Recently the issue of pre-show cause notice to Infosys for non-payment of IGST amounting to over ₹32,000 crores on import of services from their overseas branch offices (related person) came under widespread criticism, so much so that a former CFO of the company termed it as a case of tax terrorism.
The industry association of information technology companies, NASSCOM, came out in support of Infosys and wrote to the Ministry of Finance to seek clarification on the issue as the industry thinks that in view of CBIC Circular No. 210/4/2024-GST dated July 26, 2024, they were not liable to pay IGST on such imports as full ITC was available to the importing recipient.
Close on the heels came another shocker, this time to the aviation and shipping sectors when there was a reported move by the Directorate General of GST Intelligence (DGGI) to issue demand notices to foreign airlines on the import of services from their foreign branches or head offices.
Valuation of Related Party Transactions
The valuation of transactions between related entities viz branches, subsidiary companies, holding companies etc has always been a contentious issue under the direct tax as well as indirect taxes as this can be easily used to evade or shift tax. The guiding principle is to arrive at the “arm’s length” transaction value i.e. the valuation of transaction between related parties should be worked out to approximate to value of such transaction as if they were unrelated parties. There were elaborate legal provisions for arriving at such valuation under the erstwhile Central Excise and Service Tax laws, and now under GST regime.
Under the Service Tax law as well as GST regime the import of services is leviable to tax but the importer has been made liable to pay it under the Reverse Charge Mechanism or RCM. Since the Input Tax Credit or ITC is available in respect of the IGST so paid under RCM it becomes revenue neutral, pay tax and claim credit for the same amount.
There is a large number of orders of the Customs, Excise & Sales Tax Appellate Tribunal (CESTAT) and High Courts holding divergent views on the issue of sustainability of demand in such cases where the recipient is eligible for full Credit. In a good number of cases it has been held that when the tax paid by the supplier is available as credit to the recipient, allegation of wilful evasion of tax cannot be sustained, but there are also judgements holding that revenue neutrality cannot be a ground for not demanding tax as the two aspects are independent of each other and need to be examined accordingly.
Revenue Neutrality
In a recent order in the matter of BCCI Vs Commissioner, the Hon’ble Tribunal even observed that if the argument of revenue neutrality is accepted, then the entire scheme of payment under Reverse Charge Mechanism would become otiose. However under the old tax regime there was no direct clarification that any value declared for such transaction should be accepted if full credit is available to the recipient.
In fact every time the enforcement agencies can’t be faulted as the obligation of the supplier to pay GST and the right of the recipient to avail its credit are not one and the same thing, as the availability of ITC is conditional on so many factors viz. (i) ITC is available only if the inwards supplies are used for effecting taxable outward supplies and it is availed within the prescribed time period; (ii) the GST should not have been paid as a result of demand involving fraud or intentional evasion; (iii) the ITC is not at all available in respect of supplies of certain specified goods or services.
Fortunately under the GST regime there has been a paradigm shift in the attitude of the tax administrations, and the GST Council has been taking so many bold and trade friendly decisions to clarify many nagging issues which perhaps the administrative department would have rather left to the judiciary to settle, a few of such recent examples being valuation of inter-corporate or Director’s personal guarantee; related party transactions; acceptance of CA certificate as evidence of reversal of ITC; classification of many services, among others.
Rule 28 of the CGST Rules which deals with the valuation of supplies of goods or services between distinct or related persons already provides under second proviso that where recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services. Further the Circular No. 199/11/2023-GST dated July 17, 2023, clarified that valuation of supplies of services between related or distinct persons viz Head Office and Branch offices as declared in the invoice shall be deemed to be open market value and even in those cases where the HO has not issued any invoice to the Branch Office it shall be deemed to be nil and thus open market value, if the recipient Office is eligible for full ITC.
Subsequently the Circular No. 210/4/2024-GST dated 26th July, 2024 further extended this benefit in respect of import of services by Indian entities who import services from the overseas related person viz. Head office, Branch office etc. and are required to pay IGST under RCM and issue self invoice.
Referring to the Circular No. 199/2023 this Circular also provides that the value declared in the invoice shall be deemed to be open market value and even if no self invoice is issued by the importing entity it shall be deemed to be nil and thus open market value, with the same condition that the recipient importer is eligible for full ITC.
Beneficial Treatment
This Clarification is definitely going to benefit and ease the compliance burden of taxpayers and regularise cases where no invoice was issued for the supplies, particularly in IT, aviation and shipping sectors where supplies of services between overseas head offices/branch offices and Indian head offices/branch offices is common.
However, this liberal interpretation may not always prove as simple and hassle free as it appears as the condition that the related recipient person should be eligible for full ITC itself is very tricky. Even if a part of the services is utilised for providing exempted or nil rated supplies, the benefit conferred by the clarification would not be available. In certain sectors there is a practice that the import of services is not directly from the overseas head office or branch office but from a third party or agent on behalf of the overseas entities, in which scenario also the Circular may not apply.
There would also be apprehension of audit or intelligence wing subsequently scrutinising the record and pointing out that all the conditions of Rule 28 and the Circulars were not met. Therefore, the taxpayers availing of this benefit would do well to doubly ensure that they fulfil all the requisite conditions so subsequently there is no objection by the jurisdictional, audit or investigating authorities.
There is also imminent possibility of other sectors demanding such beneficial treatment in all cases where the recipient is eligible for full ITC even if the two parties are not related. Moreover the adjudicating and appellate authorities would be liberally extending the benefit in cases involving under or over valuation of supplies where ITC is available to the recipient.
Source: CNBC TV18
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