In Re: M/s. Columbia Asia Hospitals Pvt. Ltd.
GST
2018 (12) TMI 1604 – APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – 2019 (20) G. S. T. L. 763 (App. A. A. R. – GST), [2019] 64 G S.T.R. 106 (AAR)
APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – AAAR
Dated:- 12-12-2018
KAR/AAAR/05/2018-19
GST
SHRI. A.K JYOTISHI AND SHRI. M.S. SRIKAR, MEMBER
Represented by: Sri. Naveen Rajapurohit, CA
PROCEEDINGS
(Under Section 101 of the CGST Act, 2017 and the KGST Act, 2017)
At the outset; we would like to make it clear that the provisions of both the Central Goods and Service Tax Act, 2017 and the Karnataka Goods and Service Tax referred to as CGST Act, 2017 and KGST Act, 2017) are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the corresponding similar provisions under the KGST Act.
The present appeal has been filed under Section 100 of
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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 (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 Service as per Entry 1 of Schedule III of the CGST Act?
3. Before the Authority for Advance Ruling/ the appellant enumerated the following facts:
3.1. The appellant has its “India Management Office (IMO)” i.e Corporate Office in Karnataka and some of the activities like accounting, administration and Maintenance of IT System are Carried out by the employees at IMO which forms part of the registered person in Karnataka and the consequential benefit of which flows across the Company/units located in other states. Further, certain services such as rent pai
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rental services amounting to plus GST of Rs. 18 are towards management Office, the Company in Bangalore would avail the input tax credit to the extent of Rs. 18,000/- and subsequently the Company, Bangalore would raise invoices on other units for an amount determined on the basis of turnover of respective unit to the total turnover of all the units in the said tax period and the applicable GST is discharged on the same.
* Assuming the turnover of Company's unit at Pune is Rs. 10,00,000/- and the total turnover of all units of the Company is Rs. 1 Crore, then the value of the invoice is determined as follows:
Rental Services received at IMO* Turnover of Pune
Total turnover of all units
=1,00,000/-*10,00,000/- =Rs.10,000/-
1,00,00,000/-
3.3. Therefore, Company in Bangalore would raise an invoice for Rs. 10,000/- on the Company in Pune and discharge the applicable GST on this amount.
3.4. However, with respect to employee cost there are no invoices raised by the management Office
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ders Service. When an employee renders any service to other registered persons i.e distinct persons of the same legal entity, the nature of activity still -assumes the character of services by an employee to the employer in the course of or in relation to his employment as he is an employee for the legal entity as a whole and not for any registered person. Hence, the services rendered by employees towards accounting and other administrative functions which benefit the other units of the entity, Still remain the character of 'services by an employee to the employer in the course of or in relation to his employment' and shall not be treated as supply of service as per Entry I of Schedule III. Therefore, GST shall not be applicable on the said activities as the same is not a supply of service.
5. The Karnataka Authority for Advance Ruling, vide Advance Ruling No. KAR ADRG 15/2018, dated 27.07.2018 = 2018 (8) TMI 876 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA held that the IMO and its dif
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Act, there is no such relationship between the employees of one distinct entity with another distinct entity as per the GST Act, even if they are belonging to the Same legal entity.
7. Being aggrieved by the above mentioned Ruling of the Authority (hereinafter referred to as 'Impugned Order'), the applicant has filed an appeal on 1409.2018 under 100 of the CGST 2017 / KGST Act, 2017 on the following grounds:
7.1 The Advance Ruling Authority has e in holding that the activities carried out by employees at IMO in the course of or in relation to employment such as accounting, other administrative and IT systems maintenance which indirectly benefit units located in the other states as well i.e distinct persons as per Section 25(4) of the Act shall be treated as supply as per entry 2 of schedule I of the Act.
7.2 The appellant 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
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or such period as is necessary for the proper performance and exercise of your duties in connection with this employment or as the Company Shall from time to time direct. And such an even, you will be governed by the rules and regulations in these regards as may be applicable to you in the deputed place, from time to time”
7.4 Further, they submitted that the functions/duties of the employee cant be restricted to employment With the registered person as per Section 25(4) of the Act merely on account of the location from where he renders his employment service; that the employment relationship exists between the employee and the legal entity and not confined to the location of the registered person from where the said employee renders services; that the employee is an employee for the legal entity as a whole and not for any one registered person; that the functions of the head office are inherent basic stewardship functions of the legal entity. It is a central function necessary for al
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ss the country and the employees performing the said activities are employed to benefit all the offices of the Company; that disregarding employer-employee relationship merely to fasten GST liability is not correct.
7.7 They submitted that at the time of obtaining registration under GST, key managerial personnel details are required to be given in respect of all the registrations; that the key managerial personnel are employed by the Company and not by the registered person located in a particular State. In order to buttress their arguments, the appellant have cited following decision given by the Tribunals in relation to services rendered by employee towards accounting and other administrative functions pertaining to other units
In the case of Franco India Pharmaceutical (P) Ltd. Vs Commr. Of ST Mumbai {2016 (42) S.T.T. 1057 (Tri-Mumbai) = 2016 (4) TMI 496 – CESTAT MUMBAI : “In said case, the salary cost of employees deputed for marketing work was attributed to the group compa
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s which are later recouped from the other employers on an agreed basis on actual. Such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.”
In view of the above, the appellant submitted that the mere arrangement of hiring the employees in one employer-company and allocating the cost to Other employer-companies without any margin, will not be treated as consideration for any Service.
In the case of Milind Kulkarni Vs Commissioner of C.Ex. Pune 2016 (44) STR.71(Tri-Mumbai)} = 2016 (9) TMI 191 – CESTAT MUMBAI :- “ln this case the staff of the appellant were deputed from India to client locations outside India and the branches salary from the appellant and disburses the same to the staffs deputed from India, The Department was of the that the branch is providing service to the appellant and the appellant is liable to pay tax under reverse charge mechanism.”
In this ease, the Hon'ble Tribunal held that the employees are the employees of the organiza
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mortality is entirely contingent upon the will and pleasure of the head office.”
Hence, even in Cease 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.
7.8 In view of the above; the appellant pleaded that the employee is working for an organization and the organizatton shall be treated as his employer and not a particular branch. Thus entry I of Schedule III of the Act holds goods and the services by an employee to the employer in the course of his employment shall not be treated as 'supply'. Based on the above interpretation of the Statute, the appellant pleaded that the Impugned order may please be set aside.
PERSONAL HEARING:
8. The appellants were called for a personal hearing on 25.09.2018 but the same was adjourned on their request. Another personal hearing was granted on 15.11.2018 and they were represented by Sri. Naveen Rajapurohit, Chartere
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ovided any supply of service to the different units of the same entity.
10. They relied on the case of M/s. HT Media Ltd vs Commissioner of Service Tax, New Delhi reported in 2017 (7) GSTL 364 (Tri-Del) = 2017 (9) TMI 1005 – CESTAT NEW DELHI, wherein the appellant in that case, as a nodal group Company, was incurring certain expenses towards Common services being used and availed by the group companies and thereafter, recovering the said expenditure from the group companies on a proportionate basis. Service tax authorities demanded service tax on such reimbursements alleging provision of taxable infrastructure support services by the appellant to its group companies. The Tribunal set aside the demand and held that the appellant did not provide any infrastructure support service to its group companies but was merely acting as a nodal group company for facilitation of such services for use by the group and payment thereof to the service provider; that such services were commonly shared
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perty, telephone/communication services, etc incurred by the IMO which are primarily used for the operations of the IMO itself; that such services do not have any direct nexus with other registered units, Due to this reason alone, the IMO is working for the entity as a whole and the expenditure incurred on such services is also to other registered units, without involving even a rare Chance of providing a service to such other units; that they have adopted the cross-charge mechanism for allocating the other expenses on the basis of proportionate turnover instead of following the Input Service Distributor (ISD) method; that the concept of ISD nowhere necessitates that the Cost apportionment pertaining to such credit shall also be liable to tax. The appellant at the time of procurement of services from third party vendors pays applicable taxes and these services is apportioned to other units/States, based on their turnover; that if such apportionment is considered as a taxable supply, th
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ll not tantamount to supply' and thus not liable to GST. On the above grounds, they requested that the AAR ruling be set aside.
DISCUSSION & FINDINGS:
14. We have gone through the records in detail and have taken into consideration all the submissions made by the Appellant in writing as well as the detailed arguments made by their Advocate during the personal hearing. The short point for determination is whether the Services rendered by the employees at the Corporate office of the Appellant (India Management Office) in the areas of accounting, administrative work and IT system maintenance, which benefits the Appellant's units in other parts of the country, will be treated as a 'supply, as per entry 2 of Schedule 1 of the CGST Act.
15. For the sake of clarity, we reproduce the relevant portions of the CGST Act which have a bearing on the issue at hand.
15.1 In terms of Section 22 of the Act, every supplier shall be liable to be registered in the State from where he makes a taxable s
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specified in Schedule I, made or agreed to be made without consideration; and
(d)
15.7 Schedule of the CGST Act describes the activities to be treated as supply even if made without consideration. As per entry 2 of the said Schedule, 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 is to be treated as a 'supply'.
15.8 Section 7(2) of the CGST Act states that notwithstanding anything contained in subsection activities or transactions specified in Schedule III shall be treated neither as a supply of goods or supply of service. As per entry 1 of the said Schedule III, services by an employee to the employer in the course of or in relation to his employment is not a supply of service.
16. In the light of the above legal provisions, let us understand the activities of the Appellant and determine the applicability of the above provisions of law. The Appellant is an inte
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s, consultancy services, communication expenses etc. Since the IMO operations are for the benefit of all the 11 units of the Company in India; the expenses incurred in operating the IMO are allocated to other registered units for the purpose of determining the profit of each cost center. The allocation of costs to each of the registered units in India is based on the turnover of the respective unit. On such allocated Cost, the Appellant is raising a tax invoice on die other registered units and paying GST on such allocated cost However, the Appellant is not allocating the cost of employees at the IMO to their other units since, in their understanding, the services rendered by the employee to the employer in the course of or in relation to his employment shall be treated as neither a supply of goods nor supply of service in terms of entry 1 to Schedule III of the CGST Act.
18. In view of the above, the Appellant approached the Authority for Advance Ruling for decision on the question “
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above ruling, the Appellant argued that the functions of the employee cannot be restricted to employment with the registered person merely on account of the location from where he renders his employment services; that the employment relationship exists between the employee and employer i.e legal entity and not confined to the location of registered person; that the organization as a whole is to be treated as an employer and not a particular branch. Therefore, the Entry I of Schedule III applies in their case and the AAR ruling is required to be reversed.
21. In the additional submissions made by the Appellant during the course of the personal hearing, it was argued that the mere allocation of expenses incurred by the IMO would not entail that there has been a supply of service by it to its units which should be taxed. They submitted that although he Appellant has adopted the cross-charge mechanism for allocating the expenses to the other units on the basis of proportionate turnover,
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action is within units of the same business entity. However, Section 7(1)(c) of the CGST Act provides that the scope of supply extends to activities referred to in Schedule I which are made or agreed to be made without a consideration, Entry 2 of Schedule I refers to Supply of goods or services or both between distinct persons even if made without consideration, The provisions of entry 2 of Schedule I of the CGST Act clearly state that transactions between distinct persons are to be treated as a 'supply' even if made without consideration. The bone of contention is whether the activities of the IMO, involving the services of the personnel stationed at the IMO and the expenses incurred in operating the IMO, all of which benefit and flow to the other distinct units of the Appellant, would amount to a 'supply' between distinct persons and constitute a taxable supply in terms of Section 7 of the CGST Act.
23. It is noted that prior to the introduction of GST, the events which were liable
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omething available to another or to fulfill the want of another'.
24. Under the GST law, the word 'Supply' has not been defined but rather the scope of what constitutes 'supply' is stated in Section 7 of the CGST Act which reads as under:
7. (1) For the purposes of this Act, the expression “supply” includes
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in Schedule III; or
(b) such activities or
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pact but also those things which the interpretation clause declares they shall include. [[para 23] – Commercial Taxation Officer, Udaipur, vs. Rajasthan Taxchem Ltd 2007 (209) ELT 0165 S.C. relied on] = 2007 (1) TMI 187 – SUPREME COURT OF INDIA.
Clause (a) of Section 7 (1) recognizes the forms of transactions by which a supply is effected. It presupposes an agreement between the two transacting parties to engage in the dealings, and the condition that such a dealing is in course of furtherance of business, and not otherwise.
Clause (b) recognizes imports of services for a consideration as an activity that would be construed as a 'supply' even if it is not made in course of furtherance of business.
Clause (c) lays down that the activities that are specified in Schedule I would be deemed to be filling within the meaning of 'supply' even when such a transaction is made or agreed to be made without a 'consideration' or recompense.
Clause (d) refers to Schedule II which lays down the ac
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ansactions, then it can be inferred that the activity is a 'supply' under GST law and thereby chargeable to GST. 'There are however, certain exceptions to the above principles
(i) Certain activities have been termed as a 'supply' even when they are made without a consideration. Such supplies have been listed in Schedule I to the CGST Act; and
(ii) Certain activities, even when made for a consideration, have been termed as not a Supply of either goods or services and thus kept outside the scope of levy of GST. These activities have been listed in Schedule III of the CGST Act.
26. In the case of the Appellant, the IMO is the corporate office of the legal entity Columbia Asia Hospitals Pvt Ltd. It is a central administrative body of the entity as whole. The role of the head Office in an organisation takes various forms and is affected by both internal and external factors. Nevertheless, some general tendencies are apparent. Broadly there are three core functions for a head office
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caters to various business processes of all their units located in Karnataka as well as in other States. The IMO handles activities like, accounting, payment of salaries, income tax deductions, provident fund deductions, legal support, strategic directions, technical support and shared knowledge base which benefit all their offices across the Country. The IMO is a registered person in Karnataka and is a distinct person in terms of Section 25(4) of the CGST Act The execution of the above mentioned activities by the IMO which is for the benefit of all their other units is in the nature of a service by the IMO As such there is a supply of service by the IMO to the other distinct units of the Company.
27. As per entry 2 of Schedule I of the CGST Act, any supply between distinct persons is to be treated as a 'supply' in terms of Section 7 of the said Act. In view of this deeming fiction in the law, the service supplied by the IMO to its other units by way of performing activities which ben
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activities of the employees cannot be treated as a supply. The Appellant has also gone on to argue in great detail that the employer in their case is the entity M/s. Colombia Asia Pvt Ltd and not the IMO. We find that the AAR has, in their discussions held that, there is an employee-employer relationship only at the IMO and not with the entity as a whole. Undoubtedly, an individual is employed by the entity and serves the Organisation. However, the applicability of the entry I of Schedule III is to be understood in the background of the GST legal provisions. As already stated earlier, every unit of an entity Who is required to obtain a registration in more than one State shall, in respect of each such registration be considered as a distinct person in terms of Section 25(4) of the CGST Act. In other words an entity may have several registered units in different States. Each registered unit albeit part of the same business entity, is treated as a 'distinct person' under the GST law. A d
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hough all distinct persons are of the same business entity. Such services of employees, when rendered in the course of their employment are not considered as a 'supply of service' in terms of entry 1 to Schedule III. However, when the services of employees are benefiting other distinct persons, then such services of employees will be considered as a 'supply of service' by one distinct person to another. It is in this perspective that the entry I to Schedule III should be viewed and understood. The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, in instant case, the services of the employees at the IMO in so far as they are benefiting the other registered units of the Appellant are to be considered as a Supply of service' by one distinct person to another, and by virtue of the entry 2 of Schedule I, supply of services between distinct persons even if without consideration is a “supply” within the scope of Section 7 a
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cost of provision of such service.
Rule 31 of the CGST Rules provides that where the value of a supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of Section 15 and the provisions of Chapter IV of the CGST Rules. Provided that in the case of supply of services, the supplier may opt for this rule ignoring Rule 30.
30. The Appellant in their additional written submission have also argued that the expenses incurred by the IMO are for services availed by it from third party Service providers; that the cost of such expenses is attributed to other registered units In the books of accounts for determining the profitability of each unit; that they 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
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fundamental difference between the concept of ISD and that of cross charge. 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 Cross charging of expenses may or may not involve ITC and relates to both goods as well as services.
31. In the case of cross charge, there is an element of service rendered by the person who cross charges his other units even though they belong to the same legal entity. On the other hand, in the case of ISD, there is no element of Service at all, but a mere distribution of Credit Further, certain expenses like rent paid on the immovable property, housekeeping services, etc incurred in maintaining and operating the IMO will not be distributable under the ISD route, rather they are required
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in the process of doing so. We will not dwell on this aspect as it is not relevant to the issue at hand. The question that emerges in this appeal is whether the IMO is providing 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. The cost of the employees working in the IMO is an integral part of the cost of the services rendered by the IMO to its other distinct units. The services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant, will not be termed as 'employee-employer relationship' and will therefore not fall within
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