Levy of GST on services rendered by one office centre to other centres
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Services rendered by one office branch to other centres –Appellate AAR upheld the decision of AAR decision to levy GST on in-house service functions
In brief
Karnataka Appellate Authority of Advance Rulings (AAAR) has upheld the levy of GST on services rendered by one office branch to other centres. In-house service functions like payroll if carried from a centre in one state for offices in other states, the same will attract GST and invoice needs to be issued against the same.
In detail
- The taxpayer (henceforth TP), a PLC, engaged in providing health care services. TP has it “India Management Office (IMO)” i.e Corporate Office in Karnataka. They are having eleven hospitals operating in six different states.
- TP have filed application before Karnataka AAR u/s 97 of CGST/KGST Act, 2017 read with rule 104.
- TP sought ruling on “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 as well i.e. distinct persons as per Section 25(4) of the Central Goods and Services Tax Act, 2017 ((‘GST 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 Service as per Entry 1 of Schedule III of the CGST Act?”
- TP wrt employee cost, there are no invoices raised by the management Office treating the same as activities carried out by employees in the course of or in relation to his employment which does not amount to supply of service.
Issues before Tribunal
Taxpayer’s contention
- The employment relationship between the employee and employer exists with a single legal entity as whole and is not confined to the location of registered person from where the said employee renders service
- TP has submitted that the activities carried out by employees at IMO, the consequential benefit of which may flow to other locations, may have been treated as ‘supply’ under entry 2 of Schedule I, if the said entry is read in isolation. However, the same is to be read with entry 1 of Schedule III which specifically excludes ‘services by an employee to the employer in the course of or in relation to his employment” as neither a supply of goods or a supply of service
- TP has submitted that the term ’employer’ has not been defined under GST Act. Further, the service contract with the employee states that employee will work as per directive of the company irrespective of locations. Employment is not confined to geographical boundaries.
Karnataka AAR Ruling
- AAR held that IMO and its different units registered in different states are to be treated as ‘related persons’ and therefore, in terms of the entry 2 of Schedule I, the activities of accounts and management done by the IMO for the individual units located both within the State and outside the State amount to supply of services from the IMO, even if made without consideration.
- Regarding the issue relating to the activities performed by the employees at the Corporate office, the Authority held that, there is an employee-employer relationship only in the Corporate office Since the Corporate office and its other units registered in other States are distinct persons as per Section 25(4) of the CGST Act.
Appellate’s ruling
- The Appellate Authority dwelled on the question that emerged in the appeal whether the IMO provides a service to its other distinct units by way of carrying out activities such as accounting, administrative work, etc with the use of the services of the personnel working in the IMO, the outcome of which, “benefits all the other units and whether such activity is to be treated as a taxable supply in terms of the entry 2 of Schedule I read with Section 7 of the CGST Act. In view of our findings and discussions above, we clearly answer the question in the affirmative.” Accordingly it upheld the ruling dated July 27, 2018 passed by the Karnataka Authority for Advance Ruling
The takeaways
- The said order explained the key difference between “cross charges” and “input service distributor.”
- It also explains when the “services of employees “can be construed as “supply of service” and become taxable.
- This order would have impact the exempt sectors since the cross charges of employee cost would need to be absorbed as a cost.
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