2025 (6) TMI 96 - HC - GST

Requirement to pay GST in respect of those expenses which were incurred by the Petitioner but were not cross-charged with the other entities - Circular No. 199/11/2023-GST dated 17th July 2023 - HELD THAT - A perusal of the Order-in-Original clearly shows that there were no cross-charges of expenses with the other entities. Moreover the second proviso to Rule 28 of the Central Goods and Services Tax Rules 2017 has been applied without giving benefit of the Circular No. 199/11/2023-GST and consideration to the said circular. Under such circumstances this Court of the view that the Adjudicating Authority needs to reconsider the matter in the light Circular No. 199/11/2023-GST dated 17th July 2023 and the judgment in Metal One Corporation India Pvt. Ltd. Ors. 2024 (10) TMI 1534 - DELHI HIGH COURT where the Court observed In the facts of the present writ petitions it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular the value of the service rendered would have to be treated as Nil . This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently we are of the considered opinion that the proceedings initiated in terms of the impugned SCNs and their continuance would be futile and impractical. Accordingly the Adjudicating Authority shall afford a hearing once again to the Petitioner and pass a fresh order in the light of the Circular No. 199/11/2023-GST dated 17th July 2023 and the judgement passed in Metal One Corporation India Pvt. Ltd. Ors. Petition disposed off.

Summary

The core legal question considered by the Court was whether payment of Integrated Goods and Services Tax (IGST) was required on expenses incurred by the Petitioner that were not cross-charged to other entities. This central issue involved interpretation of the valuation and invoicing requirements under the Central Goods and Services Tax Act, 2017 (CGST Act), particularly in the context of internally generated services between distinct persons within a corporate group.

In addressing this issue, the Court examined the relevant legal framework, including Section 15(4) of the CGST Act and Rule 28 of the CGST Rules, 2017, which govern the valuation of supplies between distinct persons. Rule 28(a) mandates that the value of supply between distinct persons be the open market value. The second proviso to Rule 28 further provides that if 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.

The Court also considered Circular No. 199/11/2023-GST dated 17th July, 2023 issued by the Central Board of Indirect Taxes and Customs (CBIC). This Circular clarified that where a Head Office (HO) provides services to Branch Offices (BOs) and the BOs are eligible for full input tax credit, the value declared in the invoice by the HO is deemed to be the open market value, regardless of whether all cost components, such as employee salary costs, are included. Importantly, if no tax invoice is issued by the HO for such services, the value may be deemed to be nil, which would correspondingly mean no tax liability arises.

The Petitioner relied heavily on this Circular and on a precedent set by a Coordinate Bench of the Court in Metal One Corporation India Pvt. Ltd. & Ors., where it was held that if the charge is nil, no tax demand is payable. In that case, the Court had quashed the Show Cause Notice and the consequent Order-in-Original on the basis that no invoices were generated and the value of the services rendered was to be treated as nil, resulting in no plausible tax liability.

The Respondents, however, referred to a similar case where the Court had relegated the party to the appellate remedy, emphasizing procedural propriety and the need for adjudication at the appropriate forum rather than quashing proceedings outright.

Upon review, the Court found that the Adjudicating Authority had applied the second proviso to Rule 28 without considering the benefit of Circular No. 199/11/2023-GST and without giving due regard to the clarifications therein. The absence of cross-charges between the Petitioner and other entities was a critical factual finding that the Adjudicating Authority failed to adequately consider. The Court held that the Adjudicating Authority must reconsider the matter in light of the Circular and the Metal One Corporation judgment.

The Court directed that the Petitioner be afforded a fresh hearing and that a fresh order be passed after considering the Circular and the relevant precedent. The Court emphasized the principle that where no tax invoice is issued and the recipient is eligible for full input tax credit, the value of the services rendered may be deemed nil, resulting in no tax liability. The Court quoted the Metal One Corporation judgment stating:

"In the facts of the present writ petitions, it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as 'Nil'. This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently, we are of the considered opinion that the proceedings initiated in terms of the impugned SCNs' and their continuance would be futile and impractical. The impugned SCNs are essentially rendered impotent and would serve no practical purpose."

In conclusion, the Court held that the Adjudicating Authority must reconsider the tax demand in light of the CBIC Circular and the Metal One Corporation judgment, ensuring that the valuation of internally generated services and the issuance (or non-issuance) of invoices are properly evaluated before determining any tax liability. The petition was disposed of with liberty to the Petitioner to pursue all available remedies, and pending applications were also disposed of.