MM TAX CLUB

S. No

Issues

Clarification

1

Whether HO can avail the input tax credit  (hereinafter  referred  to  as ‘ITC’) in respect of common input services procured from a third party but attributable to both HO and BOs or exclusively to one or more BOs, issue tax invoices under section 31 to the said BOs for the said input services and the BOs can then avail the ITC for the same or whether is it mandatory for the HO to follow the Input    Service    Distributor (hereinafter  referred  to  as  ‘ISD’) mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and BOs or exclusively to one or more BOs?

It is clarified that in respect of common input services procured by the HO from a third party but attributable to both HO and BOs or exclusively to one or more BOs, HO has an option to distribute ITC in respect of such common  input  services  by  following  ISD mechanism laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the CGST Rules’). However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such input tax credit by ISD  mechanism.  HO  can  also  issue  tax invoices under section 31 of CGST Act to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs and the BOs can then avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.

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. 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.

2

In respect of internally generated services, there may be cases where HO is providing certain services to the BOs for which full input tax credit is available to the concerned BOs. However, HO may not  be  issuing  tax  invoice  to  the concerned BOs with respect to such services,    or  the  HO  may  not  be including  the  cost  of  a  particular component  such  as  salary  cost  of employees  involved  in  providing said  services  while  issuing  tax invoice  to  BOs  for  the  services provided by HO to BOs. Whether the HO is mandatorily required to issue invoice to BOs under section 31 of CGST Act for such internally generated services, and/ or whether the cost of all components including salary  cost  of  HO  employees involved  in  providing  the  said services has to be included in the computation  of  value  of  services provided by HO to BOs when full input tax credit is available to the concerned BOs.

The value of supply of services made by a registered person to a distinct person needs to be determined as per rule 28 of CGST Rules, read  with  sub-section  (4)  of  section  15  of CGST Act. As per clause (a) of rule 28, the value of supply of goods or services or both between  distinct  persons  shall  be  the  open market  value  of  such  supply.  The second proviso to rule 28of CGST Rules provides that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of  the  goods  or  services.  Accordingly,  in respect of supply of services by HO to BOs, the  value  of  the  said  supply  of  services declared in the invoice by HO shall be deemed to be open market value of such services, if the recipient BO is eligible for full input tax credit

Accordingly, 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.

3

In  respect  of  internally  generated services  provided  by  the  HO  to BOs, in cases where full input tax credit  is  not  available  to  the concerned BOs, whether the cost of salary  of  employees  of  the  HO involved in providing said services to the BOs, is mandatorily required to be included while computing the taxable value of the said supply of services provided by HO to BOs.

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.