VAGARIES OF CROSS CHARGE & ISD – THE GST COUNCIL NEEDS TO INTERVENE Analysis of Ruling of the AAAR (Karnataka) in M/s COLUMBIA ASIA HOSPITALS PVT LTD.)

[AttnVivek Jalan]

Recently The Appellate AAR in Karnataka has opened a Pandora’s box in the case of M/s COLUMBIA ASIA HOSPITALS PVT LTD [ 2018 (12) TMI 1604 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA ]. In the ruling it has held that “the services of the employees at the Corporate Office 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, by virtue of the entry 2 of Schedule I, supply of services between distinct persons even if without consideration”

Another issue on which it has not dwelt is the fact “whether Cross Charge can be a substitute for ISD registration”

In this article we will dwell on both the above issues. First the fact whether the services of the employees at the Corporate Office are to be considered as supply of services to the branches.  Our views are the following –

1. The fact that the branch and head office are distinct entities for the purpose of GST is not a matter of dispute. The legal fiction of service/ goods supplied by distinct persons is to ensure that the respective consuming states get the revenue from GST.
2. A commercial organization establishes its branches to further the commercial activity that the principal body is engaged in. Commercial feasibility mandates that such branches exist to render services or to facilitate placement of goods. Therefore, to posit that the employees in the HO control the branches or make policy or co-ordinate activities does not require genius of a high order.

A branch, by its very nature, cannot survive without the HO. The credibility of the business in the eyes of the clients lies in the name and style of the HO. It cannot be substituted by any other entity. The activity of the head office and branch are thus inextricably enmeshed. There is no independent existence of the branch as a business. The economic survival of the branch is also entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office. 

3. The employees of the HO as well as the branches are the employees of the organization itself. The benefit of activities of the HO Employees will, undoubtedly, accrue to the branches. Similarly the benefit of activities of the Branch Employees will also accrue to the HO. Further, incase of need the employees of the branches/ HO travel to other branches/ HO to render services there. Furthermore an employee can also travel to a state where no registration has been obtained and render services in that state of value which can be more than the threshold limit of ₹ 20 Lakhs. However, reasonable intelligence suffices to identify the nature of the service rendered.

More so, the supplier of the service in the instant case u/s 2(105) of The CGST Act is the “employee”. The employment contract between the employee and the legal entity is requires the employee to perform duties at any deputed place and is not confined to the location of the registered person from where the said employee renders services.

Entry 2 in Sch I cannot disregard the contract and change the supplier of service from the “employee” to the HO/ Branch. On the contrary, even seen from the angle of GST, it is the service by an employee to various distinct persons as is the case of Joint Employment where staff is employed by one or more employers (distinct persons in the instant case) who normally share the cost of such employment. The revenue would have had no objection if the contract of employment with the employees had been signed jointly by all the employer-companies, and if these employer-companies were paying their respective share of salary to the employees directly. The problem in the present case has arisen only because instead of the Branches signing the appointment letter jointly, only one of them has signed the same. The reason for entering into such an arrangement is not difficult to see as employees may not be willing to sign contracts with several branches who collectively do not even constitute a separate legal entity. Not only for this reason, but even for the sake of convenience in contracting and accounting, contracts of such employment may be signed by only at one place and not by all. This, however, cannot make a difference to the taxability or otherwise of the employment contract.

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 trcouped from the other employers on an agreed basis on actual. Such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.

4. Arguments against the decision of the Appellate AAR in Karnataka in the case of M/s COLUMBIA ASIA HOSPITALS PVT LTD –
   1. There is no doubt that the provision of services by employees to distinct entities (HO & branches) is a supply.
   2. 2 activities are covered in Entry 2 of Sch I for taxability of supply without consideration –
      1. Supply of services between related persons (Employees to Employers)
      2. Supply of services between distinct persons u/s 25(4) (between HO and Branch)

The Entry 2 in Sch I which seeks to tax the services without consideration between distinct persons, cannot change the nature of the service itself from related persons (employer-employee) to some other service. “The Nature of the service” remains Services by an employee to the employer in the course of or in relation to his employment which is not within the purview of GST as per Entry 1 of Schedule III.

In the instant case, the AAAR has classified the supply as a supply between distinct persons u/s 25(4) rather than going into the substance of the activity which essentially is the Supply of services between related persons (Employees to Employers).

CONCLUSION: In the above case, we are of the opinion that the decision of the AAAR in the instant case of M/s COLUMBIA ASIA HOSPITALS PVT LTD certainly needs attention of the GST Council.

It may be noted that the GST Council has been very proactive in deciding a unique rate of GST in the case of SOLAR PLANTS in its 31^st GST Council Meeting and this matter is a fit case for the GST Council to take up.

CROSS CHARGE INSTEAD OF TAKING ISD REGISTRATION:

In the instant case it is also seen that the entity M/s COLUMBIA ASIA HOSPITALS PVT LTD in the instant case is not registered as an ISD and instead is cross charging certain common expenses. The AAAR has not dwelt is the fact “whether Cross Charge can be an alternate for ISD registration. In this regard, if we look into the provisions of the law we note the following –

1. For services Procured from third party (Legal fees, audit fees, professional charges etc.), the HO is not the supplier of such services and is neither the agent as envisaged u/s 2(105) of The CGST Act. Further the other states are not the recipients of such services as they are not paying consideration for such services as envisaged u/s 2(93) of The CGST Act.
2. Since the other branches are not recipients and the supplier is also a person other than the actual supplier, the condition u/s 16(2)(b) of the CGST Act to avail such ITC may not be fulfilled and hence, in our view, may come up for departmental questioning in future.

It is to overcome such procedural irregularity that ISD mechanism specifically finds a place in the CGST Act 2017.

Hence, in our view cross charge cannot be a substitute for availing ISD registration. ISD registration must be taken.

[ Mr. Vivek Jalan is a Fellow Member of the Institute Of Chartered Accountants of India (ICAI) & a qualified LL.B. He is the member of The CII- Economic Affairs & Taxation Committee. He is the Co Chairman of The Indirect Tax Committee of The Bengal Chamber of Commerce and Industry. He is also a visiting faculty for Indirect Taxes in The Bengal Chamber of Commerce and Industry, Institute Of Chartered Accountants of India and Institute of Cost Accountants of India.]

Discussions to this article

[KUMAR JAGADEESAN]

The Article on Advance Ruling in Columbia Asia Hospitals Limited =  2018 (12) TMI 1604 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA throws open many controversial decisions on which clarity is required. The appellants had submitted that they were charging some HO expenses in proportion to their various regsitered (under GST) entities ( distinct persons) and were are also paying GST by raising invoices. Since it was not an activity coming under ISD, they had not regsitered as ISD but while the Authority was seized of the issue got themselves regsitered as ISD.

But what I do not understand is their levy of GST on the cross charges apportioned by them to their other branches which was not necessary as the cross charges are only for their internnal purpose of arriving at the profitability or otherwise of their various branches by loading the common expenses of their HO like travelling expenses, rent of HO, audit expenses etc. Thus there is no supply of any service by the HO to their branches and hence no liability to GST. on cross charges as there is no supply in terms of GST.between distinct persons in terms of SCh II but the transaction is only distribution of common expenses incurred by the HO on some accepatble criterio. An accounting entry in the books of an entity for distributing common expenses among their productive units can by no stretch of imagination be deemed to supply of service.

I agree with Mr.Jalan that the employee remuneration is outside the scope of GST in terms of Sch III entry 1 as employment contracts are made by the organisation (legal entity) as a whole and not by the distinct amd separate units. Here also the common cost of employment at HO would not lose its character as serviec by an employee under a contract of employment and thus would be outside the purview of GST in terms of Sch.III.

While the Government and GST council are trying to simplify the tax administartion, rulings such as these would be making doing business in the country more complicated and cumbersome. A rethink is necessary on this aspect.

J.KUMAR

ADVOCATE HYDERABAD

[Ganeshan Kalyani]

I agree with Sri Jalan Sir and Sri Kumar Sir on the point that service of employee at Head Office to other branches do not quality as a service because employee is rendering service to company as a whole and not statewise.

I would like to seek view on why cross charge would not be a substitute to ISD. I would agree the nature of service will not stand good. As company cannot be providing legal consultancy service or courier service etc. However, it is supporting the other branches outside the State and therefore providing business support service taxable @18% GST.