Branch office is entitled to avail full input tax credit where payments to Head office are made by netted off against receivables.

Facts: The Appellant M/s Sanghvi Movers Ltd., Tamil Nadu (SML TN) is a branch office of M/s. Sanghvi Movers Ltd. Pune, Maharashtra (SML HO), which is engaged in the business of providing medium-sized heavy-duty cranes on rental/lease/hire basis to clients without transferring the right to use the cranes. SML HO has pan-India presence and cranes are deployed across India as per the requirements of the customer

The Appellant entered into a Memorandum of Understanding (MoU) with SML HO for ‘Crane & Trailer Supplies’ to SML TN (i.e. the appellant) Depot at TN Chennai, from where the appellant would further sub-lease such cranes to final customers. SML HO agrees to provide cranes, cranes components, parts & trailer on monthly rental basis to SML TN. The ownership rests with SML HO. The payments are however made by the SML TN to SML HO on netting off basis i.e. adjustment of receivable and payable in book of accounts are made and net amount is payable.

The SML HO discharges IGST on the value of hire charges recovered from the appellant treating the same as inter-state supply of service. 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.

AAR Rulings: The Authority of Advance Rulings, Maharashtra in Order No. 26/AAR/2019 dated June 21, 2019 observed as under:

• As per MoU lease /hire charges payable by SML TN to SML HO is netted off in books of accounts and is considered as deemed payment.
• As per proviso to Section 16(2), the appellant will not be eligible for full ITC, as they are not paying the full amount to their supplier SML HO, rather net amount is being paid.
• Therefore, held that the supplies received from SML HO, Maharashtra, the appellant 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.

Appellant's contention: Being aggrieved the appellant submitted as under-

• the MOU between the distinct persons was necessitated to adhere the provisions of GST.
• The supply between the SML HO and the appellant is taxable as per the deeming provision of Section 7 of the Act read with Schedule i of the Act and therefore the proviso to Rule 37 which provides for full ITC is applicable to their case.
• The consideration on the tax invoice raised by SML HO on the appellant is approximately 95% of the price charged on the ultimate customer by the appellant. SML HO pays IGST on the value. The receipts and payables are calculated on an entity level and the receivables/ payables between the distinct persons are set off as brought out in the tax invoice raised by the SML HO and Clause 10 of the MOU and setting off of receivables against payables are recognized in the accounting standards.
• Further, the ultimate customer is directed to make payment in the Bank Account of HO and therefore the entire consideration of value raised by the SML HO on the appellant stands paid.
• Therefore, they are eligible to claim the entire ITC of the GST paid by SML HO. 

Observations of AAAR: The observations are under:

• Supply of goods or services to the distinct persons in the course or furtherance of business, even without consideration are taxable supply;
• A registered person shall be entitled to take credit of input tax charged on any supply to him which are used in the course or furtherance of business if he is in possession of a tax invoice, received the goods or services and the tax charged is paid to the Government and the returns are furnished;
• When the recipient fails to pay the supplier the amount towards the value of supply along with tax payable within a period of one hundred and eighty days from the date of issue of invoice, the proportionate credit availed is to be added to his output liability;
• The value of supplies made without consideration as specified in Schedule I of the Act is deemed to have been paid for the purposes of availment of ITC.

Further, the appellant has represented that the receipts and payables are accounted at the entity level only. The HO being distinct person in the eyes of law and the transaction is in the course of furtherance of business, the supply is taxable supply for which SML HO has adopted a value agreed under the ‘Pricing' clause of the MoU and paid the tax on the value declared in the Invoice. The proviso to rule 37, provides for deemed payment of value in such transactions. Even considering that the said proviso does not have application in the case at hand as there is a value stated in the Tax Invoice as held by the Lower Authority.

Ruling of AAAR: The AAAR Tamil Nadu held there is no reason to restrict the Input Tax Credit of the tax paid by the SML HO, in the hands of the appellant as it has been substantially brought out that the ‘consideration' stands paid to the SML HO either by the customer of the Appellant or by setting off against the payables of the appellant to SML HO, in respect of lease/hire of Cranes, etc. which is as per the established accounting principles.

Therefore,  there is no reason to restrict the eligibility of ITC credit under section 16 (2) of the Act, and it was held that branch office is entitled to avail full ITC where payments are netted off against receivables.

To read the complete judgment 2019 Taxo.online 973