An Analysis of Circular No. 199 dated 17/07/2023
Preface
- Cross charge and Input Service Distributor (ISD) compliances has been complex and contentious issues under the Goods and Services Tax (GST) framework, since its inception. These provisions have been a source of uncertainty and confusion for taxpayers with multiple GST registrations.
- The lack of clarity surrounding the application of cross charge and ISD provisions has left taxpayers grappling with questions: should compliance with either one of these provisions suffice, or is it mandatory to adhere to both? How should the valuation mechanism be approached? And what repercussions await those who fail to comply or inadvertently comply incorrectly?
- The GST landscape in India has been witness to various contradictory rulings, causing significant confusion and ripple effects across the nation. One such ruling in the case of Columbia Asia Hospitals sparked widespread ramifications, wherein it is held that employee’s cost needs to be cross charged by the HO to its other Branch Offices (BOs). This ruling created a pressing need for clarifications on the various aspects surrounding the issue.
- In response to the prevailing uncertainty the 50th GST Council Meeting address this issue. Subsequently a Circular No. 199/11/2023 dated 17/07/2023 issued, offering much-needed clarifications on the matter. This circular broadly discussed the issue in two categories one is for services procured from Third party and 2nd is internally generated services.
SERVICES PROCURED FROM 3RD PARTY
Issue
- HO receives invoice in respect of common input services procured from a third party but attributable to both HO and BOs or exclusively to one or more BOs.
- Whether HO can avail ITC on the basis of such invoice?
- Such ITC to be distributed through ISD or tax invoice (i.e. cross charge)?
Clarification Provided
- The HO would have an option to distribute such ITC either through cross charge or ISD mechanism.
- 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.
Our Comment
There are certain services which are received by the branch offices but invoices are raised at HO, such as Legal & Professional services, Logistics services, Business development Expenses, Advertisement Expenses, Training Expenses, Software Services, Bank Charges etc
ITC involved therein can be distributed either using ISD mechanism or Cross charge. It is not mandatory to comply with both the cross charge and ISD provisions simultaneously.
Where taxpayer has decided to distributed the ITC using cross charge route the valuation of services should be made in term of Rule 28.
Certain services are procured from third-party providers and exclusively utilized at the Head Office (HO), such as HO premises rent, security/housekeeping services, and AMC or repair & maintenance services for HO equipment. These services may not be attributable to the Branch Offices (BOs). Consequently, ITC pertaining to such services does not need to be distributed among the BOs.
Taxpayer should prepare a detailed working of ratio of appropriation of ITC to the branch offices. In absence thereof the distribution can be challenged by the department
It has been hinted in 50th council meeting that that the ISD mechanism shall be made mandatory prospectively for distributing ITC of common input services procured from third parties.
INTERNALLY GENERATED SERVICES – FULL ITC AVAILABLE TO BO’s
Issues
- Whether the HO is mandatorily required to issue invoice u/s 31 for the internally generated services provided to it’s BOs?
- Whether the cost of all components including salary cost of HO employees has to be included in the computation of value of services provided by HO to BOs?
Clarification Provided
- Where full ITC is available to a BO, the value declared on the invoice by HO shall be deemed to be the open market value of such services.
- If HO has not issued a tax invoice to the BO then the value of such services may be deemed to be declared as Nil, and deemed as open market value.
- Cost of any particular component of such services, like employee cost etc., is optional to include or not in the value of the services in the invoice. (2nd Proviso to Rule 28)
Our Comment
Concept of revenue neutrality has been finally accepted as a dispute avoiding mechanism, wherein value will be considered as Nil where no invoice is issued.
For distribution of ITC to the branch office, the condition of provision of services should be satisfied as mandate Under Section 16 (2) (B). Ref: M/S JSW Steel Ltd Vs Union Of India & Others [2022] 139 taxmann.com 2 (Orissa)
INTERNALLY GENERATED SERVICES – FULL ITC NOT AVAILABLE TO BO’s
Issues
- Whether salary cost of HO employees has to be included in the computation of value of services provided by HO to BOs?
Clarification Provided
- In case where full ITC is not available the cost of all components including the salary cost of HO employees involved in providing the said services is not mandatorily required to be included while computing the taxable value of supply of such services.
Our Comment
The AAAR’s decision in the Columbia Asia case has been overturned, establishing that employee costs, and similar expenses, need not be included in the valuation, even when full ITC is not available. This shift in perspective is based on the understanding that employees serve the organization as a whole and are not tied to a specific GSTIN
In case where employee cost has been distributed to a branch office where ITC is not available, the taxpayer can explore the option of reversal by issuing credit note subject to the time threshold available for issuance of CN.
Where the time limit has already expired for credit note, refund can be filed by BO subject to satisfaction of condition of unjust enrichment.
WAY FORWARD
- The above circular has clarified that the presently the common ITC can be distributed using mechanism of ISD or Cross charge simultaneously. However, in future cross charge mechanism can be used to distribute internally generated common services.
- As per the Council’s press release, it has been recommended that the ISD (Input Service Distributor) mechanism shall be made mandatory prospectively for distributing ITC of common input services procured from third parties to branches.
- The circular has addressed the distribution of credit from the HO to BO and doesn’t include the BO to HO or BO to BO transfers. In our humble view similar ratio can be applied for the such transfers
- The exclusion of employee costs while determining the cost of internally generated services brings significant relief to the industry and resolves numerous litigations surrounding this matter.