GST Update- No GST liability on payments to expats working in local arms of MNCs: Mah AAR 88/2020-21

There have been instances of tax authorities issuing notices to MNCs in a number of cases where an expat employee received payments from the parent in his home country in the service tax regime also.
The similar issue has undergone consideration in the GST regime as to the taxability of the salary payments being made to the expatriates working in India. Germany-based Hitachi Power Europe GmBH, has sought the ruling in respect of the Project Office in India for supply of goods and supervisory services to NTPC, Meja Urja and Damodar Valley Corporation etc, employs a number of expats. The applicant Hitachi Power approached the AAR on whether the GST is applicable on the accounting entry made in the books of accounts of the PO for salary cost of expat employees, where they argued that any project office of a foreign company is required to maintain its financial books of accounts in a manner which would reflect a true and fair view of the business of the company in India as per the requirement of the Companies Act, 2013. Since most of these employees have their primary bank account outside India, their salary is paid from the company’s bank account located abroad, for administrative convenience.
The question before the AAR was whether a foreign company and its project office in India can be considered as distinct entity or as part of same entity. The AAR ruled that a project office is set up for securing the interests of the foreign company and undertake project related activities and the fact that the project office has been granted PAN and TAN in the name of the HO proves that the project office is a mere extension of the HO. Therefore, the AAR concluded that the expat employees working at the PO in India but drawing salary from the HO and complying with all TDS and Form 16 related provisions, are employees of HO they are same entities. Considering that such relationship between the HO and expat employees is a relationship of an employee and employer, the same shall be governed by Schedule III which clearly lays down the fact that services by an employee to an employer shall not be considered as supply and hence not subject to GST.

Now, coming to the, Explanation 1 to section 8 of the IGST act , it states that where a person has an establishment in India and any other establishment outside India , then such establishments shall be treated as establishments of distinct persons. In the instant case, the applicants project office is situated in India and employees are working in India but their salary is being paid from head office situated outside India. Hence, the head office and project office will be treated as distinct person. Now the question arises whether the employees of head office will be treated as employee of project office though they are distinct person.
To move further, we have to see the decision of M/s Columbia Asia Hospitals Private Limited pronounced by Karnataka AAR which has ignited the spark wherein the ruling implied that businesses with multi-state offices are required to raise invoices and charge tax on in-house centralised service functions including overall management, policy decisions and execution thereof. The AAR ruled that since the corporate office in Karnataka and other branches are 'distinct persons' as envisaged by Section 25 of the CGST Act, the employer employee relationship exists between the employees and corporate office and not between the employees and branches. In-house service functions such as human resources and payrolls, if carried out from a centre in one state for offices in other states, will attract GST for which it will have to issue an invoice.
Foreign companies having liaison offices in India will not have to cough up GST on reimbursements of charges or expenses as per the ruling by the Rajasthan AARin the case of M/s Habufa Meubelen B.V. (Raj/AAR/2018-19/05) and Takko Holding GmbH the company had sought a ruling on whether reimbursements of salaries, rent, security, electricity by the parent will face GST.
Hence, Columbia Asia decision is saying that the employees of one branch office are not employees of other. As such, the GST is payable on the services provided by one branch office’s employees to other branch. But impugned order under study has held contrary to the same. It says that employees of head office situated outside India working in branch office in India are employees for both the establishments and hence GST is not applicable. Although this decision has not discussed the concept of “distinct person” in his order yet it is very favorable orders for all assessees. Hence, this controversy will end here and many rounds of litigation is to be seen in future for this topic. Else the Government should come out with a clarification.

The content of this GST update is for educational purpose only and not intended for solicitation.
You can reach us at www.capradeepjain.com, at our facebook page on https://www.facebook.com/GSTTODAYBYPRADEEPJAIN/as well as follow us on twitter at https://www.twitter.com/@capradeepjain21

Comments

GST Update- No GST liability on payments to expats working in local arms of MNCs: Mah AAR 88/2020-21

Post a Comment

Query