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TMI Blog2018 (12) TMI 1604X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) TMI 876 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA pronounced by the Karnataka Authority for Advance Ruling. Brief facts of the case:- 1. The appellant is registered under GST with GSTIN No. 29AACCC2943F1ZS and is engaged in providing health care services. The appellant is a private limited company having an international healthcare group operating a chain of modern hospitals across Asia. The appellant is presently operating across six different States having eleven hospitals out of which six units are in the state of Karnataka. 2. The appellant filed an application on 1403.2018 before the Karnataka Authority for Advance Ruling under Section 97 of CGST/KGST Act, 2017 read with Rule 104 of CGST/KGST Rules, 2017 in form GST ARA-01, seeking a ruling on the following question: 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise an invoice for Rs. 10,000/- on the Company in Pune and discharge the applicable GST on this amount. 3.4. However, with respect to employee cost there are no invoices raised by the management Office treating the same as activities carried out by employees in the course of or in relation to his employment which does not amount to supply of service. The Appellant explained before the Authority that, the activities carried out by employees from the IMO for accounting and other administrative functions with respect to other units, would amount to supply of services between distinct persons without consideration as per Entry I of Schedule l. However, by virtue of specific relaxation provided in Entry I of Schedule III of the CGST Act, which states that "Services by an employee to the employer in the Course of or in relation to his employment" shall not be treated as supply of service. the same shall not be treated as Supply of services 4. The appellant also submitted before the Authority that, the employment relationship between the employee and employer exists with a single legal entity as whole and is not confined to the location of registered person from where the said employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing grounds: 7.1 The Advance Ruling Authority has e 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 Act. 7.2 The appellant has submitted that the activities carried out by employees at IMO, the consequential benefit of which may flow to other locations, may have been treated as 'supply' under entry 2 of Schedule 1, if the said entry is read in isolation. However, the same is to be read with entry 1 of Schedule III which specifically excludes 'Services by an employee to the employer in the course of or in relation to his employment" as neither a supply of goods or a supply of service. 7.3 They submitted that the term employer' has not been defined under GST Act. However, in Common parlance an employer means "a person or entity which hires the services of another"; that in the instant case, the employee shall work as per the directions of the Company whether he is located ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cross the country and the employees performing the said activities are employed to benefit all the offices of the Company; that disregarding employer-employee relationship merely to fasten GST liability is not correct. 7.7 They submitted that at the time of obtaining registration under GST, key managerial personnel details are required to be given in respect of all the registrations; that the key managerial personnel are employed by the Company and not by the registered person located in a particular State. In order to buttress their arguments, the appellant have cited following decision given by the Tribunals in relation to services rendered by employee towards accounting and other administrative functions pertaining to other units In the case of Franco India Pharmaceutical (P) Ltd. Vs Commr. Of ST Mumbai {2016 (42) S.T.T. 1057 (Tri-Mumbai) = 2016 (4) TMI 496 - CESTAT MUMBAI : "In said case, the salary cost of employees deputed for marketing work was attributed to the group companies. The Department was of the view that the group companies are separate entity having identity of their own"- In this case, the Hon'ble Tribunal in its order held that the Service rendered by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the name and style of the appellant assessee. It cannot be substituted by any other entity. The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business. The economic survival of the branch is entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office." Hence, even in Cease where flow of funds take place from Head office to Branch, mere apportionment of employee cost can't be construed as service and employees are the employee of the organization itself. 7.8 In view of the above; the appellant pleaded that the employee is working for an organization and the organizatton shall be treated as his employer and not a particular branch. Thus entry I of Schedule III of the Act holds goods and the services by an employee to the employer in the course of his employment shall not be treated as 'supply'. Based on the above interpretation of the Statute, the appellant pleaded that the Impugned order may please be set aside. PERSONAL HEARING: 8. The appellants were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other group companies holding separate service tax registration and reimbursements received on account of such allocation does not make it liable to service tax in the absence of any service element being involved therein; that in their ease as well, certain services i.e travel expenses, business consultancy expenses. etc availed centrally by IMO may also be availed by the other registered units, payment for which is made by IMO. Applying the above principle, it may be said that, allocation of such expenses to other registered units would not in itself tantamount to supply of services by IMO to such units; that there would not be any consideration flowing from one GST registration of the company to the Other. 12. They further stated that there are certain service i.e renting of immovable property, telephone/communication services, etc incurred by the IMO which are primarily used for the operations of the IMO itself; that such services do not have any direct nexus with other registered units, Due to this reason alone, the IMO is working for the entity as a whole and the expenditure incurred on such services is also to other registered units, without involving even a rare Chance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t portions of the CGST Act which have a bearing on the issue at hand. 15.1 In terms of Section 22 of the Act, every supplier shall be liable to be registered in the State from where he makes a taxable supply. 15.2 Section 25 States that every person who is liable to be registered under Section 22 shall apply for registration in every State in which he is so liable within 30 days from the date on which he becomes liable to registration. 15.3 Sub-section 4 of Section 25 states that every person who has obtained a registration in more than one State, Shall, in respect of each Such registration, be treated as 'distinct person' for the purpose of this Act. 15.4 Section 9 of the CGST & KGST Act levies tax on all intra-state Supplies of goods and services or both. 15.5 Section 5 of the IGST Act levies a tax on all inter-state supplies of goods and services. 15.6 Section 7 (1) of the CGST Act states that "supply" includes (a) 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; (b) ---- (c) the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive unit. On such allocated Cost, the Appellant is raising a tax invoice on die other registered units and paying GST on such allocated cost However, the Appellant is not allocating the cost of employees at the IMO to their other units since, in their understanding, the services rendered by the employee to the 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. 18. In view of the above, the Appellant approached the Authority for Advance Ruling for decision on the question "Whether the activities performed by the employees at the Corporate office in the Course of or in relation to employment for the units located in other stares (distinct persons) shall be reared as a supply in terms of the entry 2 Schedule I of the CGST Act or whether it will not be treated as a supply in terms of the entry I of Schedule III of the said Act?" 19. The AAR held that the services of the employees at the Corporate office which benefit the other units of the Company will be treated as a supply of service in terms of entry 2 of Schedule I of the CGST Act In the course of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction is within units of the same business entity. However, Section 7(1)(c) of the CGST Act provides that the scope of supply extends to activities referred to in Schedule I which are made or agreed to be made without a consideration, Entry 2 of Schedule I refers to Supply of goods or services or both between distinct persons even if made without consideration, The provisions of entry 2 of Schedule I of the CGST Act clearly state that transactions between distinct persons are to be treated as a 'supply' even if made without consideration. The bone of contention is whether the activities of the IMO, involving the services of the personnel stationed at the IMO and the expenses incurred in operating the IMO, all of which benefit and flow to the other distinct units of the Appellant, would amount to a 'supply' between distinct persons and constitute a taxable supply in terms of Section 7 of the CGST Act. 23. It is noted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods. The word 'includes' in Section 7 (1) of the CGST Act, gives a wider meaning to the words or phrases in the Statute. The word includes is usually used in the interpretation clause in order to enlarge the meaning of the words in the statute. When the word 'includes' is used in the main Statute, it must be construed as comprehending not only such things as they signify according to their nature and impact but also those things which the interpretation clause declares they shall include. [[para 23] - Commercial Taxation Officer, Udaipur, vs. Rajasthan Taxchem Ltd 2007 (209) ELT 0165 S.C. relied on] = 2007 (1) TMI 187 - SUPREME COURT OF INDIA. Clause (a) of Section 7 (1) recognizes the forms of transactions by which a supply is effected. It presupposes an agreement between the two transacting parties to engage in the dealings, and the condition that such a dealing is in course of furtherance of business, and not otherwise. Clause (b) recognizes imports of services for a consideration as an activity that would be construed as a 'supply' even if it is not made in course of furtherance of business. Clause (c) lays down that the activities that are specified in Schedule I wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the organization. b) The co-ordination role: Included in this role is the exploitation of synergies between business units, the development of the core competence of the company and the provision of expert advice to different units. c) The control and policy role: Included in this role is basic control of business units, setting performance targets for units, monitoring units' achievements, and ensuring positive image for the company and lobbying political authorities. In addition to these core functions, the head office also has a service provider role. In this role, the head office provides those services that business units require, such as ICT systems and training systems. In the case of the Appellant's organisation, the Head Office or the India Management Office is the nodal office which caters to various business processes of all their units located in Karnataka as well as in other States. The IMO handles activities like, accounting, payment of salaries, income tax deductions, provident fund deductions, legal support, strategic directions, technical support and shared knowledge base which benefit all their offices across the Country. The IMO is a registered person in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CGST Act. In other words an entity may have several registered units in different States. Each registered unit albeit part of the same business entity, is treated as a 'distinct person' under the GST law. A distinct person has an independent identity under GST law and the provisions of the GST laws, its procedures and compliances are applicable to every distinct person as an independent registered person. The liability to GST on the supplies made by a distinct person is to be discharged by the said distinct person as a registered person and, the liability cannot be shifted to another distinct person on the grounds that they are part of the same entity. Further, any act f commission or omission by any distinct person attracts penal action on the said distinct person. A transaction between distinct persons even without consideration is termed as a supply under Section 7(1)(c) of the CGST Act read with entry 2 of Schedule I of the said Act. When viewed in this background, the employees stationed at the location of a particular establishment of a distinct person are deemed to be rendering their services only to that establishment of a distinct person and not to any other distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of services, the supplier may opt for this rule ignoring Rule 30. 30. The Appellant in their additional written submission have also argued that the expenses incurred by the IMO are for services availed by it from third party Service providers; that the cost of such expenses is attributed to other registered units In the books of accounts for determining the profitability of each unit; that they had adopted the cross charge mechanism for allocating the other expenses on the basis of proportionate turnover instead of following the Input Service Distributor (ISD) route which is squarely applicable in this case; that mere allocation of expenses would not entail that there has been a supply of service by the IMO to its units. In this regard, let us understand the difference between the concept of an ISD and the cross charge mechanism. The IMO may be using the services of a third party in the course of its activities on which GST is paid. In terms of Section 16(1) of the CGST Act, "Every registered person shall,....... be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd they were in the process of doing so. We will not dwell on this aspect as it is not relevant to the issue at hand. The question that emerges in this appeal is whether 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. In view of our findings and discussions above, we clearly answer the question in the affirmative. 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. 33. The Appellant has placed reliance on a few CESTAT decisions (cited supra) to buttress their Case. We have gone through all Case laws relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X
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