To address the ambiguity regarding the taxability of services provided by one office of an organization in one state to another office in a different state, the Central Board of Indirect Taxes and Customs (the ‘Board’) issued Circular No. 199/11/2023-GST dated 17.07.2023. The primary concern arises from s. 25(5)[i] of the Central Goods and Services Tax (‘CGST’) Act, 2017, which designates two offices of the same organisation in different states as distinct legal entities. The recent circular from the Board aims to clarify various aspects related to the taxability of such services.
It is common for a business entity to establish its head office (‘HO’) in one State while operating multiple branch offices (‘BOs’) in different states. These BOs often require various input services, such as security services, even though the invoices for these services are issued in the name of the HO. This practice creates a challenge because the individual BOs cannot claim an input tax credit (‘ITC’) since they lack the necessary tax invoices. At the same time, the HO is also ineligible for ITC because it is not the actual recipient of these services.
Considering that the expenses incurred for the common business operations of the entire establishment benefit all the units and BOs, it is reasonable to apportion the credit of input services among all such consuming units. The following are the key points clarified by the Board.
ITC Distribution
Issue: Can the HO claim ITC for common input services procured from a third party, attributable to both the HO and BOs?
Affirming this query, the circular extends flexibility to the HO for ITC distribution. It outlines two options for the HO:
Distribution through Input Service Distributor (‘ISD’) Mechanism[ii]: The Ho can distribute ITC to the Bos using the ISD mechanism, as defined in s. 20 of the CGST Act, in conjunction with r. 39[iii] of the CGST Rules. However, for this method, the HO must register as an ISD in accordance with s. 24(viii) of the CGST Act. It’s important to note that ITC distribution through ISD is applicable only when the input services are attributable to or ‘actually’ provided to the specific BOs.
Direct Issuance of Tax Invoices: Alternatively, the HO can directly issue tax invoices to the concerned BOs under s. 31 of the CGST Act, allowing the BOs to claim ITC. This method is subject to the provisions outlined in ss. 16[iv] and 17 of the CGST Act.
In both cases, careful consideration should be given to whether the input services are genuinely attributable to the respective BOs to ensure compliance with the GST regulations.
Internally Generated Services
Issue: Is the HO obligated to issue tax invoices for internally generated services provided to BOs, and must the invoice include all cost components when full ITC is available to BOs?
Responding negatively to these queries, the clarification states that the HO is not mandated to issue tax invoices for such services, even when full ITC is available to BOs. Furthermore, specific cost components, such as employee salaries, can be excluded from the invoice.
The circular emphasizes that the value of the supply of services between distinct persons is determined as per r. 28 of the CGST Rules. This implies that if full ITC is available to the recipient BO, the value declared in the invoice by the HO will be deemed as the open market value of such services. This holds true regardless of whether the cost of specific components of the services, such as employee costs and others, is explicitly mentioned in the invoice or not.
Additionally, if the HO has not issued a tax invoice for such services to the BO, the value of those services may be treated as ‘Nil’ and deemed to be the open market value as per the 2nd proviso to r. 28 of the CGST Rules.
Salary Cost Inclusion for Taxable Value
Issue: Is the inclusion of salary costs for internally generated services mandatory when calculating the taxable value, particularly when full ITC is not available to the concerned BOs?
The response to this issue is also in the negative. The clarification emphasizes that the HO is not required to include the salary costs of its employees when determining the taxable value of the supply of services, even if full ITC is unavailable to the BOs.
Conclusion
The recent clarifications from the Board offer much-needed guidance on the tax treatment of services between distinct legal entities within the same organization operating across different Indian states. The flexibility to distribute ITC either through the ISD mechanism or by issuing direct tax invoices provides businesses with options, while the clarification regarding cost components ensures consistency in determining the taxable value. The circular encourages all stakeholders to promptly report any challenges faced during implementation, emphasizing a commitment to uniformity and consistency in tax compliance and reporting.
End Notes:
[i] Section 25(5) of CGST Act, 2017:
Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.
[ii] Section 2(61) of CGST Act, 2017:
"Input Service Distributor" means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.
[iii] Rule 39 of CGST Rules, 2017 – Procedure for Distribution of Income Tax Credit by Input Service Distributor.
[iv] Section 16(2) of CGST Act, 2017:
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed.
Authored by Prashant Singh, Advocate at Metalegal Advocates. The views are personal and do not constitute legal opinion.
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