Corporate office services to units in other states constitute taxable supply under Section 25(4) CGST Act despite same legal entity

The AAR Karnataka ruled that activities performed by corporate office employees for units in other states constitute taxable supply under GST. The corporate office and units, being separately registered entities under different states, are distinct persons per Section 25(4) of CGST Act. Despite belonging to the same legal entity, services like accounting, administration, and IT maintenance provided by corporate office employees to units qualify as supply between related persons under Schedule I Entry 2 of CGST Act, not exempt services under Schedule III Entry 1.

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Issues:
1. Whether activities performed by employees at the corporate office for units in other states constitute a supply of services under CGST ActRs.
2. Whether allocation of expenses by the corporate office to other units amounts to supply of services under CGST ActRs.

Analysis:

Issue 1:
The applicant sought an advance ruling on whether activities by employees at the corporate office for units in other states constitute a supply of services. The applicant argued that such activities should not be considered a supply of services as they fall under the exemption provided in Entry 1 of Schedule III of the CGST Act. The applicant contended that the relationship between the employee and the employer extends to the entire legal entity, not just the specific registered unit. Therefore, the services provided by employees to other units within the same legal entity should be treated as services by an employee to the employer and not as a supply of services. The applicant emphasized that GST should not be applicable to these activities as they do not qualify as a supply of services.

Issue 2:
Regarding the allocation of expenses by the corporate office to other units, the ruling authority examined the provisions of Schedule I and Schedule III of the CGST Act. The authority noted that under Entry 2 of Schedule I, supplies between related or distinct persons, made in the course or furtherance of business, are considered supplies even if made without consideration. The authority determined that the corporate office and the units are related persons, and any supply of goods or services between them, even without consideration, would be considered a supply. Furthermore, the authority clarified that the services provided by employees at the corporate office to the employer are in the nature of an employee-employer relationship, limited to the corporate office. Since the corporate office and the units are distinct persons under the Act, there is no employer-employee relationship between the employees of the corporate office and the employees of other units. Therefore, the allocation of expenses by the corporate office to other units constitutes a supply of services under Entry 2 of Schedule I of the CGST Act.

In conclusion, the ruling stated that the activities performed by employees at the corporate office for units in other states shall be treated as a supply of services under Entry 2 of Schedule I of the CGST Act. The ruling clarified the applicability of GST to such activities and provided a comprehensive analysis based on the provisions of the CGST Act and relevant schedules.

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