Cross-Charge Vs ISD - Cloud of confusion continues with Cummins India ruling

Debasish Bandyopadhyay, B.Com, LL.B, PGDFM

There are many unsettled issues repeatedly disturbing the trade under the GST regime. In many occasions, cases coming under the process of judicial mechanism and with the emerging jurisprudence under the GST law, have also found finality and subsequently, much needed stability for the trade. One of such troubling issue is transaction between Head Office (HO) and Branch Offices/units (BO) and the exercise of mechanism of Input Service Distributor (ISD) or Cross-charge, as the case may be. In absence of clarity on the related provision along with certain Advance Rulings across the country, the issue has been tangled in controversy resulted into huge amount of dispute and litigation in the trade. For the ease of understanding, it is necessary to look at the background of the doubt and controversy surrounding the issue.

Brief background

The doubts have been raised about the option of choosing ISD or cross-charge alternatively or is it mandatory to comply with both available provisions. There has been much debate on the legislative intent behind the provision of ISD and cross- charge. In terms of the substantive law, HO and BO of any entity having two separate registration to be considered as "district persons" and therefore, transaction between them is liable to GST. This deeming provision has created huge uproar across the trade with the issuance of Advance Ruling by AAR, Karnataka in the matter of Columbia Asia Hospitals Pvt. Ltd. [2018-VIL-30-AAAR]. In the above matter, question was raised that whether the activities performed by the employees at the HO in the course of employment for the BO/units located in the other states, shall be treated as supply of service. The AAR has held that when the services of employees are benefiting other distinct persons, one distinct person to another, will consider such services as a 'supply of service'. The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, the services of the employees at the HO as far as they are benefiting the other registered units are to be considered as a 'supply of service' and is liable to GST. It was also clarified that the matter is not related to distribution of ITC so; the applicability of ISD mechanism is not relevant for the impugned case. However, the difference between the ISD and cross-charge was explained as explained in the said ruling is extracted below;

"Therefore the ITC of the GST paid on the receipt of services or goods from a third party by the IMO can be availed by the IMO. If there are certain services commonly used by all the distinct persons, then the ITC can be distributed to all the units by the ISD route. There is a fundamental difference between the concept of ISD and that of cross charge. In the ISD concept, only ITC on input services which are attributable to other distinct entities are distributable. However, in a cross charge mechanism, all expenses incurred by a distinct person for the purpose of carrying out activities the outcome of which benefits other distinct persons is required to be cross charged. Cross charging of expenses may or may not involve ITC and relates to both goods as well as services."

Post-Columbia Asia position

Cloud of uncertainty loomed across the trade on the issue of overlapping provisions of cross-charge and ISD. The department issued many notices to the taxpayers for mandatory cross charging of expense incurred at HO in respect of the services attributable to BO. CBIC has not issued any clear guidelines and/or circular throwing lights on the deeming fiction of distinct persons and cross-charge of expenses between HO and BO. In the meantime, many advance rulings were issued on the subject issue and accordingly, it has been made clear that ISD mechanism is mandatory for distribution of ITC of input services. Moreover, confusion and disputes also continued regarding the method of valuation to be adopted on cross charging of expense. Generally, valuation of supply of goods or services is based on transaction value i.e. price actually paid or payable for such supply where supplier and recipient are not related. In terms of relevant Rules under GST, in case the recipient unit (BO) is eligible for full ITC, HO may adopt any amount as value on invoice to be raised on BO and such amount will be accepted as assessable value. However, the taxpayers are routinely put to test by rejecting the valuation by the officers equipped with incredible ignorance of law leading to unnecessary litigations.

In the matter of TATA SIA AIRLINES LIMITED [2021-VIL-49-AAR], Haryana AAR has re-affirmed the position that any supply of goods or services from the HO to BO would be covered in the scope of supply and trigger a levy of GST. Further, it was confirmed that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods.

"3.6 That on the basis of Section 25(5) of the CGST Act, the applicant opined that the HO and BO, being two separate GST registrations, qualify as distinct persons under the GST regime. Hence, basis entry 2 of Schedule I of the CGST Act, any supply of goods or services from the HO to BO would be covered in the scope of supply and trigger a levy of GST.

3.7 It is irrelevant to admit that the said charge towards maintenance of aircrafts from HO to BO is merely an internal MIS entry and should not be looked at as provision of services by HO to BO because they both have separate GST registrations and qualify as distinct persons under the GST regime."

From the aforesaid ruling, it is clear that the position taken by the department has been consistent on the issue of cross charge. However, certain rulings have also created confusion on the ground.

Recent development - Cummins India Ruling

In a recent development, the issue of interplay between cross-charge and ISD is again reignited by the Maharashtra AAR vide CUMMINS INDIA LIMITED [2022-VIL-03-AAAR] ruling dated 21.12.2021. In said ruling it was held that activities of providing facilitation services to their branch offices/units by way of availment of the common input services by the Appellant' Head office would be covered under services and will qualify as supply of services in accordance with the provision of Section 7(1)(a) of the CGST Act, 2017. The allocation of the cost of the employees' salary by the Head Office/Corporate Office to the branch offices would attract levy of GST. The confusion regarding the application of cross-charge or ISD in complying with the transaction between HO and BO reawaken though this ruling. The MAAR in the instant matter, has given elaborate findings on certain conspicuous issues that may push the taxpayers to re-look at their position on the issue of ISD and cross-charge. The position established through this ruling is summarized as under:

o The facilitation services to their branch offices/units by way of availment of the common input services by the Head office shall be chargeable to GST.

o The Head Office is not entitled to avail and utilize the credit of tax paid on the common input services received by it on behalf of the branch offices/units.

o It is imperative that Input Service Distributors, which intends to distribute the credit of the tax paid on the common input services received by it on behalf of its branches/units, has to mandatorily register itself as an ISD.

o Further, the allocation and recovery of any amount including its employees salary cost from the Branch Offices/Units will be subject to GST.

Way Forward

In view of the aforesaid discussion, taxpayers are still required to remain watchful in adopting the ISD mechanism or cross charging common expenditure or valuation to be adopted in case of distinct persons. The clarity on the said issue is still missing with respect to the intent of the Government on such provisions as explained above. Moreover, the tax authorities have little respect to the intent and purpose of any provisions resulted into generating unnecessary tax litigations across the country. Pursuant to the aforesaid ruling of Cummins India, the taxpayers are required to re-assess their position on the issue of cross-charging and/or ISD to safeguard their exposure in the coming days. Government should come up with necessary clarification in bringing clarity on the subject issues as discussed supra. Hope, CBIC would intervene on this very soon.

[Date: 31/01/2022]

(The views expressed in this article are strictly personal.)