CBIC Issues Clarification: On ITC Claims on Services Provided by Head Office to Branches in Other States

CBIC Issues Clarification: On ITC Claims on Services Provided by Head Office to Branches in Other States

The Central Board of Indirect Taxes and Customs (CBIC) has issued ‘clarification regarding the taxability of services provided by an office of an organization in one State to the office of that organization in another State, both being distinct persons.’

The circular provides clarity on the tax implications and requirements for such transactions, considering the distinct person status under the Central Goods and Services Tax Act, 2017 (CGST Act).

The circular clarifies that in cases where a business entity has a Head Office (HO) in one state and branch offices (BOs) in other states, certain issues may arise regarding the taxability of services provided between the HO and 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 input tax credit (ITC) in respect of such common input services by following Input Service Distributor (ISD) mechanism laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017 (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.

Regarding the availability of ITC for common input services procured from a third party, the HO has the option to distribute ITC to the BOs using the Input Service Distributor (ISD) mechanism or issue tax invoices directly to the BOs.

The circular clarifies the requirements and options for the distribution of ITC and emphasizes compliance with the provisions of the CGST Act and CGST Rules.

Furthermore, the circular explains that 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 28 of 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,” read the circular.

The circular elucidates that 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.