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 ... Levy of GST on services provided by Head Office to its Branch Offices/Units - Valuation - input tax credit - common input supplies on behalf of other unit/units registered as distinct person, and further allocation of the cost incurred for same to such other units - necessity of obtaining registration as an ISD - determination of assessable value for facilitation of common input services - HELD THAT:- The GST Law has provided a very wide connotation for services, which will cover any activity other than those, which involves goods, money and securities. In view of this wide scope and coverage of the term “services”, it is adequately evident that the impugned activities of providing facilitation services to their branch offices/units by way of availment of the common input services by the Appellant' Head office on behalf of its Branch Offices/Units would be covered under services, and hence, supply in terms of section 7(1) (a) of the CGST Act. 2017 as the said services are provided by the Appellant Head Office to its branch offices/units for a consideration in the course of its business. Whether the Appellant's Head Office is eligible to utilize the credit of the tax paid for the common input services received on behalf of its branch offices/units? - HELD THAT:- On bare perusal of Section 16 of the CGST Act, 2017, it is revealed that any registered person is entitled to take credit of input tax charged on any supply of goods or services or both, subject to the condition that the goods or services or both received by the registered person should be used or intended to be used in the course or furtherance of business - However, in the instant case, it is observed that the common input services received by the Appellant's Head Office are being used or consumed by the Branch Office/Units in the course or furtherance of their business, and not by the Head Office, as the Head Office receives these common input services on behalf of the Branch Offices/Units. - Head Office is not entitled to avail and utilize the credit of tax paid to the third-party service vendors for the common input services received by it on behalf of the Branch Offices/Units Whether they have to be compulsorily registered as an ISD in accordance with Section 24(viii) of the CGST Act, 2017? - HELD THAT:- On perusal of sub-section (1) of section 22 of CGST Act, it is revealed that all the Input Service Distributors, whether separately registered under this act or not, are to be registered compulsorily as ISD. Thus, the law is very clear in this regard that any Input Service Distributors, which intends to distribute the credit of the tax paid on the common input services received by it on behalf of its branches/units, has to mandatorily register itself as an ISD, and is bound to comply with the provisions and rules made in relation thereto - In the instant case, there is no doubt regarding the Appellant's Head Office as being in the nature of the Input Service Distributor as per the stipulations prescribed in the definition of the Input Service Distributor provided in the Section 2(61) of the CGST Act, 2017. On account of the provisions laid under Section 24(viii) of the CGST Act. 2017, it is conclusively inferred that any persons, which fulfills the condition of the ISD as provided under 2(61) of the CGST Act. 2017. and intends to distribute the credit of tax paid on account of the receipt of the common input services for its branches/units, will have to compulsorily register itself as an ISD. and it is immaterial whether the person is already holding other separate registrations under GST Act, or not - it is imperative that the Appellant's Head Office, if it intends to distribute the credit of tax paid on account of the availment of common input services on behalf of the Branch Offices/Units, register themselves as an ISD apart from the normal supplier's registration. What will be the valuation of the services provided by the Head Office to its Branch Offices/Units? - Whether the allocation of the cost of the employees salary by the Head Office/Corporate Office to the branch offices would attract levy of GST? - HELD THAT:- It is evident that the employees of the Appellant's Head Office are working at behest of the Head Office, and not at behest of the Branch Offices/Units. Further, since the Head Office is using all its human resources to facilitate the operational requirements of the Branch Offices/Units by way of procuring common input services on behalf of the Branch Offices/Units. thereby, providing the impugned facilitation services, therefore, allocation and recovery of any amount including its employees salary cost from the Branch Offices/Units will be subject to GST - the impugned transaction of facilitation services are not effected between the employees and the employer, but between the Head Office and Branch Offices/Units. which are distinct units in terms of Section 25(4) of the CGST Act, 2017, and the same is clearly taxable under GST in terms of Section 7 of the CGST Act, 2017. Hence the allocation and recovery of the salary of the employees of the Head Office from the Branch Office/Units will be subject to GST. 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.