[By Ujjawal Badani & Tejas Geetey]
The authors are students of the National Law University Odisha.
INTRODUCTION
Business Corporations often operate through multiple locations in the form of Head Office (HO) and Branch Offices (BO). Division of Offices into HO and BOs has not been defined either under the GST law or the allied laws, however, generally, it means the principal office of a business corporation, established for policymaking and governance. HO as the primary body has multiple functions including accounting, finance, and management services which are performed for the governance of other branch offices. For instance, strategy-making and communications are generally conducted at HO and then applied to its BOs which function across the states.
Under the GST, each branch office of the same organisation is regarded as a “distinct person” and is required to obtain GST registration and also to comply with procedural requirements for each respective state. Further, if there is any supply of goods and services between two distinct persons, then such has to be invoiced as per GST. This concept is referred as cross-charging.
The question raised by coming of the cross-charging under GST is that whether services by HO to its BOs/other units can be regarded as ‘supply’ under the GST? Further, another important subset arising from this is the cost of allocation of services provided by the employees of HO to it branch offices. In this piece, the authors have tried to analyse the above issues in respect of conflicting views surrounding cross-charging.
SERVICES WITHIN ORGANIZATION
To determine whether the activity performed by HO is supply, it needs to qualify as supply u/s 7 of the CGST Act, which is an inclusive definition (including activities such as transfer and barter) for a consideration when made for furtherance of business. The definition of supply alludes to Schedule I of the CGST Act, wherein activities are considered as supply also in cases if they are with no consideration.
The respective office/branch of the same organization is regarded as a distinct person for GST registration. It is very clear that stock transfer of goods between distinct person is chargeable to tax. However, the issue which lies is “whether activities carried out by HO for other units would be construed as supply and leviable to GST or not”.
The AAAR of Karnataka in ruling of M/s Columbia Asia Hospitals Private Ltd shed some light on similar issue which was filed by the applicant to know “whether the activities performed by the employees at the corporate office in the course of employment such as accounting, other administrative and IT system maintenance for the units located in the other states shall be treated as supply or not?”
The ruling was passed on the finding that employees employed at HO are providing services at HO. Thus, there is employer-employee relationship only at HO and not BO. Based on Schedule I of the CGST Act, it was determined that such transaction, even if there is no consideration involved, is chargeable to GST. However, the Karnataka High Court has granted stay on the AAAR’s order. There is a lot of ambiguity revolving around this issue. The decision of Karnataka High Court is much awaited, and only suitable clarity could beat the heat.
Recently, this issue was also dealt in case of M/s Tupperware India Private Limited (‘applicant’). In case of applicant, the HO provides various business support services to its other units. The authorities in this matter as well passed adverse ruling and concluded that GST is chargeable on services supplied by HO to its other units/offices by way of performing activities as it benefits another distinct person.
SERVICES PROVIDED BY EMPLOYEES OF HO TO BO
Now coming to the second part of this piece. Schedule III of the CGST Act clearly mentions that “services by an employee to the employer in course of employment” shall not be considered as supply and therefore tax cannot be levied on the same[i].
Though the act clearly excludes the services of employees from taxation, the same interpretation is not considered by the Courts. In the case of Columbia Asia, the Authority held that employees providing their services in other branch offices were not considered as a part of employer-employee relations. The Appellate Authority had ruled that the employer-employee relation mentioned in Schedule III has to be restricted under the GST Act. As distinct persons can be taxed, therefore, the relationship mentioned in the Schedule has to be restricted to one office. Therefore, the service of employees shall be considered as supply.
But, the CGST Act provides that tax invoices will be charged on “distinct persons”, i.e., in this case, the HOs and BOs which and, therefore, it cannot cover an employer within its ambit.
Further, there are problems present in the valuation of such supplies as it is done without any consideration. It will be difficult to determine at what cost the services given by employees are allocated to the other offices.[ii]
~Current Stance
Though the decision in the advance ruling is only applicable to the particular parties to the dispute, the same did not happen in relation to the disputed matter of employees’ services. The advance ruling in the case of Columbia Asia gave chance to the other states to start following the lead.
In the recent advance ruling of Cummins India, the issue dealt was whether the input tax credit (ITC) received by the HOs for providing common input supplies to other BOs will be considered as supply under the CGST Act?
The Authority held that transactions performed by the HOs for the other BOs will be considered as supply. Further, the salary of employees of the HO should also be allocated and charged. The above ruling stretched the conflict further by considering input-service distribution (allocation of ITC on input services) and cross-charging under one ambit. Moreover, it is contended that the transaction that happened in the above case cannot be taxed as it is a “pass-through mechanism” and therefore not a supply.
The authors here would like to bring the attention to the Apex Court’s decision in Northern Operating System. The case dealt with service tax but is relevant in relation to the current dispute on employee services. The assessee was a service provider in India with other group companies present in countries like the U.S.A., U.K., etc. The issue in relation to non-payment of service tax arose as the agreement entered into between the assessee and its group companies was considered a form of manpower supply. The parties entered into a secondment agreement for the supply of services of employees of the group companies to the assessee.
It was contended by the group companies that the supply of employees and their services to the assessee would amount to “taxable service”. The other side contended that the assessee will not be liable as the exchange of employee services would be considered as a part of the employer-employee relationship.
The court analysed this judgement in light of the contractual secondment agreement entered between the parties. The court held that the agreement nowhere mentioned that during the period of secondment the transferred employees will work in the capacity of an employee. The employer-employee relationship cannot be established as not only the salary of the transferred employees was paid by the group companies but also the terms of employment were governed by them.
The above case throws light on the cross-charging of employee services. Although, under the service tax which was governed by the Finance Act, 2012[iii], employer-employee relation was excluded, the court did not consider the same as the contractual agreement of secondment was in the form of supply of services and not under the ambit of an employer. Therefore, in this case, service tax was ordered to be charged, but the same should not happen in cross-charging under GST as held in the number of Advance Rulings. This is because, in the Columbia Asia & Cummins India case, no specific arrangement has been agreed upon to consider the services of BOs to HOs as taxable. Further, administrative and managerial duties are generally connected to the HO and cannot be restricted to a particular BO. In such cases, the employees are bound to provide common services to other offices and therefore becomes an integral part of the employer-employee relationship.
CONCLUSION – NEED FOR CHANGE
It is reiterated that the transfer of employee services between the HO and BOs should not be considered as supply as the same is excluded under Schedule III. It is well established that, in case of dispute in the working of a provision, then the same should be interpreted in consonance with the purpose of the act. In the given problem, the scope of the employer-employee relationship should be construed so as to fully exclude it from the supply.
To analyse the ambit of the employer-employee relationship, the case of Franco India should be considered which dealt with whether the cost of employees allocated to do marketing work for group companies be considered as a service? The Court analysed that the service provided by the employee will be part of joint employment and not a supply of services.
Despite the tussle which started from the initiation of GST, the legislature has not issued proper clarification regarding cross charging of services of employees. Recently, the CBIC has considered looking into the issues surrounding cross charging including the cost charged to services of employees between HO and BOs. It is hoped that much-needed clarity is brought in relation to the problems surrounding cross-charging.
[i] The Central Goods and Services Tax Act 2017, Schedule III (1).
[ii] The Central Goods and Services Tax Act 2017, s. 15; The Central Goods and Services Tax Rules 2017, r. 28.
[iii] The Finance Act 2012, Sec. 65(44).