1. A Show Cause Notice bearing reference no. XXXXXXXX dated XX September 2023 (“SCN dated XX September 20XX”) was issued to the Noticee by the Ld. Sales Tax Officer Class XXXXXX (“Ld. Proper Officer”) proposing GST demand of Rs. XXXX/- (CGST and SGST each) along with interest amounting to Rs. XXXX/- (CGST and SGST each) under section 50 of the CGST Act,2017 (“the Act”) and penalty as applicable under Section 73 of the Act. on the sole allegation that salary cost included in the valuation in case of internally generated services provided by BOs to HOs.

Period	Amount of Salaries (including incentive)*	Salary considered for cross charge @40%	Amount of GST @18%
20XX-XX	XXXX	XXXX	XXXX
20XX-XX	XXXX	XXXX	XXXX

*Salaries of those employees are considered which directly or indirectly work for branches.

2. In response to the allegation as set out in the SCN dated XX September 20XX, A detailed reply to the allegations made in the said SCN dated XX September 20XX is produced in the following paragraphs

NOTICEE’S SUBMISSIONS

At the outset, the Noticee denies all the allegations made in the impugned SCN and regards them as incorrect and unsustainable on the basis of following submissions which are independent and without prejudice to each other.

1. From comprehensive reading of statutory provisions of relevant Acts any supply of service between two registrations of the same person in the same State or in different States attract the provision of Section 25 (4) and Section 7 read with Schedule I (2) and Section 15.

Section 15(4) of the Central Goods and Service Act 2017 read with Rule 28 of the Central Goods and Service Act, 2017, deals with the valuation of ‘Cross Charge’.

Accordingly, the value of supply of goods/services between the distinct person shall be –

• • The open market value of such supply;
  • Value of supply of goods or Services of similar kind of quality (if the open market value of such supply is not available)
  • Value determined by application of Rule 30 or Rule 31 (if the value cannot determined as per any of the above options) i.e. –
  • 110% of the cost of acquisition of such goods or cost of provision of such services (Rule 30 of the Central Goods and Services Tax Rules, 2017)

Provided that where the 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.

2. From the above mentioned provisions, it is clear that in case of supply between distinct persons the value of supply will be the open market value of such supply, where the open market value is not available the value of such supply shall be value of goods or services of like kind and quality and f by both the ways the value is not determinable it shall be determined by the application pf Rule 30 or Rule 31, in that order.

3. It has been further mentioned that in case where the recipient distinct person 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.

4. Legal Contentions on Cross Charge in GST

Columbia Asia Hospitals Private Limited cited in 2018 Taxo.online 601 held that employees working at corporate office of the applicant are employees only for the corporate office and have no such relationship with the other entities which are registered as separate entity under the GST. Further, it was held that the services rendered by employees of one registration benefitting other registrations of the entity shall be treated as supply as per Section 7 of the CGST Act, 2017, hence the same shall be liable to cross charge.

Cummins India Limited cited in 2021 Taxo.online 1355 held that in the event of employees of head office working for branch office on behest of head office, the service is not between employer and employee but between the head office and branch office which are distinct units as per Section 25(4) of the CGST Act, 2017 and the same shall be taxable in terms of Section 7 of the  CGST Act, 2017

Though, the Advance Rulings pronounced by the Ld. AAAR clarified the position to some extent, however, this has been a point of discussion in the GST department as well and no clear clarification has been received in this regard from the Central Board of Indirect taxes

5. Finally the CBIC has come up with the circular for clarification vide circular no. 199/11/2023-GST dated 17^th July 2023 regarding taxability of services provided by an office of an organisation in one state to the office of that organisation in another State, both being distinct person in terms of sub-section (4) of Section 25 of the CGST Act and the extract of same are clarified below:

Issue– With respect to ‘internally generated service’ (Eg. Employee service) of HO, where full ITC is available to BO-does HO need to issue Tax invoice u/s 31 for full /part cost?

Clarification

• • No cross Charge is mandatory in these cases.
  • If HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to Rule 28 of CGST Rules.
  • With respect to supply of services by HO to BOs, the value of the said supply of services declared in the invoice by HO shall be deemed to be open market value of such services, if the recipient BO is eligible for full input tax credit

Conclusion

6. In light of the above submissions and judgments, it is humbly prayed that as per circular No. 199/11/2023-GST dated 17^th July 2023 unequivocally states that salary costs need not be included in the valuation when Noticee is internally generated services provided by the Ros to the HO. Hence, expenses related to these incomes may not include the cost of employees for the purpose of cross charge.