Summary
The Gujarat High Court held that where the Head Office has not allocated common expenses by cross charging to branches (which eligible for full ITC), the value of services would be treated as ‘Nil’ under Rule 28 of the CGST Rules, 2017, read with the CBIC Circular Nos. 199/11/2023-GST dated 17.07.2023 and 210/4/2024-GST dated 26.06.2024. Further, mere non-adoption of cross-charging of expenses, where expenditure is duly recorded in the books and the situation is revenue-neutral, does not establish fraud, wilful misstatement or suppression of facts to invoke Section 74 of the CGST Act.
Facts
- The Petitioner held an Input Service Distributor (“ISD”) registration for its Head Office (“HO”) and separate GST registrations for its establishments outside Gujarat. It incurred common corporate expenditure, including advertisement, IT infrastructure, annual maintenance services, legal fees, litigation expenses and salaries of employees at the HO, without allocating such expenditure to its branches and depots through cross-charging for the period July 2017 to March 2019
- The Department treated these expenses as taxable supplies to distinct persons under Section 25 of the CGST Act and issued a show-cause notice invoking Section 74
- During adjudication, the Petitioner relied upon the CBIC Circulars dated 17.07.2023 and 26.06.2024, however, the adjudicating authority confirmed IGST demand under Section 74, along with interest and penalty
- Aggrieved by the order, the Petitioner approached the Hon’ble Gujarat High Court, relying, inter alia, on the aforesaid CBIC Circulars
Issues before the Gujarat High Court
- Whether GST was payable on common corporate expenses and salaries where no tax invoices were issued and the recipient branches were eligible for full ITC
- Whether the extended period under Section 74 could be invoked merely because cross-charging was not undertaken by the HO
Discussion & Ruling
The Hon’ble Gujarat High Court while allowing the writ petition held that the essential ingredients for invoking Section 74 were not established and set aside the order, on the following grounds:
- Where the recipient branch is eligible for full ITC and the HO has not issued a tax invoice, the value of such services may be deemed to be ‘Nil’ under Rule 28 of the CGST Rules, read with the relevant CBIC Circulars. Accordingly, no tax liability arises in such circumstances. The Court relied on the Delhi High Court’s decision in Metal One Corporation India Pvt. Ltd., where the value of the service was treated as ‘Nil’ as no invoices were generated
- The authorities could not determine the value of services on a proportionate basis merely because cross-charging had not been undertaken. The adjudicating authority had not properly examined the effect of the CBIC Circulars, resulting in non-application of mind
- Extended period was invoked on the basis of the DGGI investigation, on the allegation that without the investigation the facts relating to evasion would not have been known. Except for this observation, nothing was recorded in the SCN or the Order-in-Original to satisfy the ingredients of Section 74, as the intent to evade tax must involve fraud, wilful misstatement or suppression of facts
- Relying on the Hon’ble Supreme Court’s decision in Tata Steel Ltd. v. Union of India, the Court observed that the foundational facts establishing fraud, wilful misstatement or suppression of facts must be evident from the notice itself. Mere mechanical invocation of these expressions is insufficient
- Expenditure was duly recorded in the books of account of the HO and that any tax paid on cross-charged services would be available as ITC to the respective branches. Accordingly, the situation was revenue-neutral, and mere non-adoption of cross-charging could not establish fraudulent evasion or suppression of facts with intent to evade tax.