on or behalf of a BO, only if the said services have actually been provided to the concerned BOs.
2. Regarding the full input tax credit is available to the concerned BOs, the CBIC has clarified that the value of supply of services made by a registered person to a distinct person needs to be determined as per rule 28 of CGST Rules, read with sub-section (4) of section 15 of CGST Act.
As per clause (a) of rule 28, the value of supply of goods or services or both between distinct persons shall be the open market value of such supply. The second proviso to rule 28 of CGST Rules provides that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.
Accordingly, in respect of supply of services by HO to BOs, the value of the said supply of services declared in the invoice by HO shall be deemed to be the open market value of such services, if the recipient BO is eligible for full input tax credit.
Accordingly, in cases where full input tax credit is available to a BO, 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.
Further, in such cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, 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.
3.The CBIC also clarified that in respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.
The Tamil Nadu State Appellate Authority for Advance Ruling (AAAR) held that the Head office adopting the value for supply to other branches is eligible for Input Tax Credit (ITC) as provided under Proviso 2 to Rule 28 of the CGST/TNGST Rules 2OI7.
The Bench ruled that the appellant is eligible to adopt the value as per Second Proviso to Rule 28 of the CGST/TNGST Rules 2OI7, at the time of supply of goods from the State of Tamilnadu in the terms of the scenario discussed, in as much as the recipient distinct person is eligible for full Input Tax credit as required under the said proviso.
Read More: Head Office adopting the Value for Supply to other branches Outside State is eligible for ITC: AAAR
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