GST on allocation of expenses and cost of internally generated services by Head Office (HO) to Branch Office (BO) has been a contentious issue since long. As Corporates are in dilemma as to whether the HO needs to take ISD registration or can issue tax invoice to the BO. Further how the valuation of internally generated services will be made, will it include employee cost etc was also an area that bothered the Corporates. In this regard recently a clarification has been issued by CBIC on above which is based on GST Council recommendations. The same has been discussed as under:
PROCUREMENT OF SERVICES FROM A THIRD PARTY BY HO, WHICH ARE USED BY HO AND BRANCH OFFICE (BO) OR BO’S ONLY (Eg. Security Services etc)
In such case, HO currently has following has two options:
OPTION 1: HO can either obtain ISD Registration and distribute common ITC as per provisions laid in Section 20 of the CGST Act read with Rule 39 of the CGST Rules . OR,
OPTION 2: In such case, HO can issue Tax Invoices under Section 31 of the CGST Act to BO in respect of common input services procured from a third party by HO but attributable to the said BOs. Here, the BOs can then avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.
In regard to above following two developments are worth mentioning:
Press Release dated 11th July,2023
The Council has recommended to clarify through a circular that Input Services Distributor (ISD) mechanism is not mandatory for distribution of input tax credit of common input services procured from third parties to the distinct persons as per the present provisions of GST law, and also to clarify issues regarding taxability of internally generated services provided by one distinct person to another distinct person. The Council has also recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively for distribution of input tax credit of such common input services procured from third parties.
CBIC Circular No. 199/11/2023-GST dated 17th July,2023
The said Circular inter alia clarifies as under:
For Common input services
In case, the HO distributes or wishes to distribute ITC to BOs in respect of such common input services through the ISD mechanism as per the provisions of section 20 of CGST Act read with rule 39 of the
CGST Rules, HO is required to get itself registered mandatorily as an ISD in accordance with Section 24(viii) of the CGST Act.
Further, such distribution of the ITC in respect a common input services procured from a third party can be made by the HO to a BO through ISD mechanism only if the said input services are attributable to the said BO or have actually been provided to the said BO.
For on and behalf of BO only
Similarly, the HO can issue tax invoices under section 31 of CGST Act to the concerned BOs, in respect of any input services, procured by HO from a third party for on or behalf of a BO, only if the said services have actually been provided to the concerned BOs
The above clarification seems to apply after amendment in GST Law as per recommendation of GST Council and till such time both the options will continue to exist.
TREATMENT OF INTERNALLY GENERATED SERVICES PROVIDED BY HO TO BOs
In line with the GST Council recommendation in its 50th Meeting the CBIC Circular No. 199/11/2023-GST dated 17th July,2023 in regard to above clarifies as under:
Where full ITC is available to BO
In cases 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,
irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice.
Further, in such cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28 of CGST Rules.
Where full ITC is not available to BO
In respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
