2018 (12) TMI 1604 - AAAR - GST

Supply of Services or not? - distinct persons - 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 - supply as per Entry 2 of Schedule I of the CGST Act or not supply of Service as per Entry 1 of Schedule III of the CGST Act? - employer-employee relationship. Challenge to Advance Ruling No. KAR ADRG 15/2018 dated 27.07.2018 2018 (8) TMI 876 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA pronounced by the Karnataka Authority for Advance Ruling Held that - There is no dispute that each unit registered in different States is a distinct person as per 25(4) of the CGST Act. When two units of the same business entity in different States take separate GST registration, then each registered unit will be considered as a distinct entity/ person as per the GST law Every distinct person will have to maintain separate records for their principal place of business. The laws relating to filing of returns and other compliance procedures shall apply to both of them separately. Every distinct person is liable to pay GST on all supplies of goods and services or both made by it and every distinct person is treated as a separate taxable person. In the event of supplies between distinct persons, there will not be a consideration element as the transaction is within units of the same business entity. Prior to the introduction of GST, the events which were liable to tax under the existing laws were the events of manufacture, sale and the provision of a taxable service. Under the GST regime of taxation, the taxable event which attracts the levy of GST is the supply of goods or services in terms of Section 9 of the CGST (and SGST) Act or Section 5 of the IGST Act, depending on whether the transaction of supply is intrastate or interstate Thus the object of tax in GST is clear and far more comprehensive and is certainly broader than any single earlier law that has been subsumed in it The object of tax in GST is supply as understood in Section 7 of the Act. Employer-employee relationship - Held that - The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, in instant case, the services of the employees at the IMO in so far as they are benefiting the other registered units of the Appellant are to be considered as a Supply of service by one distinct person to another, and by virtue of the entry 2 of Schedule I, supply of services between distinct persons even if without consideration is a supply within the scope of Section 7 and is liable to GST. What and how should the value of Such Supplies made by the to their branch offices be established? - Held that - Rule 31 of the CGST Rules provides that where the value of a supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of Section 15 and the provisions of Chapter IV of the CGST Rules. Provided that in the case of supply of services, the supplier may opt for this rule ignoring Rule 30. Expenses incurred by the IMO - cross charge mechanism for allocating the other expenses on the basis of proportionate turnover - Held that - The ITC of the GST paid on the receipt of services or goods from a third party by the IMO can be availed by the IMO. If there are certain services commonly used by all the distinct persons, then the ITC can be distributed to all the units by the ISD route. There is a fundamental difference between the concept of ISD and that of cross charge. In the ISD concept, only ITC on input services which are attributable to other distinct entities are distributable. However, in a cross charge mechanism, all expenses incurred by a distinct person for the purpose of carrying out activities the outcome of which benefits other distinct persons is required to be cross charged Cross charging of expenses may or may not involve ITC and relates to both goods as well as services - In the case of cross charge, there is an element of service rendered by the person who cross charges his other units even though they belong to the same legal entity. On the other hand, in the case of ISD, there is no element of Service at all, but a mere distribution of Credit Further, certain expenses like rent paid on the immovable property, housekeeping services, etc incurred in maintaining and operating the IMO will not be distributable under the ISD route, rather they are required to be allocated to the other units only by way of cross charge. Therefore, the argument of the Appellant that the ISD mechanism is squarely applicable to them and not the cross charge method is not legally correct. Thus, it is concluded that the IMO is providing a service to its other distinct units by way of carrying out activities such as accounting, administrative work, etc with the use of the services of the personnel working in the IMO, the outcome of which, benefits all the other units and whether such activity is to be treated as a taxable supply in terms of the entry 2 of Schedule I read with Section 7 of the CGST Act - The cost of the employees working in the IMO is an integral part of the cost of the services rendered by the IMO to its other distinct units. The services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant, will not be termed as employee-employer relationship and will therefore not fall within the purview of entry 1 to Schedule III - the Ruling dated 27.07.2018 passed by the Karnataka Authority for Advance Ruling is upheld. Ruling - The India Management Office (IMO) of the Appellant is providing a service to its other distinct units by way of carrying out activities such as accounting, administrative work, etc with the use of the services of the employee working in the IMO, the outcome of which benefits all the other units and such activity is to be treated as a taxable supply in terms of the entry 2 of Schedule I read with Section 7 of the CGST Act.

Summary

Issues Involved:
1. Taxability of services performed by employees at the Corporate Office for units located in other states.
2. Distinction between cross-charge mechanism and Input Service Distributor (ISD) mechanism.
3. Applicability of Entry 1 of Schedule III of the CGST Act regarding employee-employer relationship.

Detailed Analysis:

Issue 1: Taxability of Services Performed by Employees at Corporate Office for Other Units:
The appellant, a healthcare service provider, sought a ruling on whether activities performed by employees at the Corporate Office (IMO) for units in other states should be treated as a supply of services under Entry 2 of Schedule I of the CGST Act or as services by an employee to the employer under Entry 1 of Schedule III. The appellant argued that the employment relationship exists with the entire legal entity, not confined to a specific registered unit, and thus, activities by employees should not be treated as a supply of services.

The Authority for Advance Ruling (AAR) held that the IMO and its units in different states are distinct persons under Section 25(4) of the CGST Act, and services provided by employees at the IMO to other units are treated as a supply of services under Entry 2 of Schedule I. The AAR ruled that there is no employee-employer relationship between employees at the IMO and other units, making Entry 1 of Schedule III inapplicable.

The appellate authority upheld this ruling, emphasizing that each registered unit is a distinct person under GST law, and services provided by employees at the IMO to other units constitute a taxable supply. The cost of employees at the IMO is integral to the services provided and must be factored into the valuation of the supply.

Issue 2: Distinction Between Cross-Charge Mechanism and ISD Mechanism:
The appellant argued that the allocation of expenses by the IMO to other units should not be considered a supply of services and suggested that the ISD mechanism should be applied instead of cross-charge. The appellate authority clarified that the ISD mechanism is for distributing input tax credit on input services, whereas the cross-charge mechanism involves allocating expenses incurred by a distinct person for services benefiting other distinct persons.

The authority explained that certain expenses like rent and housekeeping services incurred by the IMO cannot be distributed via ISD and must be allocated through cross-charge. The IMO provides services to other units, and these services, including employee costs, must be cross-charged and subjected to GST.

Issue 3: Applicability of Entry 1 of Schedule III Regarding Employee-Employer Relationship:
The appellant contended that services by employees should fall under Entry 1 of Schedule III, which excludes services by an employee to the employer from being treated as a supply. The appellate authority rejected this argument, stating that the employee-employer relationship is confined to the distinct person (registered unit) where the employee is stationed. Services benefiting other distinct units are considered a supply under Entry 2 of Schedule I, and GST is applicable.

The authority concluded that the services of employees at the IMO benefiting other units do not fall under the employee-employer relationship for those units and are thus taxable. The previous CESTAT decisions cited by the appellant were deemed inapplicable as they were rendered under the Service Tax law, which has different taxable events compared to GST.

Conclusion:
The appellate authority upheld the AAR ruling, confirming that the IMO provides taxable services to its other distinct units, and these services, including employee costs, must be cross-charged and subjected to GST. The appeal was disposed of accordingly.