Clarification regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons

Circular No.: 199/11/2023-GST
Date of Circular: 17th July 2023
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 25(4): Distinct persons
  • Section 31: Tax invoice
  • Section 20: Input Service Distributor (ISD)
  • Section 24(viii): Mandatory registration for ISD
  • Section 15(4): Value of supply
  • Section 16 & 17: Input Tax Credit
  • Section 168(1): Power to issue instructions
• CGST Rules, 2017:
  • Rule 28: Valuation between distinct persons
  • Rule 39: ISD mechanism

Summary of Clarifications Provided:

1. Use of ISD Mechanism for Distribution of ITC on Common Input Services:
   Head Office (HO) procuring common input services (e.g., security) for itself and branch offices (BOs) can distribute ITC:

• Either by using ISD mechanism under Section 20 and Rule 39 (in which case, ISD registration is mandatory),
• Or by issuing tax invoices under Section 31 to BOs for such services.
  It is not mandatory to follow the ISD mechanism under current law. Distribution (via ISD or tax invoice) must be limited to services actually attributable to the BOs.

2. Internally Generated Services – Tax Invoice Requirement and Valuation:
   Where HO provides services to BOs (internally), and full ITC is available to the BOs:

• HO may issue an invoice under Section 31; however, even if it does not, the value may be deemed as nil, and accepted as open market value under Rule 28’s second proviso.
• The value declared in the invoice, if issued, shall be deemed as open market value, regardless of whether it includes salary cost or other internal components.

3. Employee Cost Inclusion – Not Mandatory Even if Full ITC Not Available:
   Even where full ITC is not available to the BOs, the cost of salary of HO employees involved in providing such services need not be mandatorily included in the taxable value of the supply made by HO to BOs.

This circular provides much-needed relief and flexibility to corporate entities with multi-state operations by clarifying the optional nature of the ISD route and the valuation principles in intra-entity service transfers.

Source: Circular No.: 199/11/2023-GST