Demand Based on Cross-Charges Between HO and BO Set Aside Due to Department’s Failure to Apply CBIC Circular and Judicial Precedent

Demand Based on Cross-Charges Between HO and BO Set Aside Due to Department’s Failure to Apply CBIC Circular and Judicial Precedent

Issue:

Whether IGST is payable on services allegedly rendered by a Head Office (HO) to its Branch Offices (BOs) without any cross-charging, especially when the BOs are eligible for full Input Tax Credit (ITC), and whether a demand order that fails to consider a relevant CBIC Circular and judicial precedent is valid.

Facts:

An Order-in-Original dated January 31, 2025, was issued by the respondent-department, demanding Integrated Goods and Services Tax (IGST) from the petitioner-assessee. The demand was based on the premise that the assessee’s Head Office (HO) had rendered certain services to its Branch Offices (BOs) without any cross-charging. The petitioner challenged this demand via a writ petition, arguing that no IGST was payable in the absence of cross-charges, particularly since the BOs were eligible for full Input Tax Credit (ITC).

Decision:

The court held in favor of the assessee. It was noted that CBIC Circular No. 199/11/2023-GST dated July 17, 2023, clarified that where no invoice was issued and the recipient (BOs in this case) was eligible for full ITC, the value of the supply must be deemed as Nil under the second proviso to Rule 28 of the Central Goods and Services Tax Rules, 2017. Furthermore, the Circular stipulated that internal cost components, including the salary of HO employees, need not be included in the valuation if full ITC was available to the BOs. The court also cited the judgment in Metal One Corporation India Pvt. Ltd. v. Union of India, which held that when no invoice is issued and the value is deemed Nil, a GST demand is unsustainable.

The court observed that the respondent had failed to consider the aforesaid CBIC Circular and had not accounted for the absence of cross-charges among the entities. Accordingly, the impugned order was set aside, and the matter was remanded back to the respondent for reconsideration in light of the CBIC Circular and the Metal One Corporation judgment.

Key Takeaways:

• Deemed Value of Supply as Nil: For services provided by a Head Office to its Branch Offices (or vice versa), if no invoice is issued and the recipient branch/office is eligible for full Input Tax Credit (ITC), the value of such supply is to be deemed as Nil under the second proviso to Rule 28 of the CGST Rules.
• Exclusion of Internal Costs: Internal cost components, such as the salaries of Head Office employees, need not be included in the valuation of such services if the recipient branch/office is eligible for full ITC.
• Binding Nature of CBIC Circulars: The judgment underscores that CBIC Circulars provide clarity and guidance and are binding on tax authorities. Failure to follow such circulars can lead to the setting aside of demand orders.
• Importance of Judicial Precedent: The court’s reliance on the Metal One Corporation judgment highlights the significance of established judicial precedents in interpreting GST provisions, especially concerning valuation and deemed supplies.
• No Tax on Mere Internal Book Adjustments: The essence of the ruling is that where there is no actual revenue implication for the ultimate consumer (as the recipient can claim full ITC), the department should not levy GST on mere internal accounting adjustments between distinct entities of the same legal person.
• Remand for Reconsideration: When a demand order is passed without considering relevant circulars or judicial pronouncements, the usual remedy is to set aside the order and remand the matter for fresh adjudication after proper application of the law.