In practice, it generally happens that there is One Common R&D Centre who is providing R&D services to all the factories of the Company (situated in different states) or like there is Common Marketing Division at Head Office Level who is doing marketing for all the Products manufactured by different factories situated All Over India. Similarly, HO can do single contract with security agency to provide security service to all its factories situated all Over India and Security Agency is raising invoices to HO and payments to Security Agencies are also being made from Head Office.
For providing these services, these common Departments may or may not be charging/recovering their cost from the Receiving Department for their internal control purpose. As far as Accounting/Financials are concerned, these services are considered as internally consumed services and have no reflection on overall profitability/revenue of the Company.
However, question arise whether under Provisions of GST, these services provided by one branch to another or by HO to Branches are subject to GST considering them separate persons or not (distinct persons).
Therefore, in this article, we will cover each and every aspect of these situations and their respective taxability if any. In this regard, One Circular No. 199/11/2023-GST has also been issued recently; the same will also be discussed and incorporated appropriately.
Areas Covered in this Article
A. Whether HO and Branches are Separate Persons in the Eyes of Law in GST
First of all, question should come to our mind that why it is important to know whether they are separate persons or Not. Answer to this query lies in Section-7 (otherwise logical also) which implicates that for Supply of Goods/Services there must be involvement of two persons.
(Though digressing from the issue, but appears to be necessary for better understanding, You know that even Explanation was added retrospectively w.e.f. 01.07.2017 in Section-7 to clarify that the Society/Clubs/Association and its members are two separate Persons, so that transactions between them can be considered as supply).
Now, we comes to our situation, so to charge GST on any service from Head Office to Branch or for that matter from one Branch to another, first of all they should be two different persons under the provisions of GST.
In this regard, Section 25(4) needs to be referred which prescribed that
“A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”
As we all know that in GST, Each Person needs to take separate Registration in each State/UT from which it makes taxable supply. Further, it is allowed that in same state also, it can separate registrations as per his requirement, of course subject to conditions.
Therefore, as per Section 25(4), Head office and its Branches (assuming having separate registrations) are distinct (separate) persons in the eyes of law.
Accordingly, there can be supply of goods/services between Head Office and Branch if all other conditions of Supply are satisfied like consideration & involvement of Service. Now, we will discuss the second question.
B. Whether it can be Considered as Service and whether it will be a Taxable Supply of Service even without Consideration.
Definition of Service as defined in Section 2(102) is very wide; it includes anything other than goods, money and securities. Therefore, activities performed by HO or Common Support Branches like R&D, are squarely covered in the definition of Service.
Further, as per clause 2 of Schedule-I (which lists the activities to be treated as Supply even without consideration) prescribes that
“Supply of goods or services or both between related persons or between distinct persons as specified in section 25 , when made in the course or furtherance of business”...
Therefore, as per above provisions, Service between Distinct Persons (HO and Branches) even without consideration will be considered as Supply of Service.
Accordingly, Discussion tills this stage points that GST needs to be discharged on such services.
Now, we will discuss Next Question that what will be the Value on which GST needs to be discharged on such services.
C. Valuation to be adopted for discharging GST on such Services. (Can Zero Value be adopted for such service)?
Now next question that needs to be addressed is what should be the value to be adopted for such services. In this regard, Rule 28 of CGST Rules prescribes two situations here that:
In case Recipient of such service (i.e. Branch) is Eligible for “full input tax credit”, value declared in the Invoice will be accepted by the Department. Generally most of the cases will be covered in Situation-1. Accordingly, the value adopted by the Organisation for such service will be accepted by the Department.
There may be cases where Recipient of such service (i.e. Branch) is not eligible for “full input tax credit”, like in case where Branch is involved in some kind of Exempt Supply. In that case, Value to be ascertained on following priorities
a. Open Market Value of Such Services
b. If Not Available, then Like and Kind
c. If that is also not possible, Cost plus 10% or Best Judgement Basis as per available information.
Further, Circular 199/11/2023-GST has clarified that Cost of Salary of Employees involved in provision of such internally generated services need not be involved in calculation of Value of Taxable Supply.
Can Zero Value be adopted for such Service (indirectly putting them out of GST?)
Circular 199/11/2023-GST clarified that in case Recipient is Eligible for “Full Tax Credit, Zero Value can also adopted by the Organisation.
Further Circular clarified that Even Organisation has not issued any Invoice, it will deemed that Invoice has been issued at NIL Value and the same will be accepted by the Department.
By this way, Circular has saved the Department and Taxpayers from unlimited tax disputes (even what would be Revenue Neutral exercise) as otherwise Department can allege “N” number of Services flowing from HO to Branches like Accounting Services, Management Services, and Brand Services etc.
But in case Zero Value has been adopted by the Head Office, in our opinion, it will not be able to take ITC at HO level against such service. Therefore, we suggests that where ITC is involved against such services at HO Level (like for providing R&D services it also consumes various Taxable Goods/Service at HO level), HO should raise Invoice at value appropriate to them so that ITC can be utilised.
D. ITC Eligibility on such services even if Payment is not made by Recipient to Supplier within 180 days.
Since in accounting and financial terms, both HO and Branch are same person, there cannot be a situation where payment can be made by Branch to HO against such service (Bank Account is in name of Company only though can be controlled by Branch separately.
Therefore, question comes to mind whether Recipient is allowed to avail ITC on such services even without payment within 180- days. So answer is yes what is logical also and same has been provided in Rule- 37 also as:
“Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:”...
E. Whether ISD Registration is mandatory to distribute ITC of Common Service like security service (as explained above) or HO can raise invoice of Supply of Service to its branches.
There may be situations like as explained above, for Security Service, HO has entered an agreement with Security Agencies to provide Security Services to all its Factories/Branches situated all over India. Further, Security Agencies is issuing Invoice to Head Office and Payment is also being released by the Head Office.
In this regard, question arise whether it is mandatory for Head to register itself as ISD under Section 24 and distribute such Common ITC among its branches/factories following the procedure of ISD mentioned under Section 20 read with Rule 39 or can issue Invoice of Taxable Supply under Rule 31 to its Branches under Section-7 read with Schedule-I (as explained above).
In this regard, Circular has clarified that it is open to the Organisation to adopt any model as per its convenience. However, Invoice to Recipient can only be issued only if such service is received by it. (Even if in case of ISD, ITC can only be distributed to a branch which has used that service).
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