Cummins India Ltd. {APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA} :
Date of Order : 21-12-2021
In the case of Cummins India Ltd. before the Maharashtra Appellate Authority for Advance Ruling (AAAR), several key GST issues related to the allocation of costs, facilitation services, input tax credit, registration requirements as an Input Service Distributor (ISD), and valuation of services provided by the head office to branch offices were addressed. Here’s a simplified explanation of the rulings and their implications:
- Allocation of Salary Costs:
- Issue: Whether the allocation of salary costs of employees by the head office to its branch offices attracts GST.
- Ruling: The AAAR held that the allocation of salary costs by the head office to its branch offices constitutes a supply under GST. The employees of the head office are engaged in activities benefiting the branch offices, even though they are under the direct employment of the head office. Therefore, any recovery of salary costs from the branch offices is subject to GST.
- Facilitation Services Provided by Head Office:
- Issue: Whether the facilitation services provided by the head office to its branch offices, including procurement of common input services, are considered as a supply attracting GST.
- Ruling: The AAAR ruled that facilitation services provided by the head office to its branch offices, such as procuring common input services from third-party vendors, constitute a taxable supply under GST. However, the cost incurred by the head office in procuring these services on behalf of its branches qualifies as services provided as a pure agent. Hence, this cost should be excluded from the value of supply for GST purposes.
- Input Tax Credit (ITC) on Common Input Services:
- Issue: Whether the head office can avail and utilize ITC on tax paid for common input services received on behalf of its branch offices.
- Ruling: The AAAR held that the common input services received by the head office are used or consumed by the branch offices in the course or furtherance of their business activities. Therefore, the head office is not entitled to avail and utilize ITC on tax paid for these common input services. The option available to pass on the credit of tax paid on common input services is through registration as an Input Service Distributor (ISD).
- Registration as an Input Service Distributor (ISD):
- Issue: Whether the head office is required to register as an ISD for distributing ITC on common input supplies.
- Ruling: The AAAR clarified that since the head office receives tax invoices for services on behalf of its branch offices and intends to distribute ITC on common input services, it must register as an ISD apart from its regular GST registration. This registration is necessary to pass on the credit of tax paid on common input services to the respective branch offices.
- Valuation of Cross-Charge Services:
- Issue: How should the value of services provided by the head office to its branch offices (cross-charge) be determined for GST purposes?
- Ruling: The AAAR determined that in the absence of open market value or a value for services of the same kind and quality, the value declared in the invoice by the head office for services provided to its branch offices shall be deemed as the open market value. This ensures that the branch offices can claim full ITC on the GST paid for the services received.
Implications:
- The rulings ensure clarity on the GST implications related to cost allocation, facilitation services, ITC utilization, ISD registration, and valuation of services between the head office and branch offices.
- They establish guidelines for businesses operating with centralized functions (head offices) and decentralized operations (branch offices) to comply with GST regulations effectively, particularly concerning cross-charging and ITC distribution.
Overall, the decisions by the Maharashtra AAAR in the case of Cummins India Ltd. provide comprehensive insights into the GST treatment of intra-organizational transactions and facilitate proper compliance for businesses operating under similar structures.
