FEBRUARY 19, 2019

By Satya Sai

THE advance ruling order passed in the case of Columbia Asia Hospitals Private Limited - 2018-TIOL-113-AAR-GST, which is also recently upheld by appellate authority for advance ruling - 2018-TIOL-31-AAAR-GST, has certainly generated heat among the members of the industry with respect to cross charging of services. However, the confusion is still prevailing in the industry on transactions for which cross charge is applicable and whether it is mandatory, or whether there is an option. On the other hand, ISD mechanism is used for distribution of credit. In midst of these developments, it is important to understand and analyze the differences between the 'Cross Charge' and ISD mechanisms and implications of these concepts on the business.

Section 25 of CGST Act deals with registration of suppliers. As per Section 25(4) of CGST Act, a person who has obtained or is required to obtain more than one registration in one or more states shall be treated as distinct person in respect of each such registration. Further, Section 25(5) of CGST Act provides that a person who has obtained or is required to obtain registration in one or more states in respect of an establishment has another establishment in another state, then such establishments shall be treated as distinct persons.

By virtue of above provisions, Head Office (HO) registered in one state and Branch Office (BO)/factories of same entity registered in another state would be treated as distinct persons. Further, as per entry no.2 of Schedule I to CGST Act, supplies between distinct persons would fall under the scope of charging section even if such supplies are made without consideration. Accordingly, supplies made by HO to BO and vice-versa would be subjected to GST. The said provision is not only applicable to branch transfer of goods but also services provided by HO to BO and vice-versa. Therefore, it is clear that cross charging of services provided by HO to BO and vice-versa is mandatory and it is not optional.

At this juncture, it is worthwhile to discuss about ISD and its distinction from the mandatory cross charge for supplies between distinct persons.

ISD is a concept envisaged even under erstwhile service tax regime for distribution of credit by HO to other units which are commonly using certain input services. By way of the said procedure, entities can utilize the credit of taxes paid on input services otherwise such taxes may become cost to them. The same concept has been grandfathered under GST regime as well. Section 20 of IGST Act read with Rule 39 of CGST Rules merely provides the conditions and procedures to be followed in order to distribute the input tax credit on input services. Nowhere the Act mandates assessees to distribute the input tax credit on common services. As opposed to this, cross charge entirely lies on a different footing and it needs to be mandatorily followed by all suppliers.

Let us take a comprehensive scenario for the purpose of better understanding of the above important concepts:

Company A has its head office (HO) in the state of Delhi and it is registered with GST authorities in the state of Delhi. It has its branch offices (BO) in Mumbai and Hyderabad which are also registered with GST authorities in the states of Maharashtra and Telangana as these branches are also involved in supply of taxable goods / services. Since HO and BOs are registered under GST, all are treated as distinct persons even though all such establishments are under one entity.

If the corporate office i.e., HO is taking care of HR functions / Accounting functions of BOs which are located in Maharashtra and Telangana, then HO in Delhi shall mandatorily raise an invoice for the services provided by it to BOs and discharge GST on such services as per provisions discussed above. However, BOs are eligible to avail the credit subject to certain conditions.

On the other hand, if HO has appointed a statutory auditor for carrying out audit of the entity, then auditor raises the invoice for audit fee along with GST on HO. Under ISD mechanism, HO may avail input tax credit of GST charged by auditor and distribute the same to branches as per the procedure prescribed under the CGST Act. However, unlike cross charge, it is not mandatory on the part of HO to distribute the said credit to its BOs. The HO may opt for ISD if it does not have sufficient output tax liability for utilizing credit availed in HO.

Further, it is important to note that input tax credit relating to all services cannot be distributed to other registrations. For example, GST paid on rent for HO/corporate office cannot be distributed to other registrations under ISD as same is consumed totally by HO, which is distinct person from its other registrations. However, the said service may be considered by HO while cross charging to BOs for providing services as it is an input service for HO. Thus, services for which cross charge to be made and the services for which ISD can be opted are completely independent and it is not the option for the assessee to choose either cross charge or ISD for a specific service.

Cross charge is not restricted to the services provided by one unit to another but also for any goods (be it inputs, final product or capital goods) sent from one registered unit to another.

As mentioned above, cross charging is compulsory as per GST law whereas ISD is optional and it is a mere mechanism to transfer credit from one registration to another. In author's view, Industry has to take cognizance of above difference in treatment of above two mechanisms and analyze carefully all services received by them before implementing the above mechanisms.

Keeping in mind the above intricacies, members of Industry need to take steps to implement the above treatment in their organization, if the same has not been implemented already. Fortunately, Government has again increased the time limit for availing input tax credit to March 2019 vide Order No.2/2018-Central Tax dated 31.12.2018. Therefore, it is a golden opportunity for entities which are not cross charging services or distributing the credit instead of cross charging to rectify the same so that recipient BOs/units may avail the input tax credit within the extended time limit.

(The author is Principal Associate, Lakshmikumaran & Sridharan, Hyderabad and the views expressed are strictly personal)