2022 (1) TMI 660 - AAAR - GST

Head office services to branch offices constitute taxable supply under GST, requires ISD registration for input credit distribution

The AAAR held that services provided by a head office to its branch offices/units, including facilitation of common input services, constitute taxable ... Supply between distinct persons - Input tax credit eligibility - Pure agent exclusion under Rule 33 - Valuation between distinct persons - second proviso to clause (c) of Rule 28 - Compulsory registration as Input Service Distributor - Services by employee to employer excluded under Schedule IIISupply between distinct persons - Input tax credit eligibility - Services by employee to employer excluded under Schedule III - Pure agent exclusion under Rule 33 - Whether head office's procurement of common input services on behalf of branch offices/units constitutes a supply attracting GST, and whether the head office may avail and utilize input tax credit or exclude certain costs (notably payments made as a pure agent and employee-cost allocations) from the value of supply. - HELD THAT: - The Appellate Authority held that the head office's activity of procuring common input services from third-party vendors on behalf of branch offices/units falls within the wide definition of 'services' and thus constitutes a supply by the head office to those distinct persons in terms of Section 7(1)(a). However, the head office is not entitled to avail and utilize input tax credit of tax paid on such common input services because those services are used or consumed by the branch offices/units and not by the head office. Separately, where the head office incurs costs as a 'pure agent' (payment to third-party vendors on authorization of the branch offices/units) and satisfies the conditions of Rule 33, those amounts are excluded from the value of the facilitation service. Finally, allocation and recovery of employee salary cost by the head office to branch offices will be subject to GST because such allocation is a supply between distinct persons (head office and branch offices), and the exclusion in Schedule III for services by an employee to the employer does not apply to transactions between distinct registered persons. [Paras 22, 32, 33, 39, 40]The procurement of common input services by the head office on behalf of branch offices/units is a taxable supply; the head office cannot avail ITC of tax paid on those services for its own use, but amounts qualifying under Rule 33 as incurred by the head office as a pure agent shall be excluded from the value of the facilitation service; allocation of employee salary by the head office to branch offices is taxable.Valuation between distinct persons - second proviso to clause (c) of Rule 28 - Open market value - Whether the assessable value of the facilitation services provided by the head office to branch offices/units can be determined by declaring a nominal invoice value and treating it as the open market value under the second proviso to clause (c) of Rule 28, or whether Rule 30 (110% of cost) must be applied. - HELD THAT: - The Authority examined the hierarchy in Rule 28 for valuation between distinct persons (open market value; value of like kind and quality; then Rule 30/31). It accepted the Appellant's submission that where the recipient is eligible for full input tax credit the value declared in the invoice is to be deemed the open market value pursuant to the second proviso to clause (c) of Rule 28. Consequently, the assessable value of services provided by the head office to branch offices/units can be determined by the invoice value and deemed to be the open market value, avoiding automatic application of Rule 30's 110% cost formula where the proviso applies. [Paras 36, 37, 38, 40]The assessable value may be determined under the second proviso to clause (c) of Rule 28, whereby the value declared in the invoice is deemed to be the open market value when the recipient is eligible for full input tax credit.Compulsory registration as Input Service Distributor - Input Service Distributor definition - Whether the head office must compulsorily obtain registration as an Input Service Distributor (ISD) if it intends to distribute the credit of tax paid on common input services to its branch offices/units. - HELD THAT: - On construing Section 24(viii) together with the definition of Input Service Distributor in Section 2(61), the Authority concluded that persons who fulfil the ISD conditions and intend to distribute credit of tax paid on common input services must mandatorily register as ISDs. The head office, having received tax invoices for common input services on behalf of branch offices/units, meets the essential condition for being an ISD. The Appellant's contention that ISD registration is optional if it does not intend to issue prescribed documents was rejected because the law requires compulsory registration of Input Service Distributors and compliance with related provisions where distribution of such credit is intended. The Authority also noted that the ISD mechanism allows passing on credit (excluding credits attributable to services exclusively used by the head office) and that amounts recoverable from branches corresponding to GST paid to third parties can be handled under the 'pure agent' concept. [Paras 32, 33, 34, 35, 40]If the head office intends to distribute the credit of tax paid on common input services received on behalf of branch offices/units, it is required to obtain registration as an Input Service Distributor as mandated by Section 24(viii).Final Conclusion: The Appellate Authority partially modified the earlier Advance Ruling: (i) the head office's facilitation of common input services for branch offices/units is a taxable supply but amounts properly constituting payments made as a pure agent are excluded from the value of that supply and the head office cannot claim ITC for services consumed by branches; (ii) valuation may be by invoice value deemed to be open market value under the second proviso to clause (c) of Rule 28 where recipients are eligible for full ITC; and (iii) where the head office intends to distribute such credit it must compulsorily register as an Input Service Distributor. Issues Involved:1. Classification of Engine manufactured by Appellant.2. Levy of GST on facilitation of common input services, necessity of registering as an 'Input Service Distributor' (ISD), and determination of assessable value.Detailed Analysis:1. Classification of Engine Manufactured by Appellant:- This issue is not discussed in the present appeal and is therefore not addressed in the judgment.2. Levy of GST on Facilitation of Common Input Services, Necessity of Registering as an ISD, and Determination of Assessable Value:A. Supply and Levy of GST:- The Appellant's activities of providing facilitation services to their branch offices/units by way of availment/procurement of common input services from third-party vendors on behalf of their branch offices/units qualify as 'supply' under Section 7(1)(a) of the CGST Act, 2017. These activities attract GST as they are provided by the Head Office to its branch offices/units for a consideration in the course of business.B. Eligibility to Utilize ITC:- The Head Office is not entitled to avail and utilize the credit of tax paid on the common input services received on behalf of the branch offices/units. These services are used or consumed by the branch offices/units in the course or furtherance of their business, not by the Head Office.C. Necessity of ISD Registration:- The Head Office must register as an ISD according to Section 24(viii) of the CGST Act, 2017, if it intends to distribute the credit of tax paid on the common input services received on behalf of the branch offices/units. The issuance of prescribed documents by an ISD is mandatory for the distribution of ITC.D. Valuation of Services and Employee Salary Cost:- The assessable value of the services provided by the Head Office to the branch offices/units can be determined as per the second proviso to clause (c) of Rule 28 of the CGST Rules, 2017, which deems the value declared in the invoice as the open market value of the services.- The allocation and recovery of the employee's salary cost from the branch offices/units will attract GST. The services performed by employees for one distinct unit for another are not covered by the employer-employee relationship and are thus taxable under GST.Order:1. Availment of common input supplies from third-party vendors on behalf of branch offices/units qualifies as supply and attracts GST. However, the cost incurred by the Head Office in the capacity of a pure agent shall be excluded from the value of supply.2. The assessable value can be determined as per the second proviso to clause (c) of Rule 28 of the CGST Rules, 2017.3. The Appellant must register as an ISD if it intends to distribute the credit of tax paid on common input services to the branch offices/units.