Many Taxpayers have received Show Cause Notices (SCN) where it was proposed to levy GST on HO Expenses Apportioned. Department in such cases are of the view based on ruling of Karnataka AAAR in case of M/s. Columbia Asia Hospitals Private Limited [ (2018) 100 taxmann.com 501 (AAAR-KARNATAKA)] and/or Haryana AAR in case of M/s Tata Sia Airlines Limuted [ (2021) 124 taxmann.com 93 (AAR - HARYANA) ] where it was held that:
- for purposes of GST, the corporate office and the branches are distinct persons;
- relationship of employer-employee is limited between the corporate office and employees employed therein and not between such employees and other branches;
- any support by the corporate office employees to the branches will be liable to GST, for which fair-market value shall include the employee cost.
Therefore, Department is trying to levy Cross-Charges in these supplies
- Accounting, Administration, IT System maintenance etc. benefitting entire company and all branches across state or in different states.
- Procurement of common input services and allocating expenses to Branch Offices for determining Branch wise Profitability. (This activity is usually for Internal MIS Purposes)
- Providing routine tasks or maintenance and charging these to Branch Offices on cost plus mark-up basis.
Though the advance ruling is only binding upon applicant who sought such ruling the principles derived in this ruling are being used in other cases too.
In current business environment, for consistency, rational decision making, efficiency and productivity multi-business groups/multi-locational companies have common infrastructure and management. Some of the common business practices prevalent are: -
- Sharing of brand name, logo, marketing material etc.
- Common bank account for business operations, operated from corporate office
- Centralisation of various internal functions such as accounting, tax compliances, legal, HR, IT support etc.
- Infrastructure sharing by different business segments in corporate office and management time invested in decision making for different business segments
- Contract/price negotiations/discussions with external stakeholders, including customers, vendor, banks and even in some cases overseas management
- Availment of services of external service providers such as legal or business consultants
- Issuance of sale invoices from one office, to avoid multi-state jurisdiction challenges in case of any contract dispute
- Single invoice by exporters from corporate office, working out from multiple offices across country, for ease to customer as well as single refund filing
The aforesaid list is very limited & indicative and there may be countless scenarios in which corporate office may be providing support to branches and/or vice versa.
The erstwhile service tax laws had concept of input service distributor ("ISD"), which was continued under GST for distribution of credit of common services availed by corporate office to branches. The turnover based formula, was taken as base for distribution of common credit from corporate office among branches. Thus, to an extent such issue was partially taken care. However, if the Government intends businesses to cross charge each bit of expense incurred at a corporate level, purpose of carrying forward ISD mechanism to GST regime becomes redundant.
Contrary to the above-mentioned Karnataka AAR/AAAR ruling, recently Maharashtra Authority for Advance Ruling ('MH AAR'/ 'AAR'), in the case of M/s. Hitachi Power Europe GmbH [ (2020) 117 taxmann.com 537 (AAR - MAHARASHTRA)], answered the following question in negative- Whether GST is applicable on accounting entry made for the purpose of Indian accounting requirements in the books of accounts of project office for salary cost of expat employees.
Maharashtra 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; PO is an extension of HO and hence 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.
Tamil Nadu AAR in case of M/s Takko Holding GmbH [ (2018) 98 taxmann.com 334 (AAR - TAMILNADU) ] it was held that "Where RBI has permitted German-company to establish a liaison office as they are engaged in trading of clothing and textiles and operates clothes-shops and markets, and liaison activities undertaken by applicant were strictly in line with condition specified by RBI permission letter, same do not amount to supply under CGST and SGST Act and it is not liable to pay CGST, SGST or IGST, as applicable, nor is it required to get itself Registered under GST for liaison activities."
Further in case of, CCE & ST v. Nissin Brakes India (P.) Ltd. [Civil Appeal Diary No. 45344 of 2018, dated 22-2-2019] 2019-TIOL-151-SC-ST, upheld by the Apex court [TS-230-SC-2019-ST] wherein the CESTAT observed that the expat employees directly work under the supervision of the Indian company and the Indian company deducts TDS on such salary paid. Further, no consideration is flowing from the Indian company to the foreign company and hence no agency-client relationship exists. The CESTAT further held that when there is a relationship of employer-employee, the method of disbursement of salary does not matter.
In Habufa Meubelen B.V., In re [2018] 95 taxmann.com 120 (AAR - Raj.) and Takko Holding GmbH ,In re [2018] 98 taxmann.com 334 (AAR – Tamil Nadu) the respective AARs held that the Liaison Office (LO) in India and HO cannot be treated to be separate persons for the reason that the LO has no source of income and the HO reimburses all its expenses; therefore LO is a mere extension of the HO.
With this background, it can be said that the authority in the above rulings has not discussed the GST provisions comprehensively. Therefore, a thorough deliberation and discussion of these provisions is required to achieve the appropriate tax position for transactions discussed above. It may not come as a surprise if the above rulings are challenged in the court of law. Rulings of AAR/AAAR are not totally correct as they have not taken note of overall GST and order are based on narrow interpretation of GST laws. Branch Offices are not an Independent Units but part of same Organization. When these two are part of same organization how can there be supply from one unit to another unit? Further, employees of Head Offices are employees of entire organization and they do not provide any additional service to Branch Office. If you refer their appointment letters of these employees they have duties toward whole organization and that is mentioned in their "Key Responsibility Areas" (KRAs). Supply as per Section 7 will have same meaning whether it will have to be supply between HO & BO and/or HO & Liaison Office, but AARs & AAARs are considering supplies in former case and exempting supplies in later case. If it is not supply in case of Liaison Office, then same should also be considered out of GST in case of Branch Office too. Also, these transactions are usually revenue neutral except when dealing with exempt supplies. Therefore, unnecessary compliance and blocking cash flows is not sign of good taxation law. This issue should be referred to "Law Committee" of GST Council. Show Cause Notices in all such cases should be kept pending till "Law Committee" comes with some clarification. If timely actions are not taken, then this issue can become new battle ground for Litigations in future.
Disclaimer: This article is only for knowledge sharing. Author does not take any responsibly for any loss caused to any individual or organization on based of this article.
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