|Employee cost allocable to branches taxable under GST - AAR, Karnataka
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.
- 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).
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?
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.