The Authority for Advance Ruling (AAR), Karnataka has ruled that activities carried out by the employees from Corporate Office (CO) for accounting and other administrative functions with respect to units in other states and other expenses incurred by CO which are allocated to other registered units should be treated as "supply" and hence taxable under GST.

Facts

  • The applicant, i.e., Columbia Asia Hospitals Private Limited has its CO in Karnataka and hospitals in six different states.
  • Some of the activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by the employees from CO which forms part of the registered person in Karnataka.
  • Furthermore, GST paid on certain expenses such as rent paid on immovable property and equipment, travel expenses, consultancy services, communication expenses, etc., which are incurred towards services used by the CO, are availed by the registered person in the state of Karnataka and subsequently, the CO in Karnataka is discharging IGST on the expenses proportionately attributable to the units located outside Karnataka, treating the same as taxable supplies.
  • However, the applicant does not raise invoice with respect to employee cost of CO treating the same as activities carried out by employees in course of or in relation to his employment which does not amount to supply of services under per Entry 1 of Schedule III of the Central Goods and Services Tax Act, 2017 (CGST Act).

Issue

Whether the activities performed by the employees at the CO 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 CGST Act shall be treated as supply as per Entry 2 of Schedule I of the CGST Act or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act?

Ruling

The employees working out of the CO are providing services to the CO, and hence there is an employee-employer relationship only in the CO. Other offices are distinct persons and therefore the employees in the CO have no employer-employee relationship with other offices.

Consequently, the employee cost also needs to be taken into consideration at the time of valuation of goods or services provided by one distinct entity to the other distinct entities. In view of the above, activities performed by the employees at the CO in the course of or in relation to employment for the units located in the other states as well shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.

SKP's Comments

  • The AAR has made a strict interpretation of the GST law and hence the ruling is bound to open some fundamental questions in respect of taxability of services consumed at head offices/COs which may be attributable to the branches/units registered in other states. This interpretation may also be subjected to scrutiny at the appellate level and a divergent view cannot be ruled out.
  • The AAR has interpreted the phrase "employer-employee" relationship in a very narrow manner by restricting it to the relationship of the employee with the CO/head office and not extending it to the branches.
  • Some key aspects which may need consideration are:
  • Tax position to be adopted in respect of common expenses at head office and employee cost - Whether to consider the same as taxable and pay IGST under Schedule I of CGST Act
  • If yes, what is the methodology/computation/valuation to be adopted?
  • Working capital blockage
  • Possibility of utilizing input tax credit of IGST charged by head office at branch level
  • Increased compliance costs.

Note:

As per the GST law, an advance ruling is binding only on the applicant and not on any other assessee. However, an advance ruling does have persuasive value and can serve as a guide to understand the view of the authorities and likely interpretations to a particular question of law.

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