Background
GST is levied on supply of goods/services. Goods is defined as every kind of moveable property...... Service is defined as anything other than goods.
Section 7 (1) of GST Act which is related to the scope of supply clearly states "supply" includes-
i. 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...
ii. It further covers the activities specified in Schedule I, made or agreed to be made without a consideration; ..........
Schedule I deals with the activities that are to be treated as supplies, even if made without consideration. Entry 2 of Schedule I is follows:2. 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.
The branch offices or registered offices of an organization which are located in different states are distinct persons under the Act. Extract of relevant provision as under:
a. A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons under GST.
b. Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.
Accordingly when GST registered branch of a company in one state say Karnataka supplies goods or services to branch of same company in another state say Haryana, it is treated to be a supply which is liable to GST, even when such services are supplied without consideration.
Several companies are having branch offices in multiple states across India, with infrastructure, resources including employees. The customer A Co may enter into agreement with head office[HO] of X Co say in Bangalore, for supply of software services, but the services to fulfill the order maybe done by employees of X Co located at say Gurgaon branch of said company.
In another scenario, the head office of ABC Co could be in one state say Karnataka and the activities are done by employees at HO, in course of employment, with respect to accounting, and maintenance of IT systems, for branches/units located in other states.
The question which arises in respect of above transactions is whether it can be said that there is supply of services, supplied by branch located in one state to branch in other state, and taxable to GST. This issue has now become hotly debated due to recent advance ruling in Columbia Asia [2018-TIOL-113-AAR-GST ] where authority has affirmed the view that head office will have to pay GST and raise invoices to its branches [in other states] as the same are a ‘Supply' as per section 7 read with Schedule I of the CGST Act, 2017.
In this backdrop the paper writer has examined GST implications on such transactions done between branches located in different states.
Note:GST is exempt on supply of goods/services done by one branch in a state such as Karnataka to branch within state, when such branches are covered in same GST registration for that state. Consequently this aspect not covered further here.
First we examine GST and services by employee to employer
Entry No.1.of the Schedule III which is related to the activities which are to be treated neither as a supply of goods nor supply of services has an entry covering services by employee to employer in course of or in relation to his employment.
In order to be covered in said entry, the following are the requirements-
a. The service has to be provided by an employee.
b. The service has to be received by employer.
c. The service has to be in the course of or in relation to employment.
The words ‘in course of’ indicates that the work should be performed during course of and as a part of the contractual obligation. The expression ’in relation to’ is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might have a direct and an indirect significance depending on the context. Doypack Systems (P) Limited vs. UOI (1988(36) ELT 201(SC). The word in relation to is considered as equivalent to or synonymous with concerning or pertaining to.
In other words the usage of the words ’in the course of or in relation to’ in the context of employment refers to the work performed by employee should be as per or in accordance with the term of the contract or it should be necessary to accomplish the obligation arising out of the contract. Therefore where any act is done by the employee though not directly as per contractual obligation, but directly or indirectly having any nexus with the terms of employment, could be considered as in relation to employment.
It is necessary that the services should be provided by an employee to an employer. The relation of employer and employee is a prerequisite for coverage under this exclusion. If all the conditions which are discussed earlier are satisfied, then the remuneration given by the employer to the employee would be covered by the exclusion and would not be liable to GST.
If rendition of service is beyond the scope of the obligation which is imposed on the employee by contractual agreement between the parties, it may not be treated as in the course of employment as it is something which is done outside contractual arrangement. Services provided outside ambit of employment for a consideration would be a service.
There can also be cases where staff is employed by one or more employers who normally share the cost of such employment. The services provided by such employee would be covered by the entry 1 in Third Schedule to GST Act.
Another arrangement could be where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later recouped from the other employers on an agreed basis on actuals. Such recoveries would not be liable to tax as it is merely a case of cost reimbursement
It was similarly held in a number of decisions under erstwhile Service tax law including in Volkswagen decision (2013-TIOL-1640-CESTAT-MUM), that payment to employees is excluded from ST levy when agreement shows that employees are on principal to principal basis. The provision of service by an employee to the employer in the course of or in relation to his employment has been stipulated as exclusion from service definition under negative list. This view has persuasive value under GST as well.
GST and inter-branch services
a. Services by employee in one branch office for customer service contracts entered by branch office in other state:
The services provided to the employee to employer, are in the course of the employee-employer relationship. The services provided at any branch by employees are services in course of employment. The mere supply of services by employees located in branch in one state to branch located in another state, could not attract GST as there exists employer-employee relationship between the employee and the employer-legal entity ie the company. The customer may have contract with head office[HO] say in Bangalore, for supply of consulting services, but the consulting services to fulfill the order maybe done by employees of same Co located at say Chennai branch of said company. When employee at say Chennai renders services, such as say consultancy services towards contract received by other registered branches, [which are distinct persons of same legal entity], nature of activities still continues to be services by employee to employer in course or in relation to employment as he is employee for company as a whole. Consequently in our view this could be excluded at Schedule III entry 1.
We caution, the dept view could be that there is no employer and employee relationship between the employees at one branch and branch located in a different state,under GST, even if they are belonging to the same legal entity. Further revenue could take contention, the branches in different states are treated as distinct entities and services supplied by employees at a branch to any branch in another state, it is treated as supply of services between distinct persons, even when there is no consideration vide Schedule I entry 2.
In such scenario, dispute may arise in this regard unless the judicial supports are in place for these aspects under GST, which may take next 8-9 years to attain finality.
To continue earlier example, where the assessee seeks to take least risky option, Chennai office could raise tax invoice, charge and pay IGST treating it as interstate supply of services done to Bangalore HO. This is especially where the receiving interstate branch is engaged in supply of taxable goods and services and can avail input tax credit. The receiving location can avail credit, based on invoice raised by supplying branch.
b. Allocation of expenses between branch offices
In addition, at the head office say at Bangalore employees provide accounting and corporate administrative services. The said services could be said to be supplied by Bangalore office employees and consumed by branches located in other states such as Gurgaon, Vizag etc.
Nature of activities still continues to be services by employee to employer in course or in relation to employment as he is employee for company as a whole. Consequently this could be excluded at Schedule III entry 1.
Dispute may arise in this regard. Dept may contend this is treated to be a supply of service between distinct entities which is taxable to GST, even when there is no consideration. Schedule I-entry 2
Where the assessee takes conservative stance, it could take call to raise invoice, charge and pay IGST on interstate supply of services. The receiving interstate branch which is engaged in supply of taxable goods and services and can avail input tax credit.
c. Services paid for at one location but used for entity as whole
Certain services maybe procured centrally at say Bangalore HO but used by entity as a whole, at various branches. Example could be audit fee, software licenses etc.
In such scenario, the dept could deny credit availed at Bangalore office alleging that the input tax credit on such expenses is wrongly being availed at Bangalore when the benefit of such expense is also taken by branches in other states.
The denial of credit may not be in line with law. Input tax credit is allowed when the goods/services are used in course of the business of making taxable supplies by entity. When the entity is paying output GST as a whole at different locations in different states, the credit should not be denied in one state, by citing the benefit of the expense is at a different state.
However GST being state based registration, such issues maybe raked up during dept audit. In such scenario, company could take ISD registration and distribute the credit related to different locations, directly to such locations in other states. Alternately cross charge the expense under tax invoice, and when the receiving interstate branch is engaged in supply of taxable goods and services and can avail input tax credit.
When the company branches at different states are engaged in supply of exempted goods or exempted services, then the branches cannot avail credit and tax charged becomes a cost. In such case,payment of GST on above said interstate transactions in services, may be decided to be kept on hold and call need to be taken in this regard by entity. However, risk of litigation at future date with demand along with interest and penalty is there if tax is not paid
Recent Advance Ruling
Columbia Asia [2018-TIOL-113-AAR-GST ]
Facts: The Applicant is a private limited company engaged in providing health care services categorizing them as In-patient (IP) and Out-patient (OP) services. The Company is also engaged in supply of medicines (pharmacy) to in-patients and out-patients. It also operates Restaurant / Canteen services in its premises which is used for supplying food and other eatable items to its patients and their attendants.
Issue: The question on which advance ruling is sought is as follows:
"Whether the 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 services as per Entry 1 of Schedule III of the CGST Act?".
Decision: The employees employed in the Corporate Office are providing services to the Corporate Office and hence there is an employee-employer relationship only at HO. The other offices are distinct persons and therefore the employees in the HO have no employer employee relationship with other offices. The activities performed by the employees at corporate office in course of or in relation to employment such as accounting, administrative and IT maintenance for units located in other states is distinct persons shall be treated as supply under Schedule II Entry 2 of GST Act.
It maybe noted that advance ruling is applicable to the person who has applied for the same and not to others.
Conclusion
This issue may lead to confusion and demands even though clearly the services supplied by employees to employer in course of employment are excluded from tax levy. Till such time that there is clarity with regard to GST on such transactions, when the receiving branch located in another state, is in a position to avail credit, suggested that the supplying branch raise tax invoice and charge GST. The receiving branch can avail credit to extent related to taxable supplies of goods/services done by it.
The author can also be reached at roopa@hiregange.com
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