This
is to update you with a recent ruling of the Karnataka Appellate Authority for
Advance Ruling (‘AAAR’), in which advance ruling pronounced by Karnataka
Authority for Advance Ruling (‘AAR’), in the matter of M/s Columbia Asia
Hospitals Pvt. Ltd (‘Company/ Appellant’) has been upheld by the AAAR.
The
AAR had held that the services of the employees at the corporate office, which
benefit the other units of the Company, will be treated as a deemed supply of
service in terms of entry 2 of Schedule I of the Central Goods and Service tax
Act, 2017 (‘CGST Act’).
We
have provided below a synopsis of the same for your ease of reference –
1.
Facts
·
The Appellant provides health care services by operating a
chain of modem hospitals across Asia, presently operates across six different
states, including Karnataka.
·
The Appellant has its India Management Office (‘IMO’) in
Karnataka, which performs the following activities:
-
Activities
like accounting, administration and maintenance of IT System are carried out by
the employees stationed at IMO which benefits other units of the Company;
-
Since
these services are used for the entity as a whole, the cost of such services is
attributable to all registered persons located in other states;
-
Accordingly,
the Appellant is discharging IGST on the expenses proportionately attributable
to the other units located outside the State of Karnataka, treating the same as
taxable supplies;
-
Further,
in respect of employee cost, apportionment is not carried out by the Company
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.
·
The Appellant had filed an application before AAR seeking a
ruling on the following question:
“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?”
2.
Ruling of AAR and contentions of Appellant
before the AAAR
·
The AAR had held that:
-
IMO
and other units located in different states are to be treated as related
persons;
-
Accounts
and management done by the IMO for the individual units located both within the
State and outside the State, shall qualify as supply of services from the IMO;
-
Employer-employee
relationship exists only in IMO – hence, the employees in IMO have no employer-employee
relationship with other units located in different states.
·
The Appellant aggrieved by the AR, filed an appeal before
AAAR on the following grounds:
-
AAR
erred in holding that activities carried out by the employees at IMO, in the
course of or in relation to employment which indirectly benefits distinct
person i.e. other units, shall be treated as supply as per Entry 2 of Schedule
of CGST Act, 2017
§ Functions and duties
of an employee cannot be restricted to employment with the registered person merely
on account of the location from where he renders his service;
§ Employer-employee
relationship exist between the employee and legal entity i.e. the Company as a
whole.
-
The Appellant had adopted the cross charge mechanism for
allocating the other expenses on the basis of proportionate turnover instead of
following the Input Service Distributor (ISD) route, which is squarely
applicable in this case – hence mere allocation of expenses would not entail
that there has been a supply of service by the IMO to its units.
-
Further,
reliance was placed on the following judgements given by the Tribunal in
relation to services rendered by the employees towards accounting and other administrative
functions pertaining to other units
§ Franco India
Pharmaceutical (P) Ltd Vs CST Mumbai [2016 (42)S.T.T.1057 (Tri-Mumbai)]
In this case, the Hon'ble
Tribunal in its order held that the service rendered by an employee to either
one employer or many as in case of joint employment cannot make any difference
to the tax treatments of the emoluments earned by the employee.
§ Milind Kulkarni Vs
CCE, Pune [2016 (441 STR.71(Tri-Mumbai)]
In this case, it was held
that the activity of the head office and branch are thus inextricably enmeshed,
such that employees of head office are the employees of the organization
itself. Hence, there is no independent existence of the overseas branch as a
business, and the economic survival of the branch is entirely dependent on
finance provided by the head office.
Hence, even in a case where
flow of funds take place from Head Office to Branch, mere apportionment of
employee cost can't be construed as service and employees are the employee of
the organization itself.
3.
Ruling of AAAR
·
The Appellant is providing service to other units i.e.
distinct person, of the Company by way of carrying out activities such as
accounting, administrative work etc., with use of the services of the employees
of the IMO
-
Such
activities to be treated as supply in terms of Entry 2 of Schedule I read with
Section 7 of the CGST Act, 2017
·
It was observed that undoubtedly, an individual is employed
by the entity and serves the organisation, but the employees stationed at the
location of a particular establishment of a distinct person are deemed to be
rendering their services only to that establishment of a distinct person, and
not to any other distinct person.
-
The said activity will not be termed as 'employee-employer
relationship' and will therefore not fall within the purview of entry 1 to
Schedule III;
-
Hence, the services of the employees at the IMO are to be
considered as a 'supply of service' by one distinct person to another and is
liable to GST;
·
In the ISD concept, only ITC on input services which are
attributable to other distinct entities are distributable. However, in a cross
charge mechanism, all expenses incurred by a distinct person for the purpose of
carrying out activities the outcome of which benefits other distinct persons is
required to be cross charged
-
In
the instant case, the issue is not regarding the distribution of ITC by the
IMO, and IMO provides a taxable service to the distinct units – hence, cross
charge mechanism has to be followed in the instant case, as per which all
expenses incurred by a distinct person is required to be cross charged.
-
The cost of employees working in the IMO is an integral part
of the cost of the services rendered by the IMO to other distinct units of the
Company – hence, the same needs to be included in the valuation of cross charge
of expenses.
·
Case laws relied upon by the Appellant are not be applicable
to the matter at hand since they were rendered in the context of the Service
Tax law.
4. TBM comments
·
The
AAR had created enough ripples across the industry on the issue of valuation
while cross charging expenses between related/ distinct persons.
·
The instant AAAR ruling although observes that an individual
is employed by the entity and serves the organisation, it has upheld the
decision of AAR by restricting the employer-employee relationship between the
employee and the location of the registered person (where the employee is
providing employment service).
·
Hence, in cases where the full input tax credit is not
available to the recipient, and the open market value of transactions between
related parties and distinct persons is subject to validation, the issue of
inclusion of employee costs and impact thereof needs to be evaluated in detail
before carrying out the cross charge of expenses.
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