AUTHORITY FOR ADVANCE RULING, KARNATAKA
IN RE: M/S COLUMBIA ASIA HOSPITALS PRIVATE LIMITED
Advance Ruling No. KAR ADRG 15 / 2018
Dated: - 27th July 2018

FACTS

M/s Columbia Asia Hospital (the "Applicant") provides healthcare services for both 'in patients' and 'out patients'.

The applicant currently has eleven hospitals, operating in six different states. Out of these eleven units, six units are in the state of Karnataka.

The main Head Office, i.e. India Management Office (IMO) is situated in Karnataka. The activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by the employees at IMO which forms a part of the registered person in Karnataka.

Furthermore, GST is paid on certain expenses such as rent paid on immovable property and other equipments, travel charges, communication expenses and services etc.

With respect to the employer-employee relationship, there are no invoices raised by the management office.

The IMO treats the employee costs same as the activities carried out by the employees in the course of or in relation to his employment which does not amount to supply of services.

ISSUES BEFORE AUTHORITY FOR ADVANCE RULING

Whether the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states i.e. distinct persons, shall be treated as supply to attract GST?

OBSERVATION

The Authority for Advance Ruling of Karnataka referred to Entry no. 2 of Schedule I:

"Supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business"

Reference has also been made to Para 1 of Schedule III of the CGST Act as below:

"Services by an employee to the employer in the course of or in relation to his employment".

It was observed by the Authority for Advance Ruling that the supply of any kind of service from the IMO to the separately registered unit (related person) would amount to supply of goods and services even if made without consideration and hence taxable under GST.

It was also observed that as per Section 15 of the CGST Act, 2017, any consideration charged by the IMO to different units would be considered as a transfer and thus a supply transaction under clause (a) of sub-section (1) of Section 7. 

The Authority has observed that by careful reading of Section 15, since the IMO is covered under one registration in the state of Karnataka and the units are covered under different registrations, and the units are controlled by the IMO, they both are related persons.

Thus, by implication, any supply of goods and services from IMO to the separately registered units would amount to supply of goods and services, even if made without consideration.

The Authority further observed that with other offices being distinct person, employees in IMO have no employer-employee relationship with the other offices.

CONCLUDING VIEW

The Authority for Advance Ruling, Karnataka, while giving the ruling on the much-debated taxability of inter- company supply of services in GST, has concluded with a ruling that states:

"the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGST Act, 2017 ("the CGST Act") shall be treated as supply as per Entry 2 of Schedule I of the CGST Act".

It was also concluded by the AAR, that the employer-employee relation is only in the IMO. The other offices are treated as distinct person or related person. At the time of considering the valuation cost, the employee cost should also be taken into consideration provided by one distinct entity to another distinct entity.

Lastly, it was concluded that there are certain activities which are incurred towards services paid by the IMO. These activities are availed by the registered person in Karnataka, subsequently discharging IGST to other units located outside Karnataka treating the same as taxable supplies.

AMLEGALS REMARKS

We believe that this ruling will lead to a complex outspread with respect to inter-company supply of services.

The issue should have been dealt in a holistic manner with 360 degree perspective under the parameter of the following moot questions:

Q1

Whether under the given factum the relationship between an employee and employer has changed?

A1

An employee sitting in IMO i.e head office and rendering work in relation to his/her employment on any calendar day does not get fettered by a simple factum that such work also includes work related to its other units.

It is pertinent to note that the other units are also of the same employer irrespective of the fact that under GST law other units, if outside a state, are mandatorily required to take separate GST registration for the sole reason that they are treated as a separate legal entity for the purpose of intra and inter-state supply.

Employer & Employee in Indian Contract Act

The relationship between an employee and employer does not change, due to such work of other unit of the same employer, under the Indian Contracts Act, 1872.

The letter of employment, setting out the scope of work for the purpose of employment, as given by an employer to an employee is itself in lieu of Indian Contracts Act.

The relationship between an employee and employer vests till the time it is not terminated or comes to an end due to resignation or superannuation.

Employer & Employee in CGST Act, 2017

Supply under the purview of Section 7 of CGST Act, 2017 has been detailed out under Schedule I, II & III.

The specific applicability of entry no.1 of Schedule III over Schedule I & II is provided in sub-section (2) of Section 7 itself:

(2) Notwithstanding anything contained in sub-section (1)-

(a) activities or transactions specified in Schedule III; or

(b) xxxxxxx

shall be treated neither as supply of goods nor as supply of services.

On perusal of the same it is as clear as daylight that Entries in Schedule III shall prevail over Entries in Schedule I & II of Section 7 of CGST Act, 2017.

Hence, as per entry no. 1 of Schedule III, irrespective of any other factor the services between employee and employer are not supply at all.

"Services by an employee to the employer in the course of or in relation to his employment".

Further, this description is not subject to any intra or inter-state supply that any different interpretation can be drawn out of it.

This itself clarifies the entire issue that Authorities should be more vigilant before concluding on any issue.

This can change the status quo of the existing relation.

Q2

Whether a specific description will prevail over a general description?

A2

The entry no. 1 in Schedule III is a specific description for service between an employee and employer as below:

"Services by an employee to the employer in the course of or in relation to his employment".

Hence, even otherwise entry no. 1 will prevail over an entry no. 2 of Schedule I of Section 7 of CGST Act, 2017 as under:

"Supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business"

Settled Law

It is a trite law that a specific description will always prevail over a general description - The Commissioner of Central Excise, Bhubaneshwar - I v. Champdany Industries Limited- 2009(241)E.L.T 481(SC).

This also sustains the fact that no GST is applicable on services rendered by an employee and employer.

Additionally

While departing on this issue we may also refer an exemption Notification No. 15/2018 – Integrated Tax (Rate) dated July 26, 2018, which exempts

"services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation I in Section 8 of the IGST Act"

provided that the place of supply is located outside India.

This content is purely an academic analysis under "Legal intelligence series".

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