Amount of Gratuity is Chargeable under GST or Not after Merger of Parent Companies.

[Khushi Kansal]

There are two companies, Company A and Company B. Company A and Company B are the parent entities of their respective subsidiaries, namely A1 and B1. Subsequently, Company A acquires Company B, and as a result, B1 also becomes a subsidiary of Company A.

Pursuant to the said acquisition, certain employees of Company B’s subsidiary (B1) were transferred to Company A’s subsidiary (A1) along with the associated gratuity liabilities. The transfer of employees and the corresponding liabilities took place without any agreement or contractual arrangement between A1 and B1. Subsequently, B1 transferred funds to A1 for the purpose of discharging the gratuity obligations pertaining to those employees.

The query is:
Whether the transfer of funds from B1 to A1, made solely for the purpose of settlement of gratuity dues of employees originally employed under B1 and now transferred to A1, would qualify as a “supply” under Section 7 of the CGST Act, 2017, thereby attracting GST liability; or whether such transfer shall be treated as a mere movement of funds for settlement of employee-related obligations, not amounting to consideration for any supply of goods or services under GST law?

AI Summary

Transfer of funds between subsidiaries to discharge transferor's employee gratuity is generally not a 'supply' under Section 7 A transfer of funds from the transferor-subsidiary to the transferee-subsidiary made solely to discharge gratuity liabilities of employees originally employed by the transferor is generally not a 'supply' under Section 7 of the CGST Act because it lacks consideration for goods or services and is a settlement of an existing statutory/employer liability. Taxability depends on facts: if the transfer constituted payment for a service (e.g., HR/administration) or arose under a contractual arrangement creating consideration, GST could apply; absent such consideration, it should be treated as a mere movement of funds to settle employee obligations.