2018 (12) TMI 1604 - AAAR - GST

Corporate Office Services Taxable under CGST Act: Appellate Authority Clarifies Cross-Charge vs. ISD

The appellate authority upheld the ruling that services provided by employees at the Corporate Office to units in other states are considered a taxable ... Scope of 'supply' under Section 7 - services by an employee to the employer in the course of or in relation to his employment (Schedule III, Entry 1) - supply between distinct persons as a deeming fiction (Schedule I, Entry 2) - distinct person under Section 25(4) - cross charge as a taxable supply - Input Service Distributor (ISD) mechanism versus cross chargeSupply between distinct persons as a deeming fiction (Schedule I, Entry 2) - services by an employee to the employer in the course of or in relation to his employment (Schedule III, Entry 1) - distinct person under Section 25(4) - scope of 'supply' under Section 7 - Whether services performed by employees at the India Management Office (IMO) that benefit other registered units of the same legal entity constitute a 'supply' liable to GST or are excluded as 'services by an employee to the employer' under Schedule III Entry 1 - HELD THAT: - The Appellants' corporate office (IMO) is a registered unit in Karnataka and, under Section 25(4), each registration in a different State is a 'distinct person'. Section 7(1)(c) read with Schedule I (Entry 2) treats supplies between distinct persons as 'supply' even if made without consideration. Entry 1 of Schedule III excludes services by an employee to the employer from being a supply, but that exclusion must be read in the context of GST's distinct-person regime. Employees stationed at a particular registered establishment are deemed to render services to that distinct person; when the activities performed at the IMO (accounting, administrative work, IT maintenance, etc.) benefit other distinct registered units, those activities amount to a supply by one distinct person to another under Entry 2 of Schedule I. The cost of employees is an integral component of the service provided by the IMO and thus must be included in valuation. Decisions under prior service-tax jurisprudence do not govern the GST classification because the taxable event under GST is the concept of 'supply,' which is broader. Applying these principles, the services performed by IMO employees insofar as they benefit other distinct units are taxable supplies. [Paras 26, 27, 28, 32, 34]Services performed by employees at the IMO that benefit other distinct registered units are a 'supply' by one distinct person to another under Entry 2 of Schedule I read with Section 7 and are not excluded by Schedule III Entry 1.Cross charge as a taxable supply - Input Service Distributor (ISD) mechanism versus cross charge - valuation rules for supplies between distinct persons (Section 15(4), Rules 28-31) - Whether allocation of IMO-incurred expenses to other units is to be treated via the ISD mechanism or by cross charge and, if a supply, how such supplies are to be valued - HELD THAT: - ISD is a mechanism for distributing input tax credit on input services attributable to other units sharing the same PAN and does not itself create a supply; it applies only to ITC distribution under Section 20 and Section 16(1). Cross charge, by contrast, involves charging other distinct units for costs whose outcome benefits them and may or may not involve ITC. Certain expenses (e.g., rent, housekeeping) cannot be distributed via ISD and must be allocated by cross charge. Where a cross charge constitutes a supply between distinct persons, valuation is governed by Section 15(4) and Rules 28-31 (open market value, value of like kind, or cost-plus methods where appropriate). The IMO's practice of raising invoices on other units for apportioned costs therefore attracts GST and must be valued in accordance with the statutory rules. [Paras 29, 30, 31]Allocation of IMO-incurred expenses that amount to a supply must be effected by cross charge (not treated as mere ISD distribution), and valuation of such supplies between distinct persons must follow Section 15(4) read with Rules 28-31 of the CGST Rules.Final Conclusion: The AAAR upholds the AAR: the India Management Office's provision of accounting, administrative and IT services to other registered units of the same legal entity constitutes a taxable 'supply' between distinct persons under Schedule I Entry 2 read with Section 7; employee costs form part of that supply and certain allocations must be effected by cross charge and valued under Section 15(4) and Rules 28-31 rather than being excluded under Schedule III Entry 1 or treated solely as ISD distributions. Issues Involved:1. Taxability of services performed by employees at the Corporate Office for units located in other states.2. Distinction between cross-charge mechanism and Input Service Distributor (ISD) mechanism.3. Applicability of Entry 1 of Schedule III of the CGST Act regarding employee-employer relationship.Detailed Analysis:Issue 1: Taxability of Services Performed by Employees at Corporate Office for Other Units:The appellant, a healthcare service provider, sought a ruling on whether activities performed by employees at the Corporate Office (IMO) for units in other states should be treated as a supply of services under Entry 2 of Schedule I of the CGST Act or as services by an employee to the employer under Entry 1 of Schedule III. The appellant argued that the employment relationship exists with the entire legal entity, not confined to a specific registered unit, and thus, activities by employees should not be treated as a supply of services.The Authority for Advance Ruling (AAR) held that the IMO and its units in different states are distinct persons under Section 25(4) of the CGST Act, and services provided by employees at the IMO to other units are treated as a supply of services under Entry 2 of Schedule I. The AAR ruled that there is no employee-employer relationship between employees at the IMO and other units, making Entry 1 of Schedule III inapplicable.The appellate authority upheld this ruling, emphasizing that each registered unit is a distinct person under GST law, and services provided by employees at the IMO to other units constitute a taxable supply. The cost of employees at the IMO is integral to the services provided and must be factored into the valuation of the supply.Issue 2: Distinction Between Cross-Charge Mechanism and ISD Mechanism:The appellant argued that the allocation of expenses by the IMO to other units should not be considered a supply of services and suggested that the ISD mechanism should be applied instead of cross-charge. The appellate authority clarified that the ISD mechanism is for distributing input tax credit on input services, whereas the cross-charge mechanism involves allocating expenses incurred by a distinct person for services benefiting other distinct persons.The authority explained that certain expenses like rent and housekeeping services incurred by the IMO cannot be distributed via ISD and must be allocated through cross-charge. The IMO provides services to other units, and these services, including employee costs, must be cross-charged and subjected to GST.Issue 3: Applicability of Entry 1 of Schedule III Regarding Employee-Employer Relationship:The appellant contended that services by employees should fall under Entry 1 of Schedule III, which excludes services by an employee to the employer from being treated as a supply. The appellate authority rejected this argument, stating that the employee-employer relationship is confined to the distinct person (registered unit) where the employee is stationed. Services benefiting other distinct units are considered a supply under Entry 2 of Schedule I, and GST is applicable.The authority concluded that the services of employees at the IMO benefiting other units do not fall under the employee-employer relationship for those units and are thus taxable. The previous CESTAT decisions cited by the appellant were deemed inapplicable as they were rendered under the Service Tax law, which has different taxable events compared to GST.Conclusion:The appellate authority upheld the AAR ruling, confirming that the IMO provides taxable services to its other distinct units, and these services, including employee costs, must be cross-charged and subjected to GST. The appeal was disposed of accordingly.