Authority for Advance Ruling (AAR Tamilnadu) pronounced in case of M/s. Sanghvi Movers Ltd. that full ITC cannot be availed by registered branch office for the services procured from HO where payments are netted off against the receivables and full payment is not made.
Facts of the Case:M/s. Sanghvi Movers Ltd. (SML) registered in the state of Tamilnadu (hereinafter referred as “the Applicant”) is a branch office of M/s. Sanghvi Movers Ltd., registered in the state of Maharashtra (hereinafter referred as “HO”). SML is engaged in the business of providing medium-sized heavy-duty cranes on rental/lease/hire basis to the clients without transferring the right to use the cranes. SML have pan-India presence and cranes are deployed across India as per the requirements of customers. As the movement of cranes involves significant time and cost, SML has set up various branches (“SML branch offices”) across India at strategic locations including Tamil Nadu, to minimize transportation time and costs. Under GST, SML has obtained registration for 10 locations across India, including its head office (“SML Maharashtra”) located in Pune, Maharashtra and branch office (“SML Tamil Nadu”) located in Chennai, Tamil Nadu. SML branch offices receive enquiries from various customers for supply of cranes on hire charges. SML branch offices negotiate with customers and receive final work orders from customers. The title and ownership of all the different types of cranes along with their components vest with SML Maharashtra. Therefore, on receipt of the final work order, all the SML branch offices in turn raise internal work orders on SML, Maharashtra to provide requisite cranes on hire charges along with appropriate support and assistance to various customers across India.
In order to comply with the provisions of GST law and ensure operational feasibility, SML Maharashtra has entered into a formal service arrangement with all SML branch offices (including SML TamilNadu) by entering into a Memorandum of Understanding (MoU), wherein SML Maharashtra has agreed to provide cranes and crane components to all SML branch offices on hire charges. As part of the service arrangement, whenever the applicant receives a final work order from its customers for providing cranes on hire charges, they will in turn raise an internal work order on SML Maharashtra for providing the required cranes on hire charges. Further, an invoice from SML Maharashtra is issued to the applicant and the value considered for levying GST is approximately 95% of the value charged to the customer by the applicant. The applicant makes payment to HO against the invoice raised by HO after netting off the amount payable against the amount receivables from the customers and avails full input tax credit of the invoice raised by HO.
The applicant claimed that he is eligible to claim full ITC on the invoice raised by HO since he is complying with all the conditions pre-requisite for claiming ITC. Further the applicant claimed that as the said transaction is taking place between distinct persons as defined under Section 25(4) of the CGST Act and is treated as supply, as per Schedule I of CGST Act: as per the proviso to Rule 37 of the CGST rules, the condition to make actual payment to supplier within 180 days is not applicable to the applicant and they are entitled to avail credit of the IGST charged by SML Maharashtra by making deemed payment by netting off receivable and payable in book of accounts. In the light of the above facts, the applicant has sought the authority for advance ruling to determine the admissibility of ITC of the IGST paid by SML Maharashtra in the hands of the applicant.
Ruling:As per facts of the case the applicant is a branch office of SML HO. Under GST, the applicant and SML being distinct entity has obtained registrations separately u/s. 25(4) of CGST Act, 2017. Accordingly SML HO and Branch are distinct persons under GST. It is seen that though SML HO invoices to SML at 90% of the underlying billing by SML to its customers, the full amount is not being paid. As per the MOU, the same is being netted off against the receivable by SML for the upkeepment charges that SML HO has to pay to the applicant as per the MOU.
As per proviso to Section 16(2), the applicant will not be eligible for full input tax credit as they are not paying the full amount to their supplier SML HO as seen in the MOU where payments are netted off against receivables. The applicant in his application has stated that as per proviso to Rule 37, the condition to make actual payment to supplier within 180 days is not applicable to the applicant. However, the proviso clearly states that, the value of supplies “made without consideration” as specified in Schedule I shall be deemed to have been paid as per second proviso to Section 16(2).
In the instant case, there is a consideration to be paid by SML to SML HO as per MOU and the consideration is specified in the invoices raised by SML HO to the applicant. Hence, proviso to Rule 37 i.e. exemption from making full payment, will not be applicable to the applicant. Accordingly, AAR ruled that the applicant will not be eligible for the full ITC as per the inward supplies received from SML HO as they would be required to reverse such ITC if taken as per second proviso Section 16(2) of CGST Act and Rule 37 of CGST Rules.
Comments: Even though ruling of AAR is applicable only to the tax payer who sought the views of AAR, the views expressed in ruling of Tamilnadu AAR can be applied by tax authorities in other cases and accordingly ITC can be denied wherever receivables are netted off in books against amount payable. In view of author, the judgment is not logical and ignores practical aspects of doing business considering that HO and Branch are one company registered under same PAN and merely rotating fund against the invoice raised internally will result into unnecessary movement of fund and thereby blockage of working capital. The judgment is silent on admissibility of full ITC in the hands of recipient of supplies where supplies between related parties is made without consideration (i.e. without assigning monetary value to the transaction) and in such case deemed value is considered as value of supplies as per proviso to rule 28 of CGST Rules, 2017 (i.e. value of supply is deemed as 90% of the of the price charged for the supply of goods of like kind and quality). There could be many litigations on this point in coming days.
Even though ruling of AAR is applicable only to the tax payer who sought the views of AAR, the views expressed in ruling of Tamilnadu AAR can be applied by tax authorities in other cases and accordingly ITC can be denied wherever receivables are netted off in books against amount payable. In view of author, the judgment is not logical and ignores practical aspects of doing business considering that HO and Branch are one company registered under same PAN and merely rotating fund against the invoice raised internally will result into unnecessary movement of fund and thereby blockage of working capital. The judgment is silent on admissibility of full ITC in the hands of recipient of supplies where supplies between related parties is made without consideration (i.e. without assigning monetary value to the transaction) and in such case deemed value is considered as value of supplies as per proviso to rule 28 of CGST Rules, 2017 (i.e. value of supply is deemed as 90% of the of the price charged for the supply of goods of like kind and quality). There could be many litigations on this point in coming days.
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