Foreign company's India project office deemed same entity; expat employee salaries not subject to GST

The case involved determining whether the transaction between a foreign company and its project office in India constituted a transaction between the same legal entity or two distinct entities, and whether the salary paid to expat employees fell under the definition of "Supply" under GST laws. The ruling concluded that the project office was an extension of the foreign company, making them the same legal entity. Consequently, the services provided by expat employees to the project office were considered "services by an employee to the employer in the course of or in relation to his employment" under Schedule III of the CGST Act, and thus not subject to GST.

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Issues Involved:
1. Whether the transaction between M/S Hitachi Power Europe GmbH and its project office located at Meja Thermal Power Project, Allahabad is a transaction between the same company or two distinct legal entities.
2. Whether the amount paid to the expat employees falls under the definition of "Supply" under GST laws or under Schedule III of the CGST Act, 2017 as "Services by an employee to the employer in the course of or in relation to his employment."

Issue-wise Detailed Analysis:

1. Legal Entity Status of Project Office:
The applicant, M/S Hitachi Power Europe GmbH, a foreign company incorporated in Germany, has established project offices in India for executing contracts related to mega power projects. These project offices are registered under the Foreign Exchange Management Act, 1999, and operate under specific conditions, such as being funded directly or indirectly from abroad and not engaging in activities beyond the project scope. The project office is not a separate legal entity but an extension of the foreign company.

The Reserve Bank of India’s Foreign Exchange Management Regulations, 2016, define a "Project Office" as a place of business in India representing the interests of a foreign company executing a project. The project office must secure a contract from an Indian company and be funded through inward remittance or other specified means. The project office’s PAN and TAN are issued in the name of the foreign company, and it is registered under the Companies Act, 2013, as a foreign company.

The project office acts as an extension of the foreign company for administrative convenience and legal compliance. Therefore, the Head Office and the project office are considered the same legal entity, not distinct entities.

2. Applicability of GST on Salary Paid to Expat Employees:
The applicant employs expat employees from the Head Office who work at the project office in India. These employees have their salaries paid by the Head Office, with TDS deducted by the project office as an employer under the Income Tax Act, 1961. The project office issues Form 16 and pays professional tax for these employees, indicating an employer-employee relationship.

According to Section 7(2) of the CGST Act, 2017, activities or transactions specified in Schedule III, including "services by an employee to the employer in the course of or in relation to his employment," are neither treated as a supply of goods nor a supply of services. Therefore, the salary paid to expat employees falls under this category and is not subject to GST.

Ruling:
The Authority for Advance Ruling concluded that the transaction between the Head Office and the project office is an intra-company transaction, and the project office is merely an extension of the Head Office. Consequently, the services provided by expat employees to the project office are considered "services by an employee to the employer in the course of or in relation to his employment" as per Schedule III of the CGST Act, 2017. Therefore, no GST is applicable on the accounting entry made for the salary cost of expat employees in the project office’s books of accounts.

This ruling is valid subject to the provisions under Section 103(2) until and unless declared void under Section 104(1) of the CGST Act, 2017.

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