Cross-charging employee costs between distinct … Tax Alert 3-19.pdfThis tax alert summarises an...

SCV&Co.LLP Chartered Accountants SCV GST Alert

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Cross-charging employee costs between distinct persons under GST Law: Karnataka AAAR

Executive Summary

This tax alert summarises an advance ruling in the case of Columbia Asia Hospitals Private Limited wherein the Karnataka Appellate Authority for Advance Ruling, vide Order No. KAR/AAAR/05/2018-19 dated 12th December 2018, has held that activities performed by employees at corporate office in course of employment such as accounting, other administrative and IT system maintenance for units located in other states as well i.e., distinct persons as per Section 25(4) of the CGST Act 2017 shall be treated as supply as per Entry 2 of Schedule I of the CGST Act 2017.


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Facts of the Case

• The Appellant is an international healthcare group operating a chain of modem hospitals across Asia. The Appellant was operating across 6 different States having 11 hospitals in India. Each GSTIN is a distinct person in terms of Section 25(4) of the CGST Act 2017. The management operations of all 11 hospitals in India were centralized in the India Management Office (IMO) Bangalore, a person registered under GST in the State of Karnataka.

• IMO handled the operations such as accounting, administrative work and maintenance of IT systems in respect of all the units in India. Certain expenses such as rent paid for immovable property & other equipments, travel expenses, consultancy services, communication expenses etc. were incurred by IMO.

• The aforesaid expenses incurred in operating the IMO were allocated to other registered units by raising a tax invoice. However, the Appellant was not allocating the cost of the employees at the IMO to other units as the services rendered by employee to 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 2017.

• With regard to the above issue, the Hon’ble KarnatakaAuthority for Advance Ruling (Karnataka AAR) held that corporate office and units are distinct persons as per Section 25(4) of the CGST Act 2017 and the employees working at IMO have no employee-employer relationship with other branches i.e., distinct persons under the GST Law. Hence, the activities performed by employees at IMO for other branches shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.

Issues before the Appellate Authority

Whether the Karnataka AAR has erred 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 CGST Act 2017 ?


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Appellant’s Contention

• The term “employer” has not been defined under GST Act. In common parlance an employer means “a person or entity which hires the services of another”. An employee shall work as per the directions of the Company whether he is located at the IMO in Karnataka or at any of the branch office located in other states. The employment relationship exists between the employee and the legal entity and not confined to the location of IMO. Hence the services rendered by employees which benefit other units of the entity shall not be treated as supply of service as per Entry 1 of Schedule III of the CGST Act 2017.

• Further the appellant submitted that the functions of the head office are inherent basic stewardship functions of the legal entity and accordingly, such functions do not constitute supply of services by head office to other branches.

Appellate Authority’s Ruling

• Each unit registered in different states is a ‘distinct person’ as per Section 25(4) of the CGST Act 2017. A transaction between distinct persons even without consideration is termed

as a supply under Section 7(1)(c) of the CGST Act 2017 read with Entry 2 of Schedule I of the CGST Act 2017.

• An individual is employed by the entity and serves the organisation. However, the applicability of the Entry 1 of Schedule III of the CGST Act 2017, which takes services by an employee to the employer in the course of or in relation his employment out of GST ambit, is to be understood in the background of the GST legal provisions. Accordingly, there is an employee-employer relationship only at the IMO and not with the entity as a whole.

• When the services of employees are benefitting other distinct persons, then such services of employees will be considered as a 'supply of service' by one distinct person to another.

• Therefore, in the instant case, the services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant are to be considered as a 'supply of service' by one distinct person to another.


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Our Comments • It is noteworthy that Entry 1 to

Schedule III to the CGST Act 2017 which takes services by an employee to the employer in the course of or in relation his employment out of the GST ambit uses the words “services by an employee to the employer” and not “services by an employee to a person”. The concept of distinct persons as envisaged under Section 25(4) of the CGST Act 2017 is applicable in context of a person and not in context of an employer. An employee is

employed by an employer i.e., a

legal entity as a whole in terms of an employment contract. The words ‘employer’ and ‘employee’ under Entry 1 to Schedule III to the CGST Act 2017 should be given their ordinary meaning and should not be interpreted in the manner as has been done by the Hon’ble Karnataka AAAR.

• Although an advance ruling is applicable to the applicant concerned, however, this ruling could result in the tax authorities raising this issue in other cases.


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Cross-charging employee costs between distinct … Tax Alert 3-19.pdfThis tax alert summarises an...

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