Branch office entitled to avail full itc of tax paid by head office where payable are adjusted against receivable: AAAR

Facts of the case:

Appellant, the branch office entered into a service agreement with their head office for taking cranes and crane components on lease terms followed by further sub-letting to their customers. The head office duly discharges the GST liability on lease rent and branch office avails the input tax credit of the same. The customers of branch office, in some cases, directly pay to the bank account of head office. Further, branch office incurs expenses on behalf of head office, like maintenance of cranes. At the year end, receivable from head office are adjusted against the payable to head office by branch.

Given the facts of the case, applicant sought advance ruling on:

“Whether the branch office receiving the service of hiring of cranes from head office is eligible to avail the input tax credit of the GST liability charged by the head office?”
RULING BY THE ORIGINAL AUTHORITIES:
The applicant (branch office) is eligible for the Input Tax Credit to the extent where payment to the supplier (head office) has been made within 180 days. The Input Tax Credit shall not be allowed where payments are netted off against receivable.

Ground of appeal by applicant:

Rule 37 of the CGST Rules, 2017 puts on a condition for consequences of non-payment to supplier within 180 days however, it also provides that transaction between related parties made without consideration (covered under schedule I) shall be deemed to have been paid. The same principle should mutatis mutandis apply to transactions with consideration. The transaction between distinct entities having same PAN (i.e. between head office and its branches) is considered as supply as per Schedule I. The only fact that the consideration is agreed in service agreement and mentioned on the tax invoice does not imply that the branch office is liable to pay to head office. The amount was just agreed for payment of GST.

Findings and Ruling by the AAAR:

Rules 37 deems the payment to have been made in case of transaction between distinct persons. Therefore, adjustment of receivable with payable balance will not make branch office ineligible for ITC just because there is no physical movement of cash. In our view, if branch office doesn’t pay, still ITC should not be reversed for branch office, as in the end, legal entity is the same.

Source: [2020] 113 taxmann.com 24 (AAAR – TAMILNADU)