ITC claim on rented building

[KALLESHAMURTHY MURTHY K.N.]

“ Xyz” is a manufacturer and supplier registered in Chennai and Karnataka under GST. All supplies are effected from Chennai only. He has a rented building in Karnataka for assembling and meeting of the members and distributors to promote business. The Building owner is a registered person in Karnataka and issues tax invoices collecting CGST & SGST. Is “ Xyz“ eligible to avail and utilise ITC on building rent paid?

[Sadanand Bulbule]

Dear querist

Section 16 of the CGST Act provides the eligibility and conditions for availment of input tax credit. Section 16(1) of the CGST Act entitles a registered person to avail ITC on goods or services or both which are used or intended to be used in the course or furtherance of business. Thus, in order to be eligible to claim input tax credit, it is pertinent to prove that the goods or services are used or intended to be used in the course or furtherance of business.

•The expression “in course or furtherance of business” is not defined in GST Laws. Therefore, in the absence of any statutory definition in the governing act, it is permissible to refer to dictionary meaning as held by the Apex Court in the case of Star Paper Mills Ltd. v. Collector of Central Excise, 1989 (8) TMI 78 - SUPREME COURT.

So  prove the entitlement and avail it.

[VENU K]

Sec 16 (1) Every Registered person ..................to him ...........................his business.

From the above reading what I understand is that input tax credit is  qua DISTINCT REGISTERED PERSON and not registered ENTITY (Company,LLP etc). So  credit can be taken only for a specific GSTIN number. 

In case of rent paid in Karnataka the landlord can only give you an intrastate supply invoice (Charge CGST/SGST) as property is situated at Karnataka . As far as the registered person at Tamilnadu is concerned it is not possible to avail this credit as it is a blocked credit due to place of supply provisions.

There is no issue for Karnataka registration to take the credit provided there are taxable outward supplies from that GSTIN.

In a strict sense services provided by Karnataka Registration to Tamilnadu registration for business promotion etc should also be billed as supply between distinct persons in my opinion.

[VENU K]

Further the experts may also express their opinion under the following scenarion

1.Karnataka registrations pays , say 1,00,000 rent and Rs.18,000/- GST.

2. Karnataka Registration bills Rs. 1,00,000/- to Tamilnadu registration for business promotion expenses and charges 18,000/- IGST.

3. Karnataka Registration has no tax liability as Output tax equals input tax.

4. Tamilnadu registration gets Rs. 18,000/- IGST input on business promotion and it claims the ITC

All are happy as ITC on rent paid is now indirectly availed by Tamilnadu registration.

[Raam Srinivasan Swaminathan Kalpathi]

The CGST and SGST paid to the landlord is as good as lost on account of Sec.12(3)(a) of the IGST Act.  When a person expires in South India we put 'sesame' in the person's mouth.  This ITC is akin to this - 'ellu' (tamil), 'nuvvulu'(Telugu), 'til' (Hindi) - please ask the RTP to grit his or her teeth and bear with the loss.  This is an issue which is as yet to be resolved by the GST Council.  Thanks

[Padmanathan KV]

I more or less endorse the views of Sri. Venu ji.

[KASTURI SETHI]

Views expressed at serial no.4

View : The CGST and SGST paid to the landlord is as good as lost on account of Sec.12(3)(a) of the IGST Act.

My opinion : It has legal force. Legally correct.

View : When a person expires in South India we put 'sesame' in the person's mouth. This ITC is akin to this - 'ellu' (tamil), 'nuvvulu'(Telugu), 'til' (Hindi) - please ask the RTP to grit his or her teeth and bear with the loss. This is an issue which is as yet to be resolved by the GST Council.

My outpourings : The illustration has made me sad and gloomy. Better optimistic examples were available.

[KASTURI SETHI]

Views expressed at serial no.3

My observation :  The illustration  is not practicable. It is not safe. If followed, it will have legal repercussions/problems later on. 

Declaimer : These are my personal views for education purpose only and not for any court proceedings. 

[Raam Srinivasan Swaminathan Kalpathi]

My sincere apologies for hurting the sentiments of respected Shri.Kasthuriji.  This correspondent had no intention to hurt anyone's sentiments much less Shri.Kasthuriji's.  Nonetheless, to put things in perspective, this word 'ellu' is frequently and light-heartedly used in Tamil Nadu whenever one loses money or something valuable or incurs a loss.  People here laugh once this word is uttered.  Thanks

[Sadanand Bulbule]

Dear all

In public platform, it is graceful to have " sanitised langauge", irrespective of the correctness of reply. Readers are more sensitive and sensible than the resource persons. It costs nothing but pays more dividends. The dignity of readers should also be enhanced. Without readers, resource persons become completely empty. It is welcome gesture that the author has expressed his regret.

[Raam Srinivasan Swaminathan Kalpathi]

The point mentioned by respected Shri.Sadanandji is well taken and appreciated.  Will sincerely attempt to imbibe.  Thx

[KALLESHAMURTHY MURTHY K.N.]

Dear, all learned experts, 

I agree with the views in No. 7 of Learned Kasthuri Sethi Sir. 

Thanks to all for their expressions. Any legal provisions that are available to avail ITC will be helpful to RTP. 

[Sadanand Bulbule]

Dear all

At serial number 9, plz read it as " sanitised language".

[KASTURI SETHI]

Sh.Raam Srinivasan Kalpathi Ji,

I agree with you to the extent that it was not your intention to hurt others' feelings. To err is human.  Our fundamental right of freedom of expression ends where others are hurt in any way (directly or indirectly).  Needless to say that respect, love and co-operation are reciprocal indeed.

Thanks & regards

                                 

[KASTURI SETHI]

I humbly further express that an example at serial no.3 may be treated as modus operandiby the department. So what is avoidable should be avoided. 

[Padmanathan KV]

If entire sales is affected by registration in Chennai (HO)

and registration in Karnataka (branch) is organizing meetings of distributors and members by providing facilities (which includes rented premises) which would ultimately promote the sales affected in Chennai,

Why can't it be said that the Registration in Karnataka is supplying service (business support/ promotion/ marketing/ auxiliary service) to Registration in Chennai?

How would that be Modus operandi? Especially when the fact that such meeting/ promotion activities are actually done in Karnataka is not disputed?

[Amit Agrawal]

I agree with views of views of Shri VENU K Ji for his post at Sr. No. 3 above in given situation (i.e. separate registration taken in Karnataka where activity of promotion of business for Chennai GSTN is carried out).

Here, I am assuming that Chennai GSTN is eligible for 100% of ITC against whatever GST is charged by Karnataka GSTN. Reference: Second Proviso to Rule 28(1) of the CGST Rules, 2017. 

And I see no contravention of any legal provisions in above procedure & situation.

Unless and until someone point out what is the potential legal issue / controversy in above procedure, one cannot meaningful discuss or opine thereon. Dept. officers does not like so many things .... but that cannot be a sole basis to take decision on any legal issue.

What is legally permissible & required under law can not be called as 'unlawful modus operandi'  or 'avoidable'. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Sadanand Bulbule]

Dear all

1] The basic principles governing "Place of supply of services" need to be deciphered and connected with reference to the specific facts of each case before jumping the gun as regards to the entitlement of ITC or otherwise.

2] In the case at hand,the building owner is registered in Karnataka and facilities are provided to and consumed by the " XYZ" in the State of Karnataka itself. Accordingly he is charging SGST/CGST. So where is the event of inter-state supply of services under such situations to avail the credit of SGST/CGST by the "XYZ' in Chennai? 

3] Suppose had such sales promotion meetings are held in posh hotels in Karnataka State, what would have been the fate of ITC in the hands of XYZ at Chennai?

4]  Whether the place of supply of services is determinant or the place of sales promotion to fix the entitlement of ITC?

Experts to expand the clarifications.

[VENU K]

Sec 25(4) Treating each registration as Distinct persons as well as valuation provisions in Sec 15 read with Rule 28(a) and entries in Schedule 1 where it says supply of services between distinct entities will be a taxable supply even if made in absence of consideration gives legal force in this case, for Karnataka registration to bill Tamilnadu registration. I, personally, do not think there is any illegality in doing so.

It is a fact that rent is being paid at Karnataka, it is a fact that events are being held at Karnataka for business promotion and business promotion activities are also happening at Karnataka with considerable expenditure which ultimately gets translated into increased sales at Tamilnadu registration.

So in my opinion, the law mandates such inter se billings and there is nothing colourable in this case for the tax man to object to.

Remember, same provisions are being invoked by tax man whenever it suits their purpose. If my understanding is correct infosys was slapped with a huge SCN treating transactions between distinct entities as taxable. So in my opinion, there is no need for the taxable person to feel guilty in doing something as long as it is as per the law.

[Amit Agrawal]

Karnataka GSTN will be raising tax-invoice for 'Business Promotion Services' provided to Chennai Chennai of same legal entity and not that for 'Renting of Immovable Property' or 'Hotel Accommodation Services'. 

Hence, Place of Services for above services so provided will be Chennai & NOT Karnataka because 'Business Promotion Services' provided by Karnataka GSTN is NOT directly in relation to an immovable property.  

Provision of above service (i.e. 'Business Promotion Services' from Karnataka to Chennai) is the reason for which said tax-payer has taken separate registration at Karnataka, as can be seen from given factual scenario. 

Valuation of such services can be kept on lower side using second provision to Rule 28(1) of the CGST Rules, 2017 (i.e. when recipient distant person i.e. Chennai Chennai of same legal entity, is entitled to full input tax credit against gst so charged by Karnataka GSTN).

It is legally permitted choice of the taxpayer to chose lower valuation under GST for its 'Business Promotion Services' (by not including other costs like salary, housekeeping, hoteling, electricity & so on consumed by Karnataka GSTN while providing business promotion services to its Chennai GSTN and its profit margin thereon) in the given situation.

This legally permitted choice is a not a benefit extended to the taxpayer in real sense as same is given to the fact that having higher taxable value and higher tax-liability on Chennai GSTN is revenue - neutral for Govt. as recipient (i.e. distinct person) is entitled for 100% ITC. However, having 'legally permitted choice' means Dept's officer has got no choice but NOT to question valuation in given situation. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[KALLESHAMURTHY MURTHY K.N.]

Thanks to all the learned experts for their good views on the issue.

There are possibilities to save the ITC by the RTP in such a way as Sri Sadanada Sir suggested, to challenge on the grounds of “in the course or furtherance of business” is not defined in GST Laws.

As suggested by Sri Venu K sir, and learned Sri Padmanathan KV, Karnataka GSTN can charge IGST on promotional expenses but, it should be proved by determination of the valuation of revenue derivation at Chennai by promotional activities as advance clarification by Sri Amith Agarwal Ji. Otherwise, the Departmental Authorities in Karnataka can question the IGST charged so that the promotional activities are confined to the State of Karnataka alone or extended to other states using Karnataka as the centre and ask to reverse the same. The RTP has to exercise in this regard very cautiously.

AI Summary

Input tax credit eligibility: Chennai registration may claim ITC if Karnataka unit invoices IGST as inter state supply. Where a rented building in Karnataka is billed by the landlord under CGST/SGST, the Chennai GSTIN cannot directly claim ITC; an alternative is for the Karnataka registration to invoice the Chennai registration for business promotion services as an inter state (IGST) supply so Chennai can avail ITC, subject to place of supply rules, valuation under Rule 28, adequate documentation and potential departmental scrutiny.