In consideration of the suggestions of the 50th Goods and Services Tax (GST) Council, the Central Board of Indirect Taxes and Customs (CBIC) has released Circular No. 199/11/2023-GST on 17th July 2023, to simplify the taxability of services given by an office of an organization in one State to the office of that organization in another State, both being independent individuals.
Take, for example, a business entity with its Head Office (HO) in State 1 and many Branch Offices (BOs) in other states. To serve the entire firm, the HO gets specific input services, such as security services, from an external security agency. In addition, the HO delivers other services to the branch offices internally (referred to as internally generated services). The concerns that may arise regarding the taxability of the supply of services between distinct individuals under Section 25 of the CGST Act are being explained.
Issues 1: It was simplified that the HO has the option to furnish Input tax credit under the ISD mechanism under Section 20 of the CGST Act and Rule 39 of the Central Goods and Services Tax Rules, 2017 in the case of common input services obtained by the HO from a third party but attributable to both the HO and BOs or exclusively to one or more BOs.
- Clarification: However, under the current terms of the CGST Act and CGST Rules, the HO is not required to distribute such an input tax credit via the ISD mechanism. Under Section 31 of the CGST Act, HO can also issue tax invoices to the concerned BOs concerning usual input services received from a third party but attributable to the said BOs, and the BOs, accordingly, can demand ITC on the same subject to the provisions of Sections 16 and 17 of the CGST Act.
- If the HO distributes or wishes to distribute ITC to BOs in respect of such common input services through the ISD mechanism in accordance with Section 20 of the CGST Act read with Rule 39 of the CGST Rules, the HO is required to register as an ISD under Section 24(viii) of the CGST Act.
- Furthermore, the HO may distribute ITC in respect of common input services obtained from a third party through the ISD mechanism only if the said input services are attributable to the said BO or have been delivered to the said BO. Similarly, the HO may issue tax invoices to the concerned BOs under Section 31 of the CGST Act in respect of any input services obtained from a third party for or on behalf of a BO only if the said services have actually been given to the concerned BOs.
Issues 2: Concerning the full ITC applicable to the concerned BOs, the CBIC has clarified that the value of a supply of services furnished by a registered person to a distinct person must be evaluated in accordance with rule 28 of the CGST Rules, read with sub-section (4) of Section 15 of the CGST Act.
- Clarification: The value of a supply of goods or services, or both, between different individuals, shall be the open market value of such supply, according to rule 28 clause (a). Proviso 2 to Rule 28 of the CGST Rules states that where the recipient is qualified for full input tax credit, the invoice value is considered to equal the open market value of the goods or services.
- As a result, for services supplied by HO to BOs, the value specified in the HO invoice will be judged to reflect the open market value of such services if the recipient BO is entitled to full input tax credit.
- In such cases, the value declared on the invoice by HO to the said BO relating to a supply of services shall be deemed to be the open market value of such services, regardless of whether the cost of any particular component of such services, such as employee cost, has been included or not in the value of the services in the invoice.
- Furthermore, in cases where Input Tax Credit is provided to the recipient, if the HO has not issued a tax invoice to the BO for any specific services provided by the HO to the said BO, the value of these services may be considered to be declared as Nil by the HO to the BO, and may be considered as open market value under the proviso 2 to Rule 28 of the CGST Rules.
Issues 3: The CBIC also clarified that, in the case of internally generated services furnished by the HO to BOs, the cost of salaries of HO employees involved in providing the said services to the BOs is not required to be included in assessing the taxable value of the supply of such services, even if full input tax credit is not provided to the concerned BO.
- Clarification: The Tamil Nadu State Appellate Authority for Advance Ruling (AAAR) ruled that under Proviso 2 to Rule 28 of the CGST/TNGST Rules, 2017, the Head Office validating the value for supply to the other branches is qualified for ITC.
- The bench held that the appellant is required to adopt the value specified in the Proviso 2 to Rule 28 of the CGST/TNGST Rules, 2017 during the supply of goods from the State of Tamilnadu concerning the case discussed, insofar as the recipient is entitled to full Input Tax Credit as specified in the said proviso.
