M/s Columbia Asia Hospitals Private Limited, (hereinafter referred to as Applicant), is operating in six different states. It has its India Management Office (IMO) i.e. the Corporate Office in Karnataka and some of the activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by employees from IMO.
Whether activities performed by the employees of corporate office (such as accounting, administrative and IT system maintenance) for branch offices locatedin other states (distinct persons) shall be treated as supply?
In order to answer the above, reference was made to entry no. 2 of Schedule 1 which deals with the activities that are to be treated as supplies even if made without consideration:-
"2. 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".
Further, reference was made to explanation given in Section 15 of CGST Act 2017 which defines related persons.
On the basis of above, the AAR observed that:-
- The corporate and branch officeshave separate registrations in different states.
- Branch Offices are controlled by IMO, hence, they are related persons. This means that any supply of goods/services from IMO to registered branches would amount to supply of goods/services, even if made without consideration.
- As activities between related person are treated as supplies and the valuation (as per section 15 of CGST Act) must include all costs, employee cost must also be considered for valuation of goods or services provided by one distinct entity to another.
- The activities under discussion are not covered under any entries of Schedule III (Activities or Transactions which shall be treated neither as a supply of goods nor a supply of services) of the CGST Act, 2017.
- Services provided by the employees of corporate office to
corporate office are in the nature of
employer-employee relationship. However, no such relationship exists between employee of corporate office and branch office, even if both offices belong to same legal entity since they qualify as 'distinct persons' under the act.
Activities performed by the employees at the corporate office (such as accounting, administrative and IT system maintenance) for branch offices located in other states (distinct persons as per Section 25(4) of CGST Act, 2017) shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.
Different views exist on the issue of treatment of common services. While an advance ruling is binding only on applicant, the legal reasoning provided by the AAR merits consideration.
AAR has ruled that the relationship between branch office and corporate office is that of 'distinct persons'. Under GST regulations, the branches of a company are separate taxable entity and therefore, any goods/services received by one branch from another shall be considered as "supply" even if without consideration. By corollary, employees of branch offices will not be treated as employees of corporate office and vice-versa. Therefore, any goods/services provided by the branch office to the head office and vice-versa shall be subjected to GST. Hence, invoices must be dulyraised for inter-branch transactions.
Generally, Input Tax Credit can be claimed by any branch office on its input invoices. However, exempted supplies made by a branch office can result in restrictions on Input Tax Credit claim. As timeline for filing Annual Return nears, companies can take a calibrated standon the issue of common services in light of the above ruling. One should not lose sight of the fact that the GST law prescribes penalties for providing services without raising invoice and collecting GST. It is imperative thatcorporate management takes an informed decision taking into account multiple factors such as risk appetite, quantum of common expenses and possible penal consequences.
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