Goods and Services Tax Act (“GST”) does not define Cross Charge. As per Section 25(4) of Central Goods and Services Tax Act, 2017 (“CGST”), where a person has obtained or is required to obtain registration in a state or union territory in respect of an establishment, has an establishment in another state or union territory, then such establishments shall be treated as establishments of distinct persons for the purpose of this Act. Accordingly, cross charging refers to invoicing supply of goods or services amongst distinct persons.
As per Entry 2 of Schedule 1 read with Section 7 of CGST, supply of goods or services without consideration amongst ‘distinct person' is liable to be taxed. GST being a destination based tax, a supply of goods or services amongst the branches of a same entity located across two different states, comes under the ambit of tax. In line with the said provisions, every supply between distinct persons results in cross charge between such entities and will be undertaken by issue of appropriate documents entitling the receiver of the supply for GST credit.
In case of multi locational entities i.e. entity registered in more than one state under same Permanent Account Number (PAN), the Head Office (HO) may handle operations like accounting, administrative work and maintenance of IT systems in respect of all the units in India. Procurement, management and distribution of common input services are separate services provided by HO to Branch Offices (BO) and apportioned amongst the different locations in proportion to their turnover. HO will issue invoice for such common functions to BO and transfer equal input tax credit to BO enabling them to utilize such tax credit resulting into no blockage of credits.
It is noteworthy that Entry 1 of Schedule III to the CGST excludes services by an employee to the employer in the course of or in relation to his employment, from the ambit of GST laws. However, in the case of M/S Columbia Asia Hospitals Pvt Ltd, the Appellate Authority for Advance Ruling, Karnataka1 held that the services of employees at HO in so far as they are benefitting the other registered branches of HO, will not be termed as “employer-employee relationship” and will therefore not fall under the ambit of Entry 1 of Schedule 3 read with Section 7 of CGST. Such cost of employee will be treated as supply of goods or services between related persons or distinct persons, made in the course or furtherance of business, even if made without consideration.
Valuation of supply-
As per Section 15 of CGST, value of supply, in case of distinct person is determined as per Rule 28 of CGST Rules which prescribes the method to determine the value of supply. As per Rule 28 of CGST Rules, the value of supply of goods or services or both between distinct persons as specified in Section 25(4) of CGST, other than where the supply is made through an agent, shall be,
- The open market value of such supply; or
- Where the open market value of supply is not available, be the value of supply of goods or services of like kind and quality; or
- 110% of cost of acquisition of such goods or cost of provision of such other services; or
- Any other reasonable means.
The whole essence of transaction will turn out as follows- HO claim input tax credit paid for common function expenses such as consultancy services, administration related services, accounting and auditing etc. and subsequently, HO charges Integrated Goods and Service Tax (IGST) on the expenses proportionately attributable to BO which were located in another state, treating the same as taxable supplies.
In conclusion, where there is an element of supply of services or goods rendered among distinct taxable persons, the cost of common input functions incurred is cross charged, even though it relates to the same legal entity, to enable distribution of accumulated input tax credit among distinct taxable persons so as to utilize the same against their output tax liabilities.
1 KAR/AAR-15/2018 dated 27-07-2018
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