Whether activities performed by employees at the corporate office for branch offices in the course of employment liable to GST?

PJ/Case Law/2018-2019/3495

Case: M/s Columbia Asia Hospitals Pvt. Ltd
Citation: 2018-TIOL-31-AAAR-GST
Issue:Whether activities performed by employees at the corporate office for branch offices in the course of employment liable to GST?
Brief facts: Columbia Asia Hospital Pvt. Ltd.1 (Applicant) is engaged in providing health care services. The company operates a chain of modern hospitals across Asia. The company is currently operating in six different states and accordingly obtained GST registration in these states. In addition, it has its corporate office viz. Indian Management Office (IMO) which is registered in the state of Karnataka. Through the IMO, common activities attributable to each state are performed.
In light of the above background, the applicant filed an application for advance ruling on whether the activities performed by the employees at the corporate office in the course of or in relation to employment for the units located in other states as well, shall be treated as supply as per entry 2 of Schedule I of the Central Goods and Services Tax (CGST) Act i.e. supply between related/distinct person made without consideration or it shall be treated as supply of services as per entry 1 of schedule III of the CGST Act i.e. services by an employee to an employer in the course or in relation to employment.
The Authority for Advance Rulings (AAR) held that activities performed by employees at the corporate office to a distinct person shall be treated as a supply of services between distinct/related persons (entry 2 of Schedule I of the CGST Act).
Appellant’s contention:Employees based in IMO perform certain activities which are common across all the units located across six states in India. These activities are in the nature of accounting, administration and maintenance of IT system etc. Apart from the aforementioned, IMO receives services viz. rent on immovable property, communication expenses, consultancy services etc. the cost of which are allocated to other units in proportion to the taxable supplies of each unit and accordingly IGST is paid on such allocation.
The question in the instant case is whether the services provided by the employees towards performing common activities needs to be treated as a supply of service between distinct persons.
Respondent’s Contention and Judgment:By virtue of entry 2 of schedule I, activities carried out between related/distinct persons in the course or furtherance of business is treated as supplies even if there is no consideration. The related party has been defined under section 15 of the CGST Act to include person which directly or indirectly controls the other.
GST law requires separate registration in each state/UT from where a supplier provides taxable supplies and accordingly each of the units are treated as a distinct person. Supply of goods or services, carried between the two or more units are treated as taxable supplies.
Services provided by an employee to the employer are a transaction in the nature of employment and thus outside the scope of GST. However, since corporate office and units in different states are distinct persons under the Act, there is no relationship between the employees of one distinct entity with another distinct entity, (at least as per the GST Act) even if they belong to the same legal entity.
Hence any activities made between related persons made or agreed to be made without a consideration shall be covered under supply of goods or services. The valuation of such services is to be done as per the provisions of section 15 of the Central Goods and Services Tax Act, 2017
Decision: It was held that activities performed by the employees at the corporate office in the course of or in relation to employment for units located in other states shall be treated as supply and accordingly, employee cost also needs to be taken into consideration for the purpose of levy of GST.
Comment:This ruling states that as the offices across India are considered as related persons and distinct persons, services provided by key managerial person with respect to other offices will be considered as supply of service by corporate office to the branch office. In addition to the cross charging done by the hospital, they would now be required to consider employee cost for the purpose of valuation of the supply of service. It is undeniable that the services of an employee are outside the ambit of GST and, so, cannot be taxed. However, by the confirmation of advance ruling by the appellate authority, IMO is required to pay tax on an element (human resources costs) that has been consciously kept outside the ambit of GST, given that the law provides that services by an employee to its employer in the course of or in relation to his employment is not ‘supply’.
Prepared by: Himanshu Bhimani

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PJ/Case Law/2018-2019/3495

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