Question

XYZ having manufacturing unit cum Head Office in Maharashtra and other units outside Maharashtra. Certain common services are received at Maharashtra on which 100% credit is taken at Maharashtra. In this situation, they can raise monthly invoice in the name of other units under the category of ‘Business Support Service’ based on the value mentioned in the invoices of the service provider for common services received at Maharashtra and by adding certain percentage of mark - up on it. Once this figure is arrived at, the same needs to be apportioned in the name of each unit based on cost centre wise expenses maintained by company on monthly basis. Will this be allowed or Maharashtra should necessarily obtain ISD Registration and then distribute the credit to other units?

Answer

Facts of the case: Maharashtra head office is procuring services and charging other units with mark-up as per the cost center expenses maintained.

Law applicable: As per section 20 of CGST Act an Input service distributor may distributor the ITC of services procured to other units under a cover of invoice.

Interpretation: ISD is not allowed to mark-up and then distribute the cost and ITC to other units. Moreover the distribution is not possible on cost-center concept basis because these may be based on absorption costing or marginal costing and will result in different values.
Distribution shall be done on following basis :
1. If 100% usage attributable to one unit then 100% distributed to them.
2. If attributable to more than one unit then distributed in proportion to last year's aggregate turnover.

Conclusion: You may exercise the following two options whichever results in lowering the overall tax liability in your case:

Option 1 : Register as head office as ISD
-Head office will have to follow the distribution criteria laid under section 20 (as stated above)
-Markup will not be allowed
-Distribution on absorption costing or marginal costing cost centers is not possible

Option 2 : Do not register head office as ISD
-Head office will show that it is making supply to other units in course of business and will charge tax invoice.
-Units can take ITC against above invoice.
-Mark up is allowed.
-Distribution on absorption costing or marginal costing cost centers basis is possible and the distribution criteria laid under section 20 (stated above) may not be followed.

Tax Planning: If the company opts option 2 then it can also claim ITC of capital goods and inputs and distribute it through invoicing. This is not available in option 1.  (Reply dt.09/03/2019)