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GST on intra-company and inter-company supplies December 2022

Concept

Cross charge

Crosscharge mechanism stems out of entry 2 of Schedule I of CGSTAct. To undertake such cross-charge, activity should first qualify to be a supply under CGST Act

Multiple registration s under same PAN treated as distinct person under deemed provision of GST law

Cross charge to be undertakenfor activities qualifying to be a supply between related parties/distinct person

Cross charge model results in transfer of credit as in case of ISD. There is flexibility in valuation of cross-charges

For e.g. For common functions such as maintaining payroll of branches, handling finance and other admin department for branches, there will be employees working on given set of functions for head office as well as branches

Rulings for ISD and Cross charge

Cummins India

• Facilitation of common input servicebyHOfrom third party vendorson behalf of branch office (‘BO’) shallbetreated as“supply of service”. Further, the value of said services would be excluded from the value of supply of facilitation services

• The assessable value of services by HO to BO would be as per the second proviso that is the value declared in the invoice would be deemed to be OMV; and

• The HO is not entitled to the credit of tax paid to third party vendor. Hence, where HO intends to distribute the credit, HO would be required to separately register as Input Service Distributor (ISD)

Columbia Asia

• Services provided by an employee to the employer are a transaction in the nature of employment and thus outside scope of GST

• However, since corporate office and units in different States are distinct persons under the Act, there is no relationship between the employees of one distinct entity with another distinct entity even if they belong to the same legal entity

• Thus, activities performed by employees at head office/ corporate office shall be treated as supply and accordingly employee cost also needs to be taken into consideration for the purpose of levy of GST

ISD vs Cross charge

Particula rs IS D Cross charge

• ISD does not create any charge i.e., there is no outward supply, it is only distribution of ITC to the relevant units/ branches

• ITC only on input services can be distributed

Complian

ce rigidity

• It creates a charge i.e.; it shall be considered as an outward supply and GST will be applicable on the same

• There is no restriction on cross-charge of expenditure and transfer of ITC thereon of services or goods or capital goods

• Separate registration is not required under the crosscharge mechanism. It can be followed under the existing registration of a unit in a state • Separate registration as ISD is specifically required

• Following are applicable in case of ISD: ─ ISD is required to distribute ITC in the same month

Credit note of ITC should be given in same proportion in which original ITC was distributed

An ISD is required to file the return i.e. Form GSTR-6 on 13th of next month

Polling question

• ISD

FOC Supply under GST

FOC supply under GST

FOC supply under the GST law

Three conditions to classify any activity/transaction undersupply:

• There should be a supply of goods or services;

• There should be a consideration; and

• The supply should be in the course or furtherance of business

b)Import of services for a consideration whether or not in the course or furtherance of business; and c)The activities specified in Schedule I, made or agreed to be made without a consideration; Schedule I of CGST Act - Activities to be treated as Supply even if made withoutconsideration

FOC transactions between related parties

Financial statements relatedsupport

Training to Indian employees

Budgetary control, strategic support / decision making

Foreign directors working for whole region (including India)

Software / IT related support / HR / Tax related day to day support

• Overseas entities to provide various support functions to its group entities in India. Typically, no consideration charged for such support

• Such activities may or may not provide any economic benefit to the Indian entity

• Each case to be evaluated on case-to-case basis to determine GST implications

Free of Cost (FOC) import of services –Way

Way

Forward

• Review of activities (e.g., allowing use of brand name, back-office activities, providing corporate guarantee) being performed by overseas entity for Indian affiliates

• Analyze whether such mentioned activities qualify to be a supply or not –appropriate action to be taken accordingly

• Review of existing agreements with overseas entity and making appropriates changes to clauses, if any

• Determining the activities that require a cross-charge to Indian entity warranting payment of GST

• Discussion with Transfer Pricing (TP) team for finalization of agreement and consideration for activities qualifying to be supply

Genpact ruling –Intermediary

© 2022 Deloitte Touche Tohmatsu India

Background

Intermediary Services

Definition of intermediary services

Intermediary means

• broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply ofgoods or services or both, or securities, between two or more persons,

• but does not include a person who supplies such goods or services or both or securities on his own account

Ruling of AAAR in case of VservGlobal Other rulings on intermediary services

• The Advance ruling in Vserv Global Private Limited, In re [2018] 99 taxmann.com 253/19 GSTL 173 (AARMAHARASHTRA) which was upheld by the AppellateAdvance Ruling authority ruled that back office administration and accounting support are intermediaryservices

• Two other advance rulings (Asahi Kasei India Private Limited, In re [2019] 101 taxmann.com 269/21 GSTL 243 (AARMAHARASHTRA) and NES Global Specialist Engineering Services Private Limited, In re [2019] 103 taxmann.com 122 /73 GST 429/22 GSTL 541 (AARMAHARASHTRA) held that the business support services are not in the nature of intermediary

Circular on intermediary services

• A circular was issued in 2021 clarifying the nature of intermediaryservices

• Supplies made on principal- to-principal basis can not be covered under intermediary services

Recent

• Recently Punjab & Haryana High Court has pronounceda ruling in the matter of Genpact that Business Process Outsourcing (BPO) services are not in the nature of intermediary services

• Sub-contracting for a service is not intermediary service even the supplier directly deals with customers of recipient

ruling by Punjab and Haryana High Court

Observations of the High Court

• The agreement is clearly for the purpose of sub-contracting services to petitioner by the group company. These are the same services which the group company was contractually supposed to provide to its own customers

• A bare perusal of the clauses of the agreementdo not indicatethat Petitioner isactingasan“intermediary” under GSTlaw. Such clauses of the agreement do not conclude that the Petitioner has facilitated the services

Following three conditions must be satisfied to qualify as an intermediary:

• Existence of principal-agent relationship

• Involvement in arrangement or facilitation of provision of service between two other parties

• Intermediary not to perform the main service

• Petitioner isnot liaisoningor actingasan“intermediary” between groupcompanyandits customers.CircularNo.159/15/2021GST dated 20 September 2021 clarifies that sub-contractingfor aserviceisnot an“intermediary”service

Observations of the High Court

• Thedefinition of “intermediary” under the servicetaxregime andGSTissimilar, andit isalsoclarified thatthere isno change in the scope of intermediary services in the GST regime vis-à-vis service tax regime

• Revenue authorities cannot deviate from the view taken in service tax regime when there is no change in the definition of intermediary in the GST regime

• TheHon’ble PunjabandHaryanaHighCourt hasdecidedthat the servicessuppliedbythe Petitioner qualify asexport ofservices and are not in the nature of intermediary services as per the provisions of the GST law

Thank You

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