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.

Sr. No.

Issue

Clarification

1

Whether   e-invoicing   is applicable for supplies made by a  registered  person,  whose turnover exceeds the prescribed threshold  for  generation  of  e-invoicing,   to   Government Departments or establishments/ Government  agencies/  local authorities/  PSUs  which  are registered solely for the purpose of deduction of tax at source as per provisions of section 51 of the CGST Act?

Government  Departments  or  establishments/ Government agencies/ local authorities/ PSUs, which are required to deduct tax at source as per provisions of section 51 of the CGST/SGST Act, are  liable  for  compulsory  registration  in accordance with section 24(vi) of the CGST Act. Therefore,   Government   Departments   or establishments/  Government  agencies/  local authorities/  PSUs,  registered  solely  for  the purpose of  deduction  of  tax  at  source as  per provisions of section 51 of the CGST Act, are to be treated as registered persons under the GST law as per provisions of clause (94) of section 2 of  CGST  Act.  Accordingly,  the  registered person, whose turnover exceeds the prescribed threshold  for  generation  of  e-invoicing,  is required  to  issue  e-invoices  for  the  supplies made  to  such  Government  Departments  or establishments/  Government  agencies/  local authorities/ PSUs, etc under rule 48(4) of CGST Rules.

S.No.

Issue

Clarification

Taxability of share capital held in subsidiary company by the parent company

1.

Whether  the  activity  of holding  shares  by  a  holding company  of  the  subsidiary company will be treated as a supply of service or not and whether the same will attract GST or not.

Securities are considered neither goods nor services in  terms  of  definition  of  goods  under clause (52)  of section 2 of CGST Act and the definition of services under clause (102) of the said section. Further, securities include  ‘shares’  as  per  definition  of  securities  under clause  (h)  of  section  2  of  Securities  Contracts (Regulation) Act, 1956.

This implies that the securities held by the holding company in the subsidiary company are neither goods nor  services.  Further,  purchase  or  sale  of  shares  or securities, in itself is neither a supply of goods nor a supply  of  services.  For  a  transaction/activity  to  be treated as supply of services, there must be a supply as defined under section 7 of CGST Act. It cannot be said that a service is being provided by the holding company to the subsidiary company, solely on the basis that there is a SAC entry ‘997171’ in the scheme of classification of  services  mentioning;  “theservices   provided   by holding  companies,  i.e.  holding  securities  of  (or  other equity  interests  in)  companies  and  enterprises  for  the purpose of owning a controlling interest.”, unless there is a supply of services by the holding company to the subsidiary  company  in  accordance  with  section  7  of CGST Act.

Therefore,  the  activity  of  holding  of  shares  of subsidiary  company  by  the  holding  company  per  se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST.

S. No.

Issue

Clarification

1.

There are cases where the original equipment manufacturer offers warranty for the goods supplied by him to the customer and provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services. Whether GST would be payable on such replacement of parts or supply of repair services, without any consideration from the customer, as part of warranty?

The value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and / or repair services to be incurred during the warranty period, on which tax would have already been paid at the time of original supply of goods.

As such, where the manufacturer provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services, no further GST is chargeable on such replacement of parts and/ or repair service during warranty period. However, if any additional consideration is charged by the manufacturer from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.

2.

Whether in such cases, the manufacturer is required to reverse the input tax credit in respect of such replacement of parts or supply of repair services as part of warranty, in respect of which no additional consideration is charged from the customer?

In such cases, the value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and/ or repair services to be incurred during the warranty period. Therefore, these supplies cannot be considered as exempt supply and accordingly, the manufacturer, who provides replacement of parts and/ or repair services to the customer during the warranty period, is not required to reverse the input tax credit in respect of the said replacement parts or on the repair services provided.

3.

Whether GST would be payable on replacement of parts and/ or repair services provided by a distributor without any consideration from the customer, as part of warranty on behalf of the manufacturer?

There may be instances where a distributor of a company provides replacement of parts and/ or repair services to the customer as part of warranty on behalf of the manufacturer and no separate consideration is charged by such distributor in respect of the said replacement and/ or repair services from the customer.

 In such cases, as no consideration is being charged by the distributor from the customer, no GST would be payable by the distributor on the said activity of providing replacement of parts and/ or repair services to the customer.

However, if any additional consideration is charged by the distributor from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.

4.

In the above scenario where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer, whether any supply is involved between the distributor and the manufacturer and whether the distributor would be required to reverse the input tax credit in respect of such replacement of parts?

1. There may be cases where the distributor replaces the part(s) to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the part(s) so replaced from the manufacturer, by issuance of a tax invoice, for the said supply made by him to the manufacturer. In such a case, GST would be payable by the distributor on the said supply by him to the manufacturer and the manufacturer would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act. In such case, no reversal of input tax credit by the distributor is required in respect of the same.
2. There may be cases where the distributor raises a requisition to the manufacturer for the part(s) to be replaced by him under warranty and the manufacturer then provides the said part(s) to the distributor for the purpose of such replacement to the customer as part of warranty.

In such a case, where the manufacturer is providing such part(s) to the distributor for replacement to the customer during the warranty period, without separately charging any consideration at the time of such replacement, no GST is payable on such replacement of parts by the manufacturer. Further, no reversal of ITC is required to be made by the manufacturer in respect of the parts so replaced by the distributor under warranty.

(c) There may be cases where the distributor replaces the part(s) to the customer under warranty out of the supply already received by him from the manufacturer and the manufacturer issues a credit note in respect of the parts so replaced subject to provisions of sub-section (2) of section 34 of the CGST Act. Accordingly, the tax liability may be adjusted by the manufacturer, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced.

5.

Where the distributor provides repair service, in addition to replacement of parts or otherwise, to the customer without any consideration, as part of warranty, on behalf of the manufacturer but charges the manufacturer for such repair services either by way of issue of tax invoice or a debit note, whether GST would be payable on such activity by the distributor?

In such scenario, there is a supply of service by the distributor and the manufacturer is the recipient of such supply of repair services in accordance with the provisions of sub-clause (a) of clause (93) to section 2 of the CGST Act, 2017.

Hence, GST would be payable on such provision of service by the distributor to the manufacturer and the manufacturer would be entitled to avail the input tax credit of the same, subject to other conditions of CGST Act.

6.

Sometimes companies provide offers of Extended warranty to the customers which can be availed at the time of original supply or just before the expiry of the standard warranty period. Whether GST would be payable in both the cases?

1. If a customer enters in to an agreement of extended warranty with the manufacturer at the time of original supply, then the consideration for such extended warranty becomes part of the value of the composite supply, the principal supply being the supply of goods, and GST would be payable accordingly.
2. However, in case where a consumer enters into an agreement of extended warranty at any time after the original supply, then the same is a separate contract and GST would be payable by the service provider, whether manufacturer or the distributor or any third party, depending on the nature of the contract (i.e. whether the extended warranty is only for goods or for services or for composite supply involving goods and services)