CBIC clarifies on ITC claims on services provided by head office to branches in other states

The taxpayers or the industry will now need to prepare for the mechanism for ISD expected with a legislative amendment. The circular will give a breather to a lot of taxpayers who have not opted for the ISD mechanism.

The circular also clarifies that taxpayers can also adopt for a cross charge mechanism and bill the branches by adopting the value as per Rule 28, i.e., any value is acceptable if the recipient branch is entitled for full credit. In fact, there could not have been a better clarification as the circular deems the value to be nil if the cross charge has not been done.

This will put to rest a lot of legal disputes where businesses may have adopted different procedures owing to ambiguity. This circular should address ongoing disputes which would be to the tune of thousands of crores rupees.

The most critical highlight of the circular is the aspect on valuation. The circular clarifies that the value is to be accepted irrespective of the fact that whether cost of any particular component of services like employee cost has been included or not. Even for a business, where the branches are not entitled for full credit, the circular states that salary cost is not mandatorily required to be included in the value.

"It is understood that with the proposed change, it would be worthwhile to see as to how the authorities provide reliefs to business while moving towards closure of the pending matters surviving on the premise of choosing ISD as method of distribution of credit over cross charge. The going forward changes at business level also needs to be appropriately looked into to comply with the changing law," said Saurabh Agarwal, Tax Partner, EY.

Expressing similar sentiments, Deloitte’s Mahesh Jaisingh said, "The GST Council has acted proactively to address the issue around holding of equity in subsidiary company, before it turned out to be a full-fledged litigation.  In a circular issued today, the Council has made it clear that simply the activity of holding shares is not taxable under the GST because doing so does not constitute providing a service.”

“The essence of the circular is that purchase or sale of shares or securities, in itself is neither a supply of goods nor a supply of services and for a transaction or activity to be treated as supply of services, there must be a supply and not merely a classification entry. The industry and especially MNCs are certainly delighted to receive this clarification as the tax demand was being viewed as an indirect tax on investment itself," Jaisingh added.

Rajat Mohan, Senior Partner, AMRG and associates said, "In respect of the supply of services by HO to BOs , 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. Further, in such cases, the value of such services may be declared as nil by HO to BO, and thereby, there would be no need for any tax compliance in such cases."

“With this clarification, multi-locational businesses that operate in the manufacturing sector, trading of taxable goods, IT services, consulting, transportation, logistics, exports, or any other taxable sector would not be required to raise any invoice for internally generated services,” added Mohan.

In case, where full input tax credit ITC is not available, Mohan further said, "In respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, is not mandatorily required to be included for payment of taxes, even in cases where full input tax credit is not available to the concerned BO.”

“This Clarification would significantly relieve thousands of multi-location taxpayers supplying unbranded basic groceries, healthcare services, recognized education, the alcohol industry, Oil & gas sector, real estate, and certain financial services," added Mohan.