GST Circular. CBIC issues valuation norms for foreign company supplies to Indian subsidiaries

Foreign companies are relieved as the Central Board of Indirect Taxes & Customs (CBIC) has issued valuation norms for supply by these companies to their offices in India, who get full Input Tax Credit (ITC). This is one of 16 circulars issued by the board. In another circular, the board clarified that the year of issuance of invoices under the Reverse Charge Mechanism (RCM) will be the year for calculating the time limit to avail of ITC.

Relief to Foreign Companies

In a circular, CBIC clarified that in cases if a foreign company is providing certain services to its subsidiary here, which is eligible to get full input tax credit, the value of such supply of services declared in the invoice by the related domestic entity ‘may be deemed as open market value’. However, if the subsidiary does not issue an invoice for any service provided by the foreign affiliate, the value of such services may be declared as Nil and deemed as open market value.

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This mechanism is similar to domestic companies headquartered in one state and branches in another. Last year, the board said in respect of the supply of services by the Head Office (HO) to Branch Offices (BO) of an organisation, the value of the said supply of services declared in the invoice by HO shall be deemed to be the open market value of such services if the recipient BO is eligible for full input tax credit. If the invoice is not issued, the value will be Nil and may be deemed open market value.

According to Harsh Shah, Partner with Economic Laws Practice, this clarification would significantly reduce litigation as regards taxability and valuation of cross border inter-company transactions where full credit is eligible to the Indian entity. “This will put rest to stringent scrutiny of cross border inter-company transactions by the GST authorities during audits as long as the Indian entity is eligible for full credit,” he said.

Calculation of ITC time limit under RCM

A reverse charge mechanism is in place to facilitate truncation between registered and unregistered persons. The registered person is responsible for paying the GST and gets ITC. The time limit for availing of ITC is only up to September/November of the following financial year.. Now CBIC has clarified that the relevant financial year for calculation of time limit for availment of ITC will be the financial year in which the recipient has issued the invoice, subject to payment of taxes.... However, if the recipient issues the invoice after the time of supply and pays tax accordingly, he will be required to pay interest on such delayed tax payment. Also, there could be penal action against the supplier for delayed invoice issuance.

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According to Shah, a critical point of caution though is that the clarification would apply only in cases where the supplier is unregistered. “There can be several instances of tax payable under reverse charge where the supplier can very well be registered, and the clarification would not apply for the same,” he said.