CMA Rajendra Rathi
Contact: 99989 75889
Email: rajendrarathi162@gmail.com
To understand taxability on HO employees cost we have prepared article in three parts
- Views based on Acts
- Judicial pronouncement,
- Global practices
Relevant CGST Acts
Sec. 22…Separate GST registration in each state
Sec. 25(4)… A person registered in more than one state, each such registration shall be “distinct persons” for GST
Entry 2 to Schedule I…says transaction even w/o consideration between distinct persons to be treated as “Supply”
Entry 1 to Schedule III…says service by employee to employer in course of employment is not “Supply”
Relevant Judicial pronouncement.
I would like to summarize important judicial pronouncement of Columbia Asia which is very popular case on cross charge under GST by AAAR i.e., Appellate Authority of Advance Ruling.
In Columbia Asia pvt ltd company is providing health care services having an international health care group operating chain of hospital across Asia.
Columbia Asia Pvt Ltd is Presently operating branch offices in six states and head office at Karnataka.
Columbia Asia gone to AAR for applicability of cross charge on HO employees cost to branch.
AAR & AAAR held that yes cross charge is applicable.
In this case all relevant query questions are answered in para 19 & 32, relevant portion summary is as under.
1 There are two set of supply as per para 19
Ho employees provides services to HO
HO Employee cannot be employee of BO in view of distinct unit U/S.25(4)
HO to branch office
Employee of HO benefit to BO of Co. will be treated as supply
Means there is no employee employer relationship exist between HO employee and Branch offices which are distinct unit in terms of section 25 (4) hence entry 1 of schedule III will not apply. (Para 32)
2 Cost of Employee work in HO is an integral part of cost of services rendered by HO to BO. means HO is providing services to BO.
(a) Such HO activities to be treated as supply in terms of entry 2 of schedule 1 read with section 7.
3 Scope of Supply is very wide under GST in views of word includes which enlarge the meaning of words in statues accordingly authority held that
PARA 32
IMO (HO) is providing services to its other distinct unit (BO) with the use of employees working at HO and outcome of which benefit all other BO and such activity to be treated taxable supply in terms of entry 2 of schedule 1 read with section 7. (PARA-32)
One more advance ruling of B G shirke construction technology pvt ltd also support the taxability views.
B G shirke Constn technology pvt ltd have registered corporate office at pune. Shirke group is in business of civil construction, structural engineering corporate office of shirke group supplies Managerial and leadership services to its branch office and group companies which are distinct and related person and received fixed monthly charges from each of distinct and related persons.
In above case it is held that
It is held that Managerial and leadership services to its branch office and group companies which are distinct and related person is considered as supply of service in terms of section 7
It is also held that lump sum amount charged by Head office to its BO would be liable to GST under section 8 of CGST Act ie. Tax liability on composite supply.
So both advance ruling clearly held the employee cost of HO need to cross charge on BO (distinct person 25 (4)_ as per entry 2 of schedule 1 read with section 7.
Reference to Circulars, FAQ, etc.
OECD’s International VAT/GST guidelines issued in 2017 also emphasis on the rationale of VAT neutrality and it attempts to provide methodology for VAT regulator by way of cross-charge to achieve proper jurisdiction for taxing the final consumption
The Singapore GST guide issued on Reimbursement and Disbursement of expenses at para 6.23 to 6.26 dealing with secondment of staff inter aila clarifies that employee cost needs to be cross charged
Draft Circular under GST in June 2019 on the taxability of transactions between Head office and Branch
There needs to be ‘Joint Employment’ agreement between HO and BO to pay pro-rata salary in terms of pre-determined ratio for non-taxability [Para B of CBIC draft circular dated 27.07.2012 issued dealing with livability of service tax on staff benefits & employment related transactions]
Service Tax Education Guide at para 5.3.4 dealing with Global Agreement vis-a-vis a Global Framework Agreement visualizes that, expenses related to common facilities are to be cross-charged
The scope of expression ‘supply’ is very wide under GST law and even inter-state self-supplies are also made taxable [FAQ Sr. No. 7 dated 31-12-2018].
CBIC vide FAQ dated 31-12-2018 at Sr. No. 9 clarified that each activity undertaken which is included in the definition for furtherance or promoting of a business would get covered within the meaning of ‘in the course or furtherance of businesses.
Conclusion
HO Employee cost need to cross charge on Branch office in view of above legal provisions supported by latest judicial pronouncement i.e., AAR decision/supreme court judgment and circulars/FAQ.