DECEMBER 31, 2018

By Rohini Mukherjee, Joint Partner, Lakshmikumaran & Sridharan

WITH the advent of GST law, trade and industry is grappling with an array of new concepts. One such concept is 'cross charging' for supply of services between two GST registrations of an entity.

Cross charge as a concept

This concept of supplies between distinct establishments, popularly called "cross charge" has been a major area of concern for businesses particularly regarding valuing such services. The concept emanates from GST law deeming two separate registrations of a legal person as distinct persons and the supply between such distinct persons, even when made without any consideration, as a deemed supply. In other words, even in the absence of consideration for a supply of goods or services between distinct persons, the same has been deemed as a supply under GST law and GST is required to be paid on such supply.

Identification of services

While it is fairly simple to identify supplies in respect of goods, the same cannot be said for the supplies of services. In the context of services, it is commonplace for the corporate office of an entity to have employees performing functions such as finance, accounting, human resources and legal who work in common for all the business locations of the entity spread across several States. In such case, the employees performing the above functions at the corporate office are supporting the other locations.

A reverse situation also ariseswhere the marketing office of an entity under a particular GST registration provides support services related to marketing to other GST registrations. Apart from these typical situations, there are also a number of supplies from one GST registration to another such as the research and development office located in one State providing research related services to manufacturing locations in other States.

In all these situations, there is provision of services by one GST registration of an entity to another.

Columbia Asia advance ruling

While the concept of cross charge existedunder GST law from its very inception, it came to the limelight owing to the ruling of the Authority of Advance Rulings in Karnataka ("AAR") in the case of Columbia Asia Hospitals Private Limited - 2018-TIOL-113-AAR-GST. The question sought from the AAR was whether the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other States shall be treated as supply. It was observed by the AAR that the employees employed in the corporate office were providing services to the corporate office and hence, there was an employee-employer relationship only in the corporate office. The other offices were distinct persons and, therefore, the employees in the corporate office had no employer employee relationship with the other offices. Further, the AAR held that the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states shall be treated as supply. On the issue of valuation of such supply, it was held that valuation would be determined in terms of Section 15 of the Central Goods and Services Act, 2017. Further, it was observed that the valuation includes all costs, the employee cost also needs to be taken into consideration at the time of valuation of goods or services provided by one distinct entity to the other distinct entities. This ruling has been recently upheld by the appellate advance ruling authority - 2018-TIOL-31-AAAR-GST.

Valuation: The key issue

Once it has been established that such supplies are chargeable to GST, since such deemed supplies are between two GST registrations of a single entity, there would not be any consideration for such supply. This brings us to the next pertinent question, what is the value to be considered for payment of GST.

In view of a specific provision under the Valuation Rules which deems the invoice value to be taken as the taxable value for supplies between distinct persons, where the recipient GST registration is eligible for full input tax credit, a reasonable value can be indicated on the GST invoice and GST can be paid on such value.

Concerns of valuation where recipient is not eligible for full credit

The same is not the case where the recipient is not eligible for full credit.

The recipient GST registration may not be eligible for full credit in diverse situations.

The first situation is where the recipient is engaged in an exempt supply. For instance, where the goods being supplied by the recipient GST registration is exempt (example: supply of curd).

Non-eligibility due to restriction in credit

While the above is a clear case of the recipient registration not being entitled to input tax credit, there are other situations. In a case where the recipient registration is engaged in provision of canteen service to its employees which is taxable at 5% with the condition of not taking the input tax charged on goods and services used in supplying the service, the recipient is not eligible for full input tax credit.

Provision of exempt supply to employees

Additionally, there are also instances of recovery from employees towards supplies which are exempt, for instance, service of residential accommodation.

Industry specific concerns

It is worth noting here that there are certain industries such as cement where businesses have power plants which are engaged in generation of electricity, some of which is captively consumed in the same State and some of which is sold to third parties or supplied to other GST registrations. The supply of electricity being exempt under GST, this is also a situation where the invoice value would not be deemed to be the taxable value.

In all the above cases, the invoice value cannot be taken as the taxable value for payment of GST here as well.

What value to adopt where recipient registration is not eligible for full credit?

In the cases where the recipient registration is not eligible for full credit, the law prescribes the options of adopting theopen market value, the value of services of like kind and quality or cost plus 10% as the value. Where the value cannot be determined by either of these methods, the law prescribes that the value be determined using reasonable means consistent with the principles and the general provisions of valuation under GST law.

As support services are specific in nature, the open market value is not readily available. Further, since the support services are, in general, not comparable to other services as these are customised services, the services of like kind and quality may not be available.

Cost based valuation method: Concerns

This leaves the businesses with the option of valuing on cost plus 10% basis. The cost to be taken here is the cost of providing the service. It is of utmost importance for businesses to identify these costs to mitigate the possibility of dispute by the department. The exercise of identifying these costs is a daunting task. A proper costing exercise is required to be undertaken to arrive at the cost for providing these services.

A common question faced by businesses is whether while arriving at the cost, the salary of the employees engaged in providing these services is to be included. In the ruling of Columbia Asia, it was observed that as the valuation includes all costs, the employee cost also needs to be taken into consideration at the time of valuation.

In the backdrop of the law as it stands today, where cost plus 10% value is adopted, there is a high likelihood of credit accumulation at the end of the recipient registrations. This is more so in the cases where a major portion of the supplies by the recipient registration are exempt as in such cases, the entire credit or proportionate credit is not available at the end of the recipient. Accordingly, the GST charged under cross charge becomes a cost at the end of the recipient registration.

The trade and industry can consider representing to the government to suitably amend the valuation rules so that the issue of cost built up owing to the valuation provision is addressed.

(The views expressed are strictly personal.)