ISD Mechanism Is Mandatory For Distribution Of Common Credit

Facts:

The appellant is engaged in the manufacturing and selling of diesel engines and parts thereof in different part of India. The Head Office and the units receive common input supplies on behalf other units registered distinctly under GST. The Head Office makes the payment and avails the ITC of common input services on the behalf of its branches. The major questions raised were

• Whether availment of ITC on common input supplies by Head Office on behalf of units registered as distinct person, and further allocation of the cost incurred for same to such other units, qualifies as supply and attracts GST?
• Whether the allocation of the cost of the employee’s salary by the Head Office to its units would attract GST?

Ruling:

Whether availment of ITC on common input supplies by Head Office and further cost incurred constitutes ‘supply’?

• As per Section 7(1) (a) of the Central Goods and Services Tax Act, 2017, it is clearly evident that the activities of providing facilitation services to its units by way of availment of the common input services by the Head Office on behalf of its units would be covered under services, and hence will be considered as supply.
• However, the cost of such common input services availed and allocated to the units by the head office will not attract the GST as the said costs have been incurred by the head office in the capacity of a pure agent of its units and shall be excluded from the value of supply of the facilitation services.

Whether the allocation of the cost of the employee’s salary by the Head Office to its units would attract GST?

• As the employees of the Head Office are working under the Head Office and not under the units. The Head Office is using the human resource to fulfill the requirements of the Units. Therefore, allocation of the cost of employee salary would attract GST.
• Also, as per Section 16 of The CGST Act, the common input services received by the Head Office on the behalf of its units are being used by its units in the course of furtherance of their business, and not by the head office. Therefore, the Head Office is not entitled to avail and utilize the credit of tax paid of the common input services received by it on behalf of its units.
• Furthermore, if the Head Office intends to distribute the credit of tax paid on the common input services received by it on behalf of the branch offices/units to the branch offices/units, the Head Office is bound to take the ISD registration as mandated by Section 24(viii) of the CGST Act, and comply with all the provisions made in this regard.

Takeaway Points

• Supply of facilitation services to units is subject to GST. However, the cost allocation of common input services availed of behalf of units will not attract GST.
• Employees of HO are working under HO, and not the units. Thus, the salary cost of such employees will be included in the value of supply of facilitation services. • HO is not entitled to avail and utilize ITC on common input services used by the units. Therefore, they are bound to take ISD registration if they intend to distribute such ITC.
• The assessable value of the services provided by the head office to its units can be determined as per the second proviso to Rule 28(c) of the CGST Rules, which provides that value of the tax invoice will be deemed as the open market value of the services.
• Under ISD mechanism, only credit of tax paid on common input services procured on behalf of units is to be passed, and not the ITC pertaining to input services which is exclusively used by HO to provide facilitation service.

Case: M/S. Cummins India Limited [Advance Ruling No. MAH/AAAR/AM-RM/01/2021-22 dated December 21, 2021]

Aditi Mittal, Audit Associate, SW India