Let’s take an example. A Ltd has its head office at Mumbai and branch office at Ahmedabad. It approached XYZ & Co., a professional firm, to avail certain services for its Ahmedabad branch. XYZ & Co has its head office at Mumbai and branch office at Ahmedabad. XYZ & Co asked its Ahmedabad branch to provide the said services to A Ltd’s Ahmedabad branch. After completion of services, XYZ & Co, Mumbai Head Office raised invoice on A Ltd’s Mumbai head office as per the privity of contract by charging CGST and SGST. In this case, A Ltd’s Mumbai head office can avail the input tax credit pertaining to this transaction but can not utilise the same as it has not received the services. Here, A Ltd, Mumbai head office has to take Input Service Distributor (ISD) registration and distribute the credit to its Ahmedabad branch as IGST. In this case, a question may arise whether XYZ & Co, Ahmedabad branch had given any services to XYZ & Co, head office. The answer would be yes. XYZ & Co, Ahmedabad branch would raise an invoice on XYZ & Co, head office. This is called cross charge. Under cross charge, there is supply flowing from one distinct person to another distinct person. As there is no service element flowing from A Ltd’s Mumbai head office to its Ahmedabad Branch, hence A Ltd can not cross charge. A Ltd’s head office only procured the said services for its Ahmedabad branch and there was no value addition by A Ltd, H.O. in respect of this service.
Valuation Aspect
Now, at what value XYZ & Co, Ahmedabad branch will raise the invoice. Rule 28 of the CGST Rules, 2017 provides the mechanism for valuation of supply of goods or services or both between distinct or related persons (other than agent) and the same is reproduced below: –
“(28) The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:
Provided further 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.”
Therefore, to arrive at the value of supply between the distinct and related persons, the following values have to be taken sequentially-
- Open market value
- The value of supply of goods or services of like kind & quality
- 110% of the cost of supply
- Residual method
However, the second proviso to rule 28 of the CGST Rules, 2017, provides that where the recipient is eligible for full input tax credit, the invoice value shall be deemed to be the open market value of the goods or services. In terms of this proviso, if XYZ & Co, Mumbai head office can avail full input tax credit, the invoice value declared by the XYZ & Co, Ahmedabad branch would be deemed as open market value. It means that, if XYZ & Co, Mumbai head office is eligible for full input tax credit, then XYZ & Co, Ahmedabad branch can declare any value as invoice value even rupee one.
Whether goods/services can be valued under the second proviso instead of following other provisions specified under rule 28
The supplier distinct person (where recipient is eligible for full input tax credit) can value goods/services directly under the second proviso to rule 28 at his discretion.
In the case of GKB Lens Pvt Ltd, Hon’ble AAR, West Bengal held as under:
‘The applicant has the option of not supplying goods to its branches under the First Proviso of Rule 28 and is eligible to value these goods by applying the terms of the Second Proviso to Rule 28 of the GST Act.
The expression “where the recipient is eligible for full input tax credit”, as used in the Second Proviso to Rule 28 of the CGST Rules, 2017, means that the recipient will be eligible to take full input tax credit of the amount of tax paid by the supplier as mentioned in the respective invoice or any other document valid under Section 16(2) (a) of GST Act.’
Supplier must declare some value in the invoice/debit note
The recipient of goods/services will not be eligible for input tax credit, if the value declared by the supplier in the invoice/debit note is zero. The Hon’ble AAAR, West Bengal in the case of Assistant Commissioner, CGST & CX, In re [97 taxmann.com 636 (AAAR-West Bengal)] held that no input tax credit, however would be available for supply of goods/services at Zero Value. Therefore, to apply the provisions of second proviso to rule 28 of the CGST Rules, the supplier must declare some value in the invoice/debit note and can not declare zero value.
Conclusion
As per section 7(1)(c) of the CGST Act, 2017, supply includes the activities specified in Schedule I, made or agreed to be made without a consideration. Para 2 of Schedule I stipulates that supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business shall be treated as supplies even if made without consideration. Further, section 25(4) of the CGST Act, 2017 stipulates that a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons. A joint reading of para 2 of the Schedule I and the concept of distinct persons gives rise for the requirement of cross charge. On the other hand, ISD mechanism is used to distribute ITC by the Head Office among its different branches holding normal registrations under the same PAN. Where the recipient is engaged in taxable outward supply and is eligible for full ITC, valuation of cross charge would not be a challenge. However, where the recipient is engaged exclusively in exempt supply, valuation of cross charge could be a challenge as the second proviso to Rule 28 of the CGST Rules, 2017 would not work in that scenario.