CBIC Clarifies Valuation of Imported Services by Related Persons Eligible for Full Input Tax Credit
On June 26, 2024, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 210/4/2024-GST to provide clarity on the valuation of imported services by related persons where the recipient is eligible for full input tax credit (ITC). This clarification aims to address the concerns raised by trade and industry regarding the tax demands made under an expansive interpretation of Schedule I of the Central Goods and Services Tax Act, 2017 (CGST Act).
Background
According to S.No. 4 of Schedule I of the CGST Act, the import of services by a person from a related person or from any of their other establishments outside India is considered a supply even if it is made without consideration. This provision has led to some field formations raising tax demands on registered persons for activities undertaken by their related persons based outside India. These demands were made under the reverse charge mechanism, considering these activities as imports of services, despite the lack of consideration and the fact that such activities are not treated as supplies by the related persons in India.
Key Clarifications
To ensure uniformity in the implementation of the provisions of law, the CBIC provided the following clarifications:
1. Rule 28 of CGST Rules
The circular reiterates Rule 28 of the CGST Rules, 2017, which deals with the valuation of supply of goods or services between distinct or related persons, other than through an agent. The rule specifies that the value of such supply shall be:
- The open market value of the supply;
- If the open market value is not available, the value of goods or services of like kind and quality;
- If the value is not determinable under the above clauses, the value as determined by the application of Rule 30 or Rule 31, in that order.
2. Applicability of Second Proviso to Rule 28(1)
The second proviso to Rule 28(1) states that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of the goods or services. This provision is applicable in all cases involving supply between distinct or related persons where the recipient can claim full ITC.
3. Circular No. 199/11/2023-GST
The circular references Circular No. 199/11/2023-GST dated July 17, 2023, which clarified the taxability of services provided by an office of an organization in one State to an office in another State. It stated that the value declared in the invoice by the Head Office (HO) shall be deemed the open market value if the recipient Branch Office (BO) is eligible for full ITC. In cases where no tax invoice is issued, the value may be deemed as nil.
4. Application to Imported Services
The CBIC clarifies that the principles outlined in Circular No. 199/11/2023-GST are equally applicable to the import of services between related persons. In cases where a registered person in India imports services from a related person located outside India, the tax must be paid under the reverse charge mechanism. The registered person in India must issue a self-invoice under Section 31(3)(f) of the CGST Act and pay the tax accordingly.
Practical Implications
For businesses importing services from related persons, this circular provides much-needed clarity and simplifies compliance. Key takeaways include:
- The value declared in the invoice by the related domestic entity is deemed to be the open market value if full ITC is available.
- If no invoice is issued for the services provided by the foreign affiliate, the value of such services may be deemed as nil and considered the open market value.
- This ensures that businesses do not face undue tax demands for imported services where no consideration is involved, provided they are eligible for full ITC.
Conclusion
The CBIC’s clarification is a welcome move to resolve ambiguities surrounding the valuation of imported services between related persons. By aligning the treatment of these transactions with domestic transactions between related parties, the circular promotes consistency and fairness in GST compliance.
For further details, businesses are encouraged to refer to Circular No. 210/4/2024-GST and the related provisions of the CGST Act and Rules. Any difficulties in the implementation of these instructions should be reported to the CBIC.
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