2 January 2019
Employee cost allocable to branches taxable under GST - AAR, Karnataka

An advance ruling was pronounced by the Authority for Advance Ruling (AAR), Karnataka in case of M/s Columbia Asia Hospitals Private Limited (M/s Columbia) in July 2018, whereby it was held that activities carried out by the employees from the corporate office (CO) for accounting and other administrative functions, with respect to units in other states, should be treated as “supply” and hence are taxable under GST.

Please refer to our previous alert for detailed analysis - https://bit.ly/2AoxH7u
The appellant, i.e., M/s Columbia had challenged the above ruling before the Appellate Authority for Advance Ruling (AAAR). The ruling in this matter was pronounced by AAAR on 12 December 2018. The AAAR upheld the ruling rendered by the AAR, i.e., any services provided to its other distinct units by way of carrying out activities such as accounting, administrative work, etc., with the use of the services of its employees, the outcome of which benefits all the other units, then such activity is to be treated as a taxable supply.
The ruling was pronounced on the below-mentioned grounds –
  • The Services provided by M/s Columbia to its distinct unit entities would qualify as “supply” under GST.
  • The employees of a distinct person are deemed to be rendering their services only to that establishment and not to any other distinct person, even though all the distinct persons are of the same business entity, i.e., the employee-employer relationship is to be viewed separately for every registered unit of the business entity.
  • The liability to GST on the supplies made by a distinct person is to be discharged by the said distinct person as a registered person, and the liability cannot be shifted to another distinct person on the grounds that they are a part of the same entity.
  • The taxable event under the Service Tax law and GST are vastly different and hence the ratio of decisions rendered in the light of the taxable event under Service tax provisions cannot be applied to the transactions under GST regime.
  • The services of the employees at the head office in so far as they are benefiting the other registered units of the Appellant are to be considered as a 'supply of service' even if it is made without any consideration.
SKP's Comments

The fact that the ruling has been upheld at the appellate stage by the AAAR has imparted further importance to the question of treatment of all expenses, including employee cost incurred at the head office but benefitting all the other branches. We would like to reiterate our comments as provided in the previous alert in this matter regarding the key aspects, which may need to be considered by companies -
  • Tax position to be adopted in respect of common expenses at the head office and employee cost – Whether to consider the same as taxable and therefore pay IGST under Schedule I of the CGST Act?
  • If yes, what is the methodology/computation/valuation to be adopted?
  • Working capital blockage
  • The possibility of utilizing ITC of IGST charged by HO at branch level
  • Increased compliance costs.
It should be noted that 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 the likely interpretations to a particular question of law.
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