Circular No. 199/11/2023-GST [C10-6R4]

Various representations have been received seeking clarification on the taxability of activities performed by an office of an organisation in one State to the office of that organisation in another State, which are regarded as distinct persons under section 25 of Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘the CGST Act’). The issues raised in the said representations have been examined and to ensure uniformity in the implementation of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST Act hereby clarifies the issue in succeeding paras.

2. Let us consider a business entity which has Head Office (HO) located in State-1 and a branch offices (BOs) located in other States. The HO procures some input services e.g. security service for the entire organisation from a security agency (third party). HO also provides some other services on their own to branch offices (internally generated services).

3. The issues that may arise with regard to taxability of supply of services between distinct persons in terms of sub-section (4) of section 25 of the CGST Act are being clarified in the Table below: -

S. No Issues Clarification

1. Whether HO can avail the input tax It is clarified that in respect of common input credit (hereinafter referred to as services procured by the HO from a third ‘ITC’) in respect of common input party but attributable to both HO and BOs or

services procured from a third party exclusively to one or more BOs, HO has an but attributable to both HO and BOs option to distribute ITC in respect of such or exclusively to one or more BOs, common input services by following ISD issue tax invoices under section 31 mechanism laid down in Section 20 of CGST to the said BOs for the said input Act read with rule 39 of the Central Goods services and the BOs can then avail and Services Tax Rules, 2017 (hereinafter the ITC for the same or whether is it referred to as ‘the CGST Rules’). However, mandatory for the HO to follow the as per the present provisions of the CGST Input Service Distributor Act and CGST Rules, it is not mandatory for (hereinafter referred to as ‘ISD’) the HO to distribute such input tax credit by mechanism for distribution of ITC ISD mechanism. HO can also issue tax in respect of common input services invoices under section 31 of CGST Act to the procured by them from a third party concerned BOs in respect of common input but attributable to both HO and BOs services procured from a third party by HO or exclusively to one or more BOs? 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 The value of supply of services made by a services, there may be cases where registered person to a distinct person needs to HO is providing certain services to be determined as per rule 28 of CGST Rules, the BOs for which full input tax read with sub-section (4) of section 15 of credit is available to the CGST Act. As per clause (a) of rule 28, the concerned BOs. However, HO may value of supply of goods or services or both not be issuing tax invoice to the between distinct persons shall be the open concerned BOs with respect to such market value of such supply. The second services, or the HO may not be proviso to rule 28 of CGST Rules provides including the cost of a particular that where the recipient is eligible for full input component such as salary cost of tax credit, the value declared in the invoice employees involved in providing shall be deemed to be the open market value said services while issuing tax of the goods or services. Accordingly, in invoice to BOs for the services respect of supply of services by HO to BOs, provided by HO to BOs. Whether the value of the said supply of services the HO is mandatorily required to declared in the invoice by HO shall be deemed issue invoice to BOs under section to be open market value of such services, if the

31 of CGST Act for such internally recipient BO is eligible for full input tax generated services, and/ or whether credit. the cost of all components including salary cost of HO employees involved in providing the said Accordingly, in cases where full input tax services has to be included in the credit is available to a BO, the value declared computation of value of services on the invoice by HO to the said BO in respect provided by HO to BOs when full of a supply of services shall be deemed to be input tax credit is available to the the open market value of such services, concerned BOs. 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 In respect of internally generated services services provided by the HO to provided by the HO to BOs, the cost of salary BOs, in cases where full input tax of employees of the HO, involved in providing

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

4. It is requested that suitable trade notices may be issued to publicize the contents of this circular.

5. Difficulty if any, in the implementation of this circular may be brought to the notice of the Board. Hindi version would follow.