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CBIC Clarifies Valuation of Imported Services by Related Persons under GST

The Central Board of Indirect Taxes and Customs (‘CBIC’) issued Circular No. 210/4/2024-GST on 26.06.2024, providing crucial clarification on the valuation of the supply or import of services by a related person where the recipient is eligible for full input tax credit (‘ITC’). This circular responds to concerns raised by trade and industry regarding the tax treatment of such transactions under the Goods and Services Tax (‘GST’) regime.

Key Provisions of the Circular

The CBIC noted that certain field formations were raising demands on registered persons in India for tax on a reverse charge basis for activities undertaken by their related persons based outside India. These activities were classified as import of services, even without any consideration. This interpretation stemmed from S. No. 4 of Sch. I of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), which deems the import of services by a related person as a supply, even if made without consideration.

R. 28 of the CGST Rules, 2017

The circular reiterates r. 28 of the CGST Rules, 2017 (‘CGST Rules’), which specifies the method for valuing the supply of goods or services between distinct or related persons other than through an agent. According to this rule, the value should be the open market value or the value of similar goods or services if the open market value is not available. If these values are not determinable, the value should be determined using r. 30 or 31 of the CGST Rules.

Clarification on Valuation

  • Deemed Open Market Value: The second proviso to r. 28(1) states that if the recipient of the supply is eligible for full ITC, the value declared in the invoice is deemed to be the open market value of the goods or services.

  • Application to Related Persons: The CBIC clarifies that this provision applies to all supplies between distinct or related persons, including the import of services from a related person outside India. This ensures consistent treatment of domestic and cross-border transactions.

Reverse Charge Mechanism

For the import of services by a registered person in India from a related person located outside India, the registered person must pay tax on a reverse charge basis and issue a self-invoice under s. 31(3)(f) of the CGST Act.

Valuation in Absence of Invoice

If the related domestic entity issues no invoice for services provided by the foreign affiliate, the value of such services is deemed to be declared as Nil. This value is considered the open market value as per the second proviso to r. 28(1) of the CGST Rules.

Implementation and Trade Notices

The CBIC requests that suitable trade notices be issued to publicise the contents of this circular and ensure uniform implementation. The board should be informed of any difficulties in implementing these instructions.

Conclusion

This circular provides essential clarity on the valuation of services imported from related persons, ensuring consistent treatment for transactions where the recipient is eligible for full ITC. By deeming the invoice value as the open market value and addressing scenarios where no invoice is issued, the circular aims to simplify compliance and reduce disputes in this area.




Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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