AN ANALYSIS OF ADVANCE RULING IN THE CASE OF M/S COLUMBIA ASIA HOSPITALS PRIVATE LIMITED

[Prasanna Kumar]

AN ANALYSIS OF ADVANCE RULING IN THE CASE OF

 M/S COLUMBIA ASIA HOSPITALS PVT LTD

ADVANCE RULING NO. KAR.ADRG 15/2018

With due respect to the authorities for advance ruling in Karnataka, I have made an attempt to analyze the Advance Ruling given in the case of M/S COLUMBIA ASIS HOSPITALS PVT LTD.[ 2018 (8) TMI 876 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA ] This attempt is not to disrespect the authorities. This attempt is purely an academic one. The readers are required not to take this analysis as an opinion on legality.

Columbia Hospitals Pvt Limited

As per the contents of the Advance Ruling, M/S Columbia Hospitals Pvt Ltd is a private limited company and is an International Healthcare group operating a chain of modern hospitals across Asia. The Company is currently operating across six different states having eleven hospitals out of which six units are in the state of Karnataka. The Hospitals are engaged in providing secondary and tertiary Healthcare services which in turn categorizes as an in-patient (IP) and Out-patient (OP) services. 

The Company has a system of centralized accounting, administration and maintenance of IT system for all the units (Hospitals), functioning from Corporate Office in Karnataka. Also the Company is operating all these eleven Hospitals on “Profit-Centre” basis, each unit is responsible for making profit from its operations. Therefore, couples of expenses which are incurred by IMO are allocated to each “Profit – Centre” on a satisfactory basis as decided by the management. The major expenses are rent paid on immovable property and equipments, travel expenses, consultancy services, communication expenses etc incurred at IMO. While allocating such expenses to units, the IMO is also charging applicable IGST, treating them (proportion of expenses) as taxable supplies. An example of how the company is distributing the common expenses is also quoted by the company in its application.

Issues for Advance Ruling

As per Para 3 of the Advance Ruling, The question on which advance ruling is sought is as follows;

“ whether the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in other states as well i.e distinct persons as per Section 25(4) of the Central Goods and Services Act 2017(CGST ACT) shall be treated as supply as per Entry 2 of Schedule I of the CGST Act or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act”  

Also, as per Para 7 of the Advance Ruling, the Company has also asked,

“whether the allocation of expenses to registered units located in other states, by IMO tantamount to supply of service between related or distinct persons as per Entry 2 of Schedule I to CGST Act and accordingly liable to tax?”

Advance Ruling

The Ruling reads as follows;

            “The activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e, distinct persons as per Section 25(4) of the CGST Act shall be treated as supply as per Entry 2 of Schedule I of the CGST Act”.

Analysis – Supply of services

As per information given, M/S Columbia Hospitals Pvt Ltd is a private limited company and is an International Healthcare group operating a chain of modern hospitals across Asia. The Company is currently operating across six different states having eleven hospitals out of which six units are in the state of Karnataka. The Hospitals are engaged in providing secondary and tertiary Healthcare services which in turn categorizes as an in-patient (IP) and Out-patient (OP) services. 

It is clear that the business of the Company is to provide secondary and tertiary healthcare services in India.

In Para 8.1 under “Findings & Discussion” to ascertain the applicability of Entry No.2 of Schedule I to the activities of the accounts and management done by the IMO (India Management Office) for the individual units located both within the state and also outside the state, the authorities have relied upon Entry 2 of Schedule I, which deals with the activities that are to be treated as supplies even if made without consideration, which reads as under;

“2. Supply of goods or services or both between related persons or between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”

The contention of the authorities is that the transactions between employer and employee are taxable even though there is no consideration flowing between them since covered by Explanation to Section 15 of the CGST Act.   

The reference to clause (c) of sub-section (1) of Section 7 has been made at Para 8.3. This provision defines “Supply” as follows;

“Supply includes

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental or disposal made or agreed to be made for a consideration by a person in the course of or furtherance of business,

And at

(c) the activities specified in Schedule I made or agreed to be made without a consideration.”

The issue of what constitutes supply “in the course of or furtherance of business” was not at all considered.

Section 2 sub-section (17) of the CGST Act, defines business as follows;

            “Business includes,-

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager, or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of trade, profession or vocation;

(h) services provided by a race club by way of totalisator or a license to book maker in such club; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Discussion Paper by Expert Committee

But unfortunately, the phrase “in the course or furtherance of business has not been defined under Section 2 of the CGST Act. An effort has been made to search for the definition of this phrase. We all know that the Central Board of Excise & Customs set up a GST Core Team for providing a comprehensive conceptual framework for the proposed GST legislation with the approval of the then Union Finance Minister, Mr.Pranab Mukerjee. This team started working from July 2010 and submitted its report in the form of a “Discussion Paper” (The Paper) in October 2011. This Paper discussed amongst various elements, supply, supply of goods and services, supply for consideration, supply even when there is no consideration, business and the supply in the course of or in furtherance of business.   

The Paper explained that unless a transaction was in the course or furtherance of business, it would not be treated as supply under GST. The Paper also pointed out that internationally, the business test has emerged through judicial decisions. Generally, whether an activity carried on by a taxable person constitutes a business or not is determined by considering the whole of the activities carried on by him. If these activities are predominantly concerned with the making of taxable supplies to customers for a consideration, it has to be held that the taxable person is in the “business” of making taxable supplies, and that the taxable supplies which he makes are supplies made in the course of carrying on that business, especially if those supplies are made commercially by those who seek to profit from them. In the UK, there is generally a 6 – point test to determine whether an activity is in the course of business, which has emerged through various judicial decisions. The Paper explained that the same 6-point tests could serve as a set of tools to compare an activity with features of activities that were clearly in the nature of business. The 6-point tests are as follows;

1. Is the activity a serious undertaking earnestly pursued?
2. Is the activity an occupation or function which is actively pursued with reasonable or recognizable continuity?
3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
4. Is the activity conducted in a regular manner and on sound and recognized business principles?
5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

Conclusion

In my opinion, based on the above assertions and facts, the following conclusions can be arrived at;

1. The business activity of the Company is providing secondary and tertiary Healthcare services which in turn categorizes as an in-patient (IP) and Out-patient (OP) services and definitely not accounting, administration and IT maintenance of its units.
2. The accounting, administration, IT maintenance are not activities which are provided in the course of or in furtherance of its business since its  business is to provide secondary and tertiary healthcare services only.
3. Entry 2 of Schedule I states, “Supply of goods or services or both between related persons or between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”. As long as the supply is not in the course of or in furtherance of business, it is not liable to GST though it is between distinct persons.
4. Only transactions which are in the nature of business and have been carried on in the course of or furtherance of business, whether with or without consideration, are subject to GST and not otherwise. Of course subject to other provisions of the GST law.
5. For sharing of expenses amongst branches, divisions, of a single entity, there is no need to apply GST since they don’t tantamount to supply in the course of or furtherance of business in view of the explanation given herein above on supply in the course or furtherance of business. This is a common practice in Profit- Centers type of organizations.

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