TMI Blog2018 (12) TMI 1604X X X X Extracts X X X X X X X X Extracts X X X X ..... r their principal place of business. The laws relating to filing of returns and other compliance procedures shall apply to both of them separately. Every distinct person is liable to pay GST on all supplies of goods and services or both made by it and every distinct person is treated as a separate taxable person. In the event of supplies between distinct persons, there will not be a consideration element as the transaction is within units of the same business entity. Prior to the introduction of GST, the events which were liable to tax under the existing laws were the events of manufacture, sale and the provision of a taxable service. Under the GST regime of taxation, the taxable event which attracts the levy of GST is the supply of goods or services in terms of Section 9 of the CGST (and SGST) Act or Section 5 of the IGST Act, depending on whether the transaction of supply is intrastate or interstate Thus the object of tax in GST is clear and far more comprehensive and is certainly broader than any single earlier law that has been subsumed in it The object of tax in GST is supply as understood in Section 7 of the Act. Employer-employee relationship - Held that:- The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stributable under the ISD route, rather they are required to be allocated to the other units only by way of cross charge. Therefore, the argument of the Appellant that the ISD mechanism is squarely applicable to them and not the cross charge method is not legally correct. Thus, it is concluded that the IMO is providing a service to its other distinct units by way of carrying out activities such as accounting, administrative work, etc with the use of the services of the personnel working in the IMO, the outcome of which, benefits all the other units and whether such activity is to be treated as a taxable supply in terms of the entry 2 of Schedule I read with Section 7 of the CGST Act - The cost of the employees working in the IMO is an integral part of the cost of the services rendered by the IMO to its other distinct units. The services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant, will not be termed as employee-employer relationship and will therefore not fall within the purview of entry 1 to Schedule III - the Ruling dated 27.07.2018 passed by the Karnataka Authority for Advance Ruling is upheld. Ruling:- The In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... states as well i.e distinct persons as per Section 25(4) of the Central Goods and Services Tax 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 Service as per Entry 1 of Schedule III of the CGST Act? 3. Before the Authority for Advance Ruling/ the appellant enumerated the following facts: 3.1. The appellant has its India Management Office (IMO) i.e Corporate Office in Karnataka and some of the activities like accounting, administration and Maintenance of IT System are Carried out by the employees at IMO which forms part of the registered person in Karnataka and the consequential benefit of which flows across the Company/units located in other states. Further, certain services such as rent paid on immovable property, telephone services and services are availed at the IMO but, since these services are used for the entity as whole, the cost of such services is attributable to all registered persons located in other states as well. Accordingly, the GST paid on certain expenses such as rent paid on Immovable Property and other equipments, travel expenses, consultancy services, communication e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 4. The appellant also submitted before the Authority that, the employment relationship between the employee and employer exists with a single legal entity as whole and is not confined to the location of registered person from where the said employee renders Service. When an employee renders any service to other registered persons i.e distinct persons of the same legal entity, the nature of activity still -assumes the character of services by an employee to the employer in the course of or in relation to his employment as he is an employee for the legal entity as a whole and not for any registered person. Hence, the services rendered by employees towards accounting and other administrative functions which benefit the other units of the entity, Still remain the character of services by an employee to the employer in the course of or in relation to his employment and shall not be treated as supply of service as per Entry I of Schedule III. Therefore, GST shall not be applicable on the said activities as the same is not a supply of service. 5. The Karnataka Authority for Advance Ruling, vide Advance Ruling No. KAR ADRG 15/2018, dated 27.07.2018 = 2018 (8) TMI 876 - AUTHORIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the term employer has not been defined under GST Act. However, in Common parlance an employer means a person or entity which hires the services of another ; that in the instant case, the employee shall work as per the directions of the Company whether he is located at the IMO in Karnataka or at any of the branch offices located in other that the same is evident in the employment contract; that the relevant clause, (1.6) of the service contract of the employee and company is given below; Your appointment will be subject to- 1.6. your agreement that you will be prepared to travel or reside and work in any of the company facilities, in India or abroad, for such period as is necessary for the proper performance and exercise of your duties in connection with this employment or as the Company Shall from time to time direct. And such an even, you will be governed by the rules and regulations in these regards as may be applicable to you in the deputed place, from time to time 7.4 Further, they submitted that the functions/duties of the employee cant be restricted to employment With the registered person as per Section 25(4) of the Act merely on account of the location ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the salary cost of employees deputed for marketing work was attributed to the group companies. The Department was of the view that the group companies are separate entity having identity of their own - In this case, the Hon ble Tribunal in its order held that the Service rendered by an employee to either one employer or many as in case of joint employment cannot make any difference to the tax treatements of the emoluments earned by the employee. The draft circular issued by the Board dated 27.07.2012 was referred wherein Joint Employment was explained as below: 5. There can also be cases where staff is employed by one or more employers who normally share the cost of such employment. The services provided by such employee will be covered by the exclusion provided in the definition of service. However, if the staff has been engaged by one employer and only made available to other for a consideration, it shall not be a case of joint employment. 6. Another arrangement could be where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later recouped from the other employers on an agreed basis on actual. Such recoveries wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Schedule III of the Act holds goods and the services by an employee to the employer in the course of his employment shall not be treated as supply . Based on the above interpretation of the Statute, the appellant pleaded that the Impugned order may please be set aside. PERSONAL HEARING: 8. The appellants were called for a personal hearing on 25.09.2018 but the same was adjourned on their request. Another personal hearing was granted on 15.11.2018 and they were represented by Sri. Naveen Rajapurohit, Chartered Accountant, who reiterated the arguments in the grounds of appeal and also furnished additional witten submissions. 9. In the additional written Submissions, the appellant stated that the expenses incurred by the IMO in Karnataka are for services availed by it from third party service providers. Payment to such service providers is being made by IMO and ITC thereof is also availed by it where tax component exists. Being a central administrative body of the entity as a whole, the cost of such expenses is attributed to other registered units in the books of accounts for determining the profitability of each unit. In this regard, they submitted that mete allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IMO which are primarily used for the operations of the IMO itself; that such services do not have any direct nexus with other registered units, Due to this reason alone, the IMO is working for the entity as a whole and the expenditure incurred on such services is also to other registered units, without involving even a rare Chance of providing a service to such other units; that they have adopted the cross-charge mechanism for allocating the other expenses on the basis of proportionate turnover instead of following the Input Service Distributor (ISD) method; that the concept of ISD nowhere necessitates that the Cost apportionment pertaining to such credit shall also be liable to tax. The appellant at the time of procurement of services from third party vendors pays applicable taxes and these services is apportioned to other units/States, based on their turnover; that if such apportionment is considered as a taxable supply, the Company would be required to pay the taxes again on the same Supply even though the Corporate Office/IMO has not provided any additional service to the units. Therefore, they submitted that the apportionment of other services cost, from the corporate office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of goods and services. 15.6 Section 7 (1) of the CGST Act states that supply includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) ---- (c) the activities specified in Schedule I, made or agreed to be made without consideration; and (d) --- 15.7 Schedule of the CGST Act describes the activities to be treated as supply even if made without consideration. As per entry 2 of the said Schedule, supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business is to be treated as a supply . 15.8 Section 7(2) of the CGST Act states that notwithstanding anything contained in subsection activities or transactions specified in Schedule III shall be treated neither as a supply of goods or supply of service. As per entry 1 of the said Schedule III, services by an employee to the employer in the course of or in relation to his employment is not a supply of service. 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the entry 2 Schedule I of the CGST Act or whether it will not be treated as a supply in terms of the entry I of Schedule III of the said Act? 19. The AAR held that the services of the employees at the Corporate office which benefit the other units of the Company will be treated as a supply of service in terms of entry 2 of Schedule I of the CGST Act In the course of its discussions, the AAR observed that there is an employee-employer relationship only with respect to the IMO and the services of the employees at the IMO. No such relationship exists between the employees at the IMO and the other units of the Company which are distinct units in terms of Section 25(4) of the CGST Act and hence entry 1 of Schedule III will not apply, 20. In their appeal before us against the above ruling, the Appellant argued that the functions of the employee cannot be restricted to employment with the registered person merely on account of the location from where he renders his employment services; that the employment relationship exists between the employee and employer i.e legal entity and not confined to the location of registered person; that the organization as a whole is to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a supply between distinct persons and constitute a taxable supply in terms of Section 7 of the CGST Act. 23. It is noted that prior to the introduction of GST, the events which were liable to tax under the existing laws were the events of manufacture, sale and the provision of a taxable service. Under the GST regime of taxation, the taxable event which attracts the levy of GST is the supply of goods or services in terms of Section 9 of the CGST (and SGST) Act or Section 5 of the IGST Act, depending on whether the transaction of supply is intrastate or interstate Thus the object of tax in GST is clear and far more comprehensive and is certainly broader than any single earlier law that has been subsumed in it The object of tax in GST is supply as understood in Section 7 of the Act. It is a concept which, going purely by what has been written down in the GST law, is wider than the concepts of manufacture , sale of goods , provision of services which were the objects of taxation in respective laws concerning Central Excise, VAT or Service Tax. In order to construe what is supply one starts with the layman s understanding of the expression as meaning to make somet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It presupposes an agreement between the two transacting parties to engage in the dealings, and the condition that such a dealing is in course of furtherance of business, and not otherwise. Clause (b) recognizes imports of services for a consideration as an activity that would be construed as a supply even if it is not made in course of furtherance of business. Clause (c) lays down that the activities that are specified in Schedule I would be deemed to be filling within the meaning of supply even when such a transaction is made or agreed to be made without a consideration or recompense. Clause (d) refers to Schedule II which lays down the activities to be treated as supply of goods or supply of services. Subsection (2) of Section 7 states that Notwithstanding anything contained in sub-section 1 , certain activities specified in Schedule III shall be treated as neither as a supply of goods or supply of service. Entry 1 of Schedule III talks of the services by an employee to the employer in the course of or in relation to his employment , which will not be a supply. 25. Therefore, for an activity to qualify as supply in terms of Section 7 of the CGST Acts the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant s organisation, the Head Office or the India Management Office is the nodal office which caters to various business processes of all their units located in Karnataka as well as in other States. The IMO handles activities like, accounting, payment of salaries, income tax deductions, provident fund deductions, legal support, strategic directions, technical support and shared knowledge base which benefit all their offices across the Country. The IMO is a registered person in Karnataka and is a distinct person in terms of Section 25(4) of the CGST Act The execution of the above mentioned activities by the IMO which is for the benefit of all their other units is in the nature of a service by the IMO As such there is a supply of service by the IMO to the other distinct units of the Company. 27. As per entry 2 of Schedule I of the CGST Act, any supply between distinct persons is to be treated as a supply in terms of Section 7 of the said Act. In view of this deeming fiction in the law, the service supplied by the IMO to its other units by way of performing activities which benefits the other distinct persons is liable to be charged to GST. In accounting terminology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion by any distinct person attracts penal action on the said distinct person. A transaction between distinct persons even without consideration is termed as a supply under Section 7(1)(c) of the CGST Act read with entry 2 of Schedule I of the said Act. When viewed in this background, the employees stationed at the location of a particular establishment of a distinct person are deemed to be rendering their services only to that establishment of a distinct person and not to any other distinct person even though all distinct persons are of the same business entity. Such services of employees, when rendered in the course of their employment are not considered as a supply of service in terms of entry 1 to Schedule III. However, when the services of employees are benefiting other distinct persons, then such services of employees will be considered as a supply of service by one distinct person to another. It is in this perspective that the entry I to Schedule III should be viewed and understood. The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, in instant case, the services of the employees at the IMO in so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been a supply of service by the IMO to its units. In this regard, let us understand the difference between the concept of an ISD and the cross charge mechanism. The IMO may be using the services of a third party in the course of its activities on which GST is paid. In terms of Section 16(1) of the CGST Act, Every registered person shall, . be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business... The registered person in this Section refers to the person registered under Section 25 and not to the legal entity. Therefore the ITC of the GST paid on the receipt of services or goods from a third party by the IMO can be availed by the IMO. If there are certain services commonly used by all the distinct persons, then the ITC can be distributed to all the units by the ISD route. There is a fundamental difference between the concept of ISD and that of cross charge. In the ISD concept, only ITC on input services which are attributable to other distinct entities are distributable. However, in a cross charge mechanism, all expenses incurred by a distinct person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees working in the IMO is an integral part of the cost of the services rendered by the IMO to its other distinct units. The services of the employees at the IMO in so far as they are benefitting the other registered units of the Appellant, will not be termed as employee-employer relationship and will therefore not fall within the purview of entry 1 to Schedule III. 33. The Appellant has placed reliance on a few CESTAT decisions (cited supra) to buttress their Case. We have gone through all Case laws relied upon and hold that the said decisions will not be applicable to the matter at hand since they were rendered in the context of the Service Tax law. The taxable event under the Service Tax law and under GST are vastly different and hence the ratio of decisions rendered in the light of the taxable event under Service Tax provisions cannot be applied to the transactions under GST regime. As such the case laws relied upon by the Appellant are not of any assistance to this case. 34. In view of the above discussions, we uphold the Ruling dated 27.07.2018 passed by the Karnataka Authority for Advance Ruling as under: The India Management Office (IMO) of the Appellant is pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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