2021 (9) TMI 949 - AAR - GST

Managerial services by Registered/Corporate Office to Group Companies held taxable under CGST Act

The managerial and leadership services provided by the Registered/Corporate Office to its Group Companies were deemed as 'supply of service' under Section ... Supply of services between related persons or distinct persons - value of supply between related or distinct persons - second proviso to Rule 28 - invoice value deemed to be open market value where recipient is eligible for full input tax credit - Rule 30 - valuation based on cost (110% of cost of provision of services) - Rule 31 - residual method for valuation of supply of services - admissibility of input tax credit subject to the provisions of Sections 16 and 17Supply of services between related persons or distinct persons - Entry 2 of Schedule I - Entry 1 of Schedule III - Whether managerial and leadership services provided by the Registered/Corporate Office to its group companies/site offices constitute a taxable supply of service under the GST law - HELD THAT: - The Authority examined the applicant's contention that services rendered to group companies and site offices are not supplies because they are services by an employee to employer under Entry 1 of Schedule III. It held that the site offices and group companies are separately registered distinct persons and related persons respectively under Section 25 and therefore cannot be treated as employees of the applicant for the purpose of Schedule III. Entry 2 of Schedule I treats supplies between related or distinct persons in the course or furtherance of business as supply even if without consideration. Judicial decisions relied upon by the applicant were considered but found not to be applicable to alter the statutory scheme under the CGST/MGST Acts. The Authority therefore concluded that the managerial and leadership services supplied to branches and group companies fall within the compass of taxable supply under Section 7 read with Schedule I. [Paras 5]The services are taxable and answered in the affirmative.Value of supply between related or distinct persons - taxability of lumpsum consideration - Whether the lumpsum amounts charged by the Registered/Corporate Office on its group companies are liable to GST - HELD THAT: - Having held that the activities constitute supply, the Authority treated the lumpsum charges as consideration for supply made to distinct/related persons and therefore taxable. The valuation question was considered separately, but the legal consequence that the lumpsum receipts are subject to GST follows from the finding that a supply has been made under Section 7 and Schedule I. [Paras 5]The lumpsum amounts charged are liable to GST and answered in the affirmative.Second proviso to Rule 28 - invoice value deemed to be open market value where recipient is eligible for full input tax credit - Rule 28 - valuation between related/distinct persons - Whether the applicant can continue to charge lumpsum amounts and treat the invoice value as the open market value under the second proviso to Rule 28 where most recipients are eligible for full ITC - HELD THAT: - The Authority analysed Chapter IV (Rules 27-35) and Rule 28 in particular. It noted that where recipients are eligible for full input tax credit the second proviso to Rule 28 deems the invoice value to be the open market value. The applicant's practice of issuing invoices with lump sum values to group units that are, in most cases, eligible for full ITC therefore falls within the second proviso to Rule 28 and is permissible for those transactions. The Authority accepted that in cases where recipients are not eligible for full ITC the proviso would not apply and other valuation provisions would become relevant. [Paras 5]The applicant may continue to charge lumpsum amounts and treat the invoice value as open market value under the second proviso to Rule 28 for recipients eligible for full ITC; answered in the affirmative.Rule 31 - residual method for valuation of supply of services - proportional apportionment based on expenses and turnover - Whether the applicant can adopt valuation under Rule 31 by apportioning total expenses proportionately based on turnover of distinct and related persons - HELD THAT: - Since the Authority held that valuation under Rule 28 (second proviso) is available for transactions where recipients have full ITC, it declined to decide the applicant's alternative question on adopting Rule 31 for valuation. The question was therefore not adjudicated on merits because the primary valuation route under Rule 28 applies to most transactions; the matter remains open where Rule 28's proviso does not apply. [Paras 5]Not answered in view of the Authority's finding on applicability of Rule 28.Rule 30 - valuation based on cost (110% of cost of provision of services) - allocation of related expenses and addition of ten percent - Whether the applicant can adopt valuation under Rule 30 by allocating related expenses and adding ten percent (i.e., 110% of cost) - HELD THAT: - The Authority observed that Rule 30 provides valuation on the basis of cost where preceding rules do not determine the value. However, because the Authority accepted applicability of Rule 28's second proviso for most transactions, it did not take up the applicant's specific alternative question on Rule 30 for decision. The question is therefore left unanswered for cases where Rule 28 does not apply. [Paras 3, 5]Not answered in view of the Authority's finding on applicability of Rule 28.Scope of advance ruling under Section 97 - permissible subject-matter - procedural suggestions vs. determination of value - Whether the Authority can suggest an alternative workable method of valuation (procedural guidance) considering the nature of the industry - HELD THAT: - The Authority held that Section 97 permits advance rulings on determination of time and value of supply, but the applicant's sixth question sought procedural suggestions rather than a determination of value. That request falls outside the permissible scope of the advance ruling provisions and hence the question was not answered. [Paras 5]Not answered as it falls outside the scope of matters on which an advance ruling may be sought.Admissibility of input tax credit subject to the provisions of Sections 16 and 17 - ruling applicant vs. recipient-specific questions - Whether input tax credit of GST paid by the applicant is admissible to each distinct and related person where their supplies are taxable - HELD THAT: - The Authority observed that questions regarding entitlement to input tax credit are matters for the recipients of supply and must be raised by them; such recipient-specific claims fall outside the scope of the applicant's advance ruling. Consequently the Authority declined to answer the question on admissibility of ITC to recipients. [Paras 5]Not answered because the question is outside the Authority's jurisdiction to decide on behalf of recipients.Final Conclusion: The Authority held that managerial and leadership services supplied by the registered/corporate office to its branch offices and group companies constitute taxable supplies and the lumpsum charges are liable to GST. For transactions where recipients are eligible for full input tax credit, the invoice value may be treated as the open market value under the second proviso to Rule 28. Questions on alternative valuation methods (Rules 30 and 31), procedural suggestions, and recipient-specific input tax credit entitlement were not answered. Issues Involved:1. Whether managerial and leadership services provided by the Registered/Corporate Office to its Group Companies are considered as 'supply of service' under Section 7 of the CGST Act, 2017.2. Whether the lump sum amount charged by the Registered/Corporate Office on its Group Companies is liable to GST under Section 8 of the CGST Act, 2017.3. Whether the Applicant can continue to charge a lump sum amount as per the second Proviso to Rule 28 of the CGST Rules, 2017.4. Whether the Applicant can adopt valuation in terms of Rule 31 of the CGST Rules, 2017, if the lump sum method is not permissible.5. Whether the Applicant can adopt valuation in terms of Rule 30 of the CGST Rules, 2017, if Rule 31 is not permissible.6. Feasible alternative methods of valuation suggested by the Advance Ruling Authority.7. Admissibility of input tax credit of GST paid by the Applicant to each of the distinct and related persons.Detailed Analysis:1. Managerial and Leadership Services as 'Supply of Service':The applicant argued that the services provided to its group companies and branch offices should not be treated as 'supply of service' due to the specific relaxation provided in Entry 1 of Schedule III of the CGST Act, which states that services by an employee to the employer in the course of employment are not treated as supply of goods or services. The applicant contended that their group companies and site offices should be considered as employees.The Authority determined that site offices and group companies, being distinct and related persons respectively, cannot be treated as employees. Therefore, the services provided by the applicant fall under Entry No. 2 of Schedule I, making them taxable under GST laws.2. GST Liability on Lump Sum Amount Charged:Given the conclusion that the services are taxable, the Authority held that the lump sum amount charged by the Registered/Corporate Office to its Group Companies is liable to GST under Section 8 of the CGST Act, 2017.3. Charging Lump Sum Amount under Rule 28:The applicant can continue to charge a lump sum amount as per the second Proviso to Rule 28 of the CGST Rules, 2017, since most recipients are eligible for full input tax credit. The value declared in the invoice would be deemed the open market value of the services.4. Valuation under Rule 31:Since the applicant can resort to valuation under Rule 28, the question of adopting valuation under Rule 31 was not addressed.5. Valuation under Rule 30:Similarly, since Rule 28 is applicable, the question of adopting valuation under Rule 30 was not addressed.6. Alternative Methods of Valuation:The Authority did not provide any alternative methods of valuation, stating that the question does not fall under the purview of Section 97 of the CGST Act, 2017.7. Admissibility of Input Tax Credit:The question regarding the admissibility of input tax credit of GST paid by the Applicant to each of the distinct and related persons was not answered, as it should be raised by the concerned recipient of the supply of services.Order:1. Managerial and leadership services provided by the Registered/Corporate Office to its Group Companies are considered as 'supply of service' under Section 7 of the CGST Act, 2017.2. The lump sum amount charged by the Registered/Corporate Office on its Group Companies is liable to GST under Section 8 of the CGST Act, 2017.3. The Applicant can continue to charge a lump sum amount in terms of the second Proviso to Rule 28 of the CGST Rules, 2017.4. Questions regarding valuation under Rule 31 and Rule 30 were not answered.5. No alternative feasible workable method of valuation was suggested.6. The question on the admissibility of input tax credit was not answered.