Fixed Establishment

[Archna Gupta]

Dear Professional Colleagues

Please explain the concept of fixed establishment in GST law. Do we need to register the place of fixed establishment? If yes, then what is use of this term? What is the difference between place of business and fixed establishment.

Please reply.

Regards

[DR.MARIAPPAN GOVINDARAJAN]

Fixed establishment is defined to mean a place, other than the registered place of business, which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs.

[Ganeshan Kalyani]

In GST, any one place within the same state can be declared as the principal place of business. And, the other location will become an additional place of business. So, in my view, Head office can be called as 'fixed establishment' if the same is not selected as 'principal place of business' in the registration certificate.

[KASTURI SETHI]

After in agreement with both experts, I further opine as under :-

(i) Fixed establishment is other than the registered place of business. One place of business is already registered. Fixed establishment is in addition to the place of business already registered.

(ii) Now the question arises what are ingredients/characteristics of ‘fixed establishment’. As per the definition under Section 2(50) of CGST Act, these are as follows :

(a) Sufficient degree of permanence (temporary presence of staff by way of a short visit cannot be called a fixed estadlished.

(b) Suitable structure to supply and receive service

(c) Suitable structure to use the services supplied for its own needs

(d) Adequacy of arrangement of human and technical resources to carry out an activity for a consideration.

In view of above parameters, Head Office can be called fixed establishment but registered office cannot be considered as fixed establishment. There is a lot of difference between registered office and head office.

Suppose an actor has his place of business (Film studio/Head Office or any other business place ) in Mumbai and he goes out for shooting in Shimla where he has no fixed establishment as per the criteria mentioned above, his place of business will be Mumbai. Suppose that actor has fixed establishment in Shimla (in addition to his place of business in Mumbai), he will have to get that fixed establishment registered in the jurisdiction of Shimla.

To have clearer concept, go through para nos.5.2.6 and 5.3.4 of Education Guide published by CBEC after July, 2012. Although it pertains to Service Tax era, yet it is relevant here.

5.2.6 What is the meaning of a “fixed establishment”?

A “fixed establishment” is a place (other than the business establishment) which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to provide the services that are to be supplied by it, or to enable it to receive and use the services supplied to it for its own needs.

Temporary presence of staff by way of a short visit at a place cannot be called a fixed establishment. Also, the number of staff at a location is not important. What is relevant is the adequacy of the arrangement (of human and technical resources), to carry out an activity for a consideration, or to receive and use a service supplied. Similarly, it will be important to evaluate the permanence of the arrangement i.e. whether it is capable of executing the task.

For further guidance on when a fixed establishment of a service receiver would be treated as “location”, please see para 5.3.4.

5.3.4 What would be the situation where the payment for a service is made at one location (say by the headquarters of a business) but the actual rendering of the service is elsewhere (i.e. a fixed establishment)?

Occasionally, a person may be the person liable to make payment for the service provided on his behalf to another person. For instance, the provision of a service may be negotiated at the headquarters of an entity by way of centralized sourcing of services whereas the actual provision is made at various locations in different taxing jurisdictions (in the case of what is commonly referred to as a multi-locational entity or MLE). Here, the central office may act only as a facilitator to negotiate the contract on behalf of various geographical establishments. Each of the geographical establishments receives the service and is obligated to make the payment either through headquarters or sometimes directly. When the payment is made directly, there is no confusion. In other situations, where the payment is settled either by cash or through debit and credit note between the business and fixed establishments, it is clear that the payment is being made by a geographical location. Wherever a fixed establishment bears the cost of acquiring, or using or consuming a service through any internal arrangement (normally referred to as a “recharge”, “reallocation”, or a “settlement”), these are generally made in accordance with corporate tax or other statutory requirements. These accounting arrangements also invariably aid the MLE’s management in budgeting and financial performance measurement.

Various accounting and business management systems are generally employed to manage, monitor and document the entire purchasing cycle of goods and services (such as the ERP- Enterprise Resource Planning System). These systems support and document the company processes, including the financial and accounting process, and purchasing process. Normally, these systems will provide the required information and audit trail to identify the establishment that uses or consumes a service.

It should be noted that in terms of proviso to section 66B, the establishments in a taxable and non-taxable territory are to be treated as distinct persons. Moreover, the definition of “location of the receiver” clearly states that “where the services are “used” at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service” will be the location. Thus, the taxing jurisdiction of service, which is provided under a ‘global framework agreement’ between two multinational companies with the business establishment located outside the taxable territory, but which is used or consumed by a fixed establishment located in the taxable territory, will be the taxable territory.

Illustration

The following example illustrates the above, by comparing the place of provision of services rendered under a Global Agreement vis-a-vis a Global Framework Agreement.

AAA is a firm with its manufacturing unit and business establishment located in the taxable territory A. It has got two other manufacturing plants located in countries X and Y (say, AAA-X and AAA-Y respectively). AAA wishes to obtain IT services for a new production process for its three manufacturing plants in the region.

BBB is an IT firm located in the taxable territory (location of business establishment). BBB Ltd also has fixed establishments (subsidiaries) located in country X (say BBB-X) and in country Y (say, BBB-Y).

AAA engages BBB for meeting its IT service requirement.

Scenario 1 [See Flow Diagram F 2 at the end of this section]

AAA enters into a Global (centralized purchasing) agreement with BBB for provision of IT services for the whole group. Following are the different transactions under which services are provided :-

(a) Under the global agreement, some component of IT service is provided by BBB to AAA in country A (say. Transaction 1).

(b) To meet the requirements of providing IT solutions specific to the plants AAA-X and AAA-Y in countries X and Y, BBB enters into agreements with its subsidiaries BBB- X (in country X) and BBB-Y (in country Y), under which they provide IT services to BBB (say, Transaction 2 and Transaction 3). Though these services are provided by BBB-X and BBB-Y to BBB, these are rendered as under :-

• By BBB-X to AAA-X (in country X)- under transaction 2, and

• By BBB-Y to AAA-Y (in country-Y) - under transaction 3.

(c) AAA enters into separate agreements with AAA-X and AAA-Y, under which AAA Ltd provides IT services to them (transaction 4 and transaction 5).

The transactions and provision of service under each are illustrated in the Flow diagram 2 titled ‘Scenariol’ at the end of this section.

Scenario 2 [See Flow Diagram F 3 at the end of this section]

AAA enters into a Framework Agreement with BBB for provision of IT services for the whole group. The Framework agreement covers the broad contours of supply between the two parties, payment milestones, obligations relating to confidentiality, penalty for default, limitations of liability and warranties etc, which would apply as and when group companies enter into separate agreements, in accordance with the terms envisaged in the framework agreement. BBB-X and BBB-Y could then enter into separate and independent business agreements with AAA-X and AAA-Y, in countries X and Y respectively, for provision of IT services. There are four agreements, but only three transactions involving provision of services, as indicated in the Flow diagram F3- Scenario 2 at the end of this section.

[orup dasgupta]

After the wonderful explanation by the experts above, very little is left to say. I would like to simply put it that normally fixed establishment does not hold value as we take registration at our key place of business. However the significance assumes importance when we start having additional places of business or business operations at different locations. As per Section 22 registration has to be taken from the place from where we are making the supply. So in order to test the place from where we are making the supply we need to test whether we have a fixed establishment separately from the place where we are registered. If yes then we are liable to be registered at the additional place from where we are making the supply.

[KASTURI SETHI]

Sh.Orup Das Gupta Ji,

Nicely explained. I agree with you, Sir. I treat your views as finishing touch.

[orup dasgupta]

Thank you very much Sir for the motivation.

[Ganeshan Kalyani]

Nicely explained by experts colleague.Thanks.

[Archna Gupta]

First of all I would like to thanks to all experts for such a detailed reply to my query.

Sir still I want to ask can we differentiate between Additional place of business and fixed establishment. Do we need to get registration of fixed establishment? It is an important term because it can be location of supplier and will directly impact to the nature of supply whether inter or intra. Actually not able to understand why this concept is there in the Act.

Please help.

[DR.MARIAPPAN GOVINDARAJAN]

If the fixed establishment is within the State then the fixed establihsment can be an additional place of business.

AI Summary

Fixed establishment determines registration as an additional place of business and drives the place of supply under GST. Fixed establishment is a place other than the registered place of business marked by a sufficient degree of permanence and a suitable structure with adequate human and technical resources to supply services or to receive and use services for its own needs. Temporary presence does not qualify. A fixed establishment located in a state separate from the principal registered place of business will be treated as an additional place of business and may require registration there; the establishment most directly concerned with use generally determines the location for tax purposes.