1. A is a holding company. B is its subsidiary company. Both the companies carry on their business from same premises. In other words, Place of Business (POB) of both the companies is one and the same. Both the companies are registered under the GST law.
2. Common related expenses such as courier expenses, office rent, telephone expenses, motor car expenses, printing & stationery expenses, royalty expenses, overhead expenses, accounts & admin department expenses etc are borne by company ‘A’.
3. At the end of the year, company ‘A’ shares these expenses with company ‘B’. For this purpose, company ‘A’ issues tax invoices to company ‘B’. Company ‘A’ pays the tax along with returns.
4. Company ‘B’ record these transactions in its books of account as tax paid
purchases and claim ITC (Setoff) in its returns.
5. Querist seeks to know whether this arrangement is in accordance with the law and whether there are any issues which may be raised by Revenue Authorities?
6. A holding company and a subsidiary are related parties under the Explanation to Section 15 of the GST Act. Therefore, any supply of services by the holding company to the subsidiary company or vice-versa will be taxable under Schedule I Clause 2, even though no consideration passes between the two for the services as such.
7. Both these companies carry on their businesses from the same premises. However, that in itself cannot be determinative of whether any services are provided by the holding company to the subsidiary company or vice-versa.
8. Firstly, it is pertinent to note that simply because a case falls within Schedule I Clause 2, every expenditure involving related persons does not become a supply of services. GST is a tax on supply of goods and services and not tax on expenditure per se. Schedule I, Clause 2 also recognises this and speaks only of supply of goods and services between related persons.
9. Therefore, only those transaction which are capable of being regarded as supplies as per the yardstick of an ordinary commercial reasonable man will come within Schedule I, Clause 2.
10. When two persons jointly acquire the services of a third party, and one of them pays the entire amount while the other reimburses, the one who pays the entire amount acts as a paymaster or an agent of the other. [Durham Aged Mineworkers’ Home Association v. CEC (1994) BVC 145].
11. Therefore, where courier expenses are paid by the holding company for itself as well as its subsidiary and subsequently gets itself reimbursed by the subsidiary company, the holding company merely acts as an agent of the subsidiary company. It does not actually provide any courier services to the subsidiary. The courier services are provided directly by the third-party service provider to the subsidiary company. The real nature of supply in this case is the supply of facilitation or agency services by the holding company to the subsidiary company. The holding company is merely facilitating the supply of courier services by making the payment as an agent of the subsidiary company.
12. It can be no one’s case that the actual reimbursed amount is the value of the facilitation service. There is in fact no commission charged or margin kept by the holding company in this case which can be said to constitute the consideration for the facilitation or agency service. However, such a service will be taxable even without consideration due to the effect of Schedule I, Clause 2. But the value of reimbursement has absolutely no nexus with facilitation or the agency service.
13. Now, if tax is to be paid one must determine the value of the facilitation or agency services. If the subsidiary is eligible for full input tax credit, whatever value is shown in the invoice by the holding company will be accepted without question in revenue due to the provision of the second proviso to Rule 28. Even if the value of the facilitation service is shown as the entire reimbursed amount, the same cannot be questioned.
14. However, where the subsidiary is not eligible for full input tax credit, the second proviso to Rule 28 will not be applicable. In such a case, the other provision of Rule 28 will to have to be applied.
15. It’s is our view that facilitation services involved in this case cannot be valued even under Rule 28. There is no open market value for such services. Similarly, value of supply of services of like kind and quality cannot be determined. The cost-plus methodology is also unworkable. The only remaining rule of valuation is the Rule 31 which states that the value should be computed by using reasonable means consistent with the principles and the general provisions of the valuation rules.
16. The Supreme Court in K. Damodarasamy Naidu v. State of Tamil Nadu [(2000) 117 STC 1] has held that unless a certain and definite mechanism of valuation is laid down in the statute, the levy cannot be enforced. Particularly, where every assessing officer has the discretion to arbitrarily create his own method of valuation, the same offends the Constitution. In my view, Rule 31 cannot be applied at all since it gives each assessing officer intolerable discretion to devise his own mechanism.
17. In such a case, it is better for the invoices from third party service providers to be issued separately in the name of the holding company as well as subsidiary company. The payment for both the invoices may be made by the holding company and the subsidiary company may reimburse the amount relating to itself. However, as long as the invoices are divided at source, the manner of payment will not matter.