Branch entitled to avail full ITC of tax paid by Head office

Branch entitled to avail full ITC of tax paid by Head office

TAMILNADU STATE APPELLATE AUTHORITY FOR ADVANCE RULING

The Full Text of Judgement/Order as follows :

At the outset, we would like to make it clear that the  provisions  of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference  to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

The subject appeal has been filed under Section 100(1) of the Tamilnadu Goods & Services Tax Act 2017 / Central       Goods & Services Tax Act 2017 (hereinafter referred to ‘the Act’) by M/s. Sanghvi Movers Limited (hereinafter referred to as ‘Sanghvi’ or ‘Appellant’). The appellant is registered under GST vide GSTIN 33AACCS3775K1Z4. The appeal is filed against the Order No.26/AAR/2019 passed by the Tamilnadu State Authority for Advance ruling on the application for advance ruling filed by the appellant.

2. Sanghvi Movers Limited (“SML”) is a public limited company incorporated in the year 1989 under the provisions of the  Companies Act, 1956. SML is engaged in the business of providing medium-sized heavy-duty cranes on rental/ lease/ hire basis to its clients without transferring the right to use the cranes. SML has pan-India presence and cranes are deployed across  India as per the requirements of customers. SML has a large fleet of more than 400 cranes ranging from 40 MT to 800 MT lifting capacity. The cost of these cranes is significantly high and their average economic life ranges from 25 to 35 years. These cranes are moved/ transported on trailers, from one location to another, in knock down condition. 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 (the appellant/sanghvi). At present, 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.

2.1 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 appellant 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. On receipt of internal work order from the appellant,  SML Maharashtra  transports the crane and its components to the customer’s location /project location on the instructions of the appellant. For each type of crane given on hire charges, the crane operator maintains a separate monthly log sheet at the customer/project location, wherein daily and hourly details of crane usage and idle time are maintained, based on which the monthly  service invoice is  raised  by the appellant on  respective  customers.  Further, an invoice from SML Maharashtra is issued to the appellant and the value considered for levying GST is approximately 95% of the value charged to the customer by the appellant.

2.2 SML Maharashtra discharges IGST on the value of hire charges recovered from the appellant treating the same as inter-state supply of Consequently, the recipient i.e. the appellant avails credit of IGST charged/paid by SML Maharashtra on the value of hire charges charged on the invoice. The appellant sought the authority for advance ruling to determine the admissibility of ITC of the IGST paid by SML Maharashtra in the hands of the appellant.

3. The Original Authorities has ruled as follows:

On the supplies received from M/s Sanghvi Movers Ltd., Maharashtra, the applicant  M/s  Sanghvi  Movers  Ltd.,  Tamil  Nadu,  is  not  eligible  for the full Input Tax Credit but only to the extent specified in the restrictions  as  per  second proviso Section 16(2) of CGST Act and Rule 37 of CGST Rules read with Section 20(iv) of IGST Act, subject to fulfillment of all other conditions under section 16 of CGST Act, read with Section 20(iv) of IGST Act.

4. Aggrieved by the above decision, the Appellant has filed the present The grounds of appeal are as follows:

4.1. In case of supply of cranes, crane components and trailers on lease/hire charges by SML Head Office in Maharashtra to SML Depot in Tamil Nadu the same constitute a supply of service between two distinct entities as per provision of GST law. In order to regulate these transactions and follow a consistent practice in line with the provisions of GST laws, MOU is entered.

4.2. The impugned order has not read the MOU as a Whole. Instead a few clauses such as Para 6 and 10 in the MOU  have been read without collectively considering the intention of the MOU. The contention placed by the Authority that consideration has been agreed in the MOU has not considered the fact that consideration has been agreed in the  first place only for the purposes of compliance with the valuation provisions under GST law. The transaction in its commercial sense is still without any consideration, as is the case in the case of branch transfers, as an entity the   commercial contractual arrangement is always vis-a-vis customers.

The Authority has erred in concluding that consideration is agreed in the MOU only because the following sentence has been used in Para 10 of the MOU:

….At the time of raising internal work order on SML HO by SML Depot lease/ hire charges for the Cranes, Cranes components, parts and Trailer’ will be charged at rate as per the rates agreed in a respective work order and up-keepment charges will be as per and specified in Schedule I enclosed hereunder. “

4.3. The above clause in Para 10 when read with the preamble, clearly indicates that the consideration specified in the MOU is only for the purposes of compliance with valuation provisions under GST law. Such consideration does not have any sort of commercial substance.

4.4. Being a legal entity, accounting of revenue and flow of money is only when the transaction is with customer, inter-branch transactions are not considered to be revenue generating transactions. Since GST law requires the tax payers to undertake GST compliances and discharge GST liability, it is necessary to assign a value for such inter-branch transactions.

4.5. The objective of preparing MOU is to ensure business operation feasibility and compliance with provision under GST law. The need to enter into an MOU arose only on account of Schedule I of CGST Act, wherein transactions between distinct persons even if made without consideration have been subjected to GST. Therefore, the Appellant is of the view that it would be incorrect to draw a conclusion by isolating a few clauses in the MOU. The MOU should be read as a whole, collectively taking into consideration the intention of the MOU.

4.6. As the movement of crane from SML Maharashtra to SML Tamil Nadu would be taxable supply, SML Tamil Nadu would be entitled to avail ITC of IGST charged by SML Maharashtra if all the conditions of Section 16(2) of CGST Act are fulfilled which are stated below:

a. SML Tamil Nadu receives tax invoice from SML Maharashtra on monthly basis;

b. SML Tamil Nadu actually receives service from SML Maharashtra, because only on receiving the cranes on hire charges from SML Maharashtra, can SML Tamil Nadu further sub-lease the cranes to their ultimate customers;

c. IGST charged by SML Maharashtra is paid into the Government treasury of Tamil Nadu; and

d. Regular GST returns as applicable are furnished by SML Maharashtra and SML Tamil Nadu.

4.7. In order to verify whether aforesaid conditions arc fulfilled, SML Tamil Nadu submitted the documents vide email dated 5 June, 2019 before the Authority for Advance Ruling. In the order passed by the Authority for Advance  Ruling at Paras  4.1, 4.2 &  6.3, it is very clearly stated that documents received from SML Tamil Nadu are verified and no issues were raised. Consideration mentioned in the MOU/tax invoice is only for the purposes of complying with GST prov1s10ns. The Authority for Advance Ruling, in its order denied ITC of IGST because full payment of consideration is not made by SML Tamil Nadu to SML Maharashtra, by invoking the second proviso to Section 16(2) of CGST Act.

4.8. The Authority for Advance Ruling in its order also stated that proviso to Rule 37 of CGST Rules, 2017 will not be applicable to SML Tamil Nadu as transaction between SML Maharashtra and SML Tamil Nadu is not made without consideration. As discussed above, the Authority has erred in concluding  that in the instant case, there is a consideration  to be paid by SML ‘Tamil Nadu to SML Maharashtra (evidenced by the MOU) and the consideration is specified in the invoices raised by SML Maharashtra on the Appellant.

4.9. As per Schedule I of CGST Act, any activities or transactions between distinct person (i.e. SML Maharashtra and  SML Tamil Nadu in this case) will be deemed to be supply, even if made without consideration. The present transaction clearly falls within the ambit of Schedule I of  the CGST Act wherein SML Maharashtra supplies services to SML Tamil Nadu without any commercial consideration. Further, for the purpose of GST compliance and  discharging GST, the MOU provides the mechanism to determine the value.

4.10. In terms of Section 31(2) of the COST Act, it is mandatory for a registered person supplying taxable services to issue a tax invoice, showing the description, value and x charged thereon. Therefore, in the instant case, since SML Maharashtra is supplying taxable services to SML Tamil Nadu in terms of Schedule I of the COST Act, it is\ mandatory for SML Maharashtra to issue a tax invoice showing the value and tax charged thereon.  If the      interpretation adopted by the Authority were to be adopted, it would lead to absurd situations wherein distinct persons i.e. every branch office of a legal entity would be forced to  open  separate  bank accounts and undertake thousands  of  bank  payment  transactions with other distinct persons (branch offices) of the same entity,  only  in order to avail ITC. It would completely defeat the purpose of introducing the proviso to Rule 37 of the CGST Rules, 2017.

4.11. The Authority for Advance Ruling has erred in concluding that payment needs to be made even for supplies made between distinct persons, only because consideration is specified in the MOU/tax invoice. SML Tamil Nadu has been led to specify the consideration in the MOU/tax invoice and discharge applicable GST, only on account of Schedule I read with Section 31(2) of the CGST Act. If such an extreme view is taken, major FMCO companies with multi-State operations would be greatly burdened with denial of ITC and unwarranted compliances. The legislative intention behind creating the deeming fiction in the proviso to Rule 37 of the COST Rules, 2017, should also be taken into consideration. If the deeming fiction is watered-down to only apply to transactions between distinct persons where no consideration has been specified on the tax invoice (which would be a non-compliance with Section 31(2) of the COST Act by itself ), it would effectively make the proviso redundant.

4.12. The recent appellate advance ruling pronounced by this authority in the case of M/s. MRF Limited is referred to state that the second proviso to Section 16(2) of the CGST Act is merely an anti-evasion measure introduced in the law and the legislative intention behind introducing the same, is to ensure that suppliers especially from MSME sector are paid promptly. It is not the intention of the legislator to apply this proviso to transactions between inter-offices as distinct persons. Therefore, transactions between inter-offices as distinct persons cannot be subjected to this proviso. In case of transactions between inter-offices as distinct persons there is no revenue loss to the Government as long as the necessary compliances as per Section 16(2) of CGST Act (other than making payment within 180 days), are made. Therefore, it would be incorrect to deny the admissibility of ITC in the present case when all necessary conditions of Section 16(2) of CGST Act have been satisfied.

4.13. The order has erred in concluding that the up-keepment charges receivable by SML Tamil Nadu are being netted off against the lease/hire charges payable by SML Tamil Nadu and hence full consideration is not being paid. It is clearly mentioned in clause 10 of MOU that “lease/hire” charges payable by SML Tamil Nadu to SML Maharashtra shall be settled by netting off the lease/hire charges receivable by SML Maharashtra with the lease/hire charges payable by SML Tamil Nadu, in the books of accounts of SML as a whole. The Authority has erred by concluding that the up-keepment charges receivable by SML, Tamil Nadu are being netted off against the lease/hire charges payable by SML Tamil Nadu. The up­ keepment charges and the lease/hire charges are two separate charges which are not netted off against one another. Rather the up-keepment charges  payable   my  SML  Maharashtra  are  netted off against the up­- keepment charges receivable  by SML Tamil Nadu and  the  lease/hire charges payable by SML Tamil Nadu are netted off against the lease/hire charges receivable by SML Maharashtra, by way of book adjustments at an entity level.

4.14. Based on accounting principles, the receivable and payable have to be considered at an entity level and not at a GST registration level, as such book adjustments of netting off are made at an entity level in the books of accounts i.e. the receivable of SML Maharashtra is netted off against the payable of SML Tamil Nadu in the books of accounts of SML. Further, while preparing financial statements, transactions between SML, Maharashtra and SML Tamil Nadu are netted off in books of account and these transactions do not form part of revenue or expenses/purchases disclosed in financial statements.

4.15. Further, without prejudice to the above submissions, even if one were to agree with the interpretation of the Authority for Advance Ruling wherein the up-keepment charges receivable by SML Tamil Nadu are netted off against the lease/hire charges payable by SML Tamil Nadu in terms of Para 10 of the MOU and accordingly full payment is not being made by SML Tamil Nadu (since the value of up-keepment charges is  significantly  lower than the lease /hire charges), the proviso to Section 16(2) of the CGST Act read with Rule 37 of the CGST Rules, applies only to cases of failure to pay the value and tax to the supplier and not cases where value paid to the supplier is reduced as a  result of mutual settlement between the supplier and the recipient. The reduced payment in the case on hand would not be as a result of failure on the part of recipient to pay value and tax to  the supplier, it would rather be as result of the reduced mutual settlement agreed between SML Tamil Nadu and SML Maharashtra by way of the MOC. Hence, when there is no failure on their part to pay the value, this proviso cannot be invoked to deny the credit.

4.16. A reading of the proviso to Section 16(2) of the CGST Act, also indicates that the requirement is to pay to the supplier of goods or services, the amount towards the value of supply along with tax payable thereon within  180 days. The proviso does not specify that entire value of supply has to be paid. The words ‘amount towards the value of supply’, implies only the amount as agreed between the supplier and the recipient which need not be the entire value of supply. As per the mutual agreement, if such value of supply is reduced, even such reduced payment fulfils the requirement, “amount towards the value of supply”. Hence, the payment in the present case (assumed to be netting off the up-keepment charges receivable by SML Tamil Nadu against the lease/hire charges payable by SML Tamil Nadu) has to be construed as in full compliance with the proviso to Section 16(2) of the CGST Act. Accordingly, the input tax credit cannot be denied.

It was Ruled Out that:

The appellant is eligible to avail full Input tax credit of tax paid by SML HO on the lease/hire of cranes to them for furtherance of business,  subject  to other conditions of eligibility to such credit as per Section 16 of CGST/TNGST Act 2017

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Tags : Judgement, GST, Advance Ruling

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