GST on services provided by branches to headquarters and vice versa
Fact and issue of the case
The applicant submitted a copy of challan evidencing payment of application fees of Rs.5,000/- each under sub-rule (1) of Rule 104 of CGST Rules 2017 and SGST Rules 2017.
The Applicant registered under the Companies Act 2013 in the State of Karnataka, have branch office at Chennai and the branch office is registered in the State of Tamil Nadu under GST Act for providing engineering services for industrial and manufacturing projects.
The branch office of the applicant is providing support services like engineering services, design services, accounting services, etc to the Head Office at Bangalore and also registered in the State of Karnataka under GST Act.
On interpretation of law, applicant states that employees are appointed and working for the company as whole and not employed for head office or branch specifically, which is a distinct person under GST.
Salary and benefits paid to employees are in relation to employment, which is neither a supply of goods nor services under para 1 of the schedule 3 of CGST Act, which reads as ‘Services by an employee to the employer in the course of or in relation to his employment’.
The applicant, after consent, was given an opportunity to be virtually heard on 12.01.2023. The Authorized Representative (AR) Sri Ganesh Bhat, of the applicant appeared before the authority and reiterated the submissions. When asked about the nature of service provided by the applicant to the head office at Bengaluru, AR stated that support services like engineering services, design, accounts services, etc are provided by the common employees of the applicant company in Tamil Nadu to Head Office of the applicant company in Karnataka. AR stated that no invoice is issued and no GST is paid for provision of the said services.
The applicant is under the administrative control of Central Tax. The said jurisdictional authority was addressed to report if there are any pending proceedings against the applicant on the issues raised by the applicant in the ARA application and for comments on the issues raised. The said authority vide letter dated 01.12.2022 stated that there are no pending proceedings on the issue raised by the applicant in the ARA application. It is further stated that service provided to Head Office will attract GST liability as per para (2) of Schedule I of CGST Act, 2017 which reads as “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 the business”.
The concerned State Tax Officer has not informed about existence of any pending proceedings against M/s Profisolutions Private Limited on the issue raised by the applicant.
Observation of the court
We have carefully considered the submissions made by the applicant in the advance ruling application, the additional submissions made during the personal hearing and the comments furnished by the Centre and State Tax Authorities. The applicant filed advance ruling application for determination of the liability to pay tax on service, within the meaning of that term as per Section 97(2)(e) of GST Act, 2017. We also take cognizance of the fact that subject matter of the application viz rendering of service by branch office in one State to head office in another State continues, thereby fulfills the requirement of Section 95(a) of the Act.
The question which needs to be answered is whether providing service by branch office in one State to head office in another State through employees who are common to the company constitute supply of service in terms of Section 7 the Act, if so, whether such services attract GST liability.
It is seen from the submissions and documents discussed in para 3 supra that the applicant from branch office has supplied, apart from accounting services, various technical services to head office in other State where the factory is located to fulfill the product design requirement of the customers.
The applicant states that employees are appointed and working for company as whole and not employed for head office or branch specifically, while recognizing the legal position that head office and branch office are distinct person under GST. It is obvious that service of an employee working in a branch flows only through the branch to the head office or customer. As long as the employee is deployed in a branch of an entity, his services that is rendered directly to head office will be in his representative capacity as an employee of the branch.
For ease of reference, the relevant statutory provisions of the Act are reproduced below;
As per Section 7(1) (c), supply includes ‘the activities specified in Schedule I, made or agreed to be made without a consideration’.
As per Section 5(1) of IGST Act, 2017, ‘subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person’.
Schedule I (2) to CGST Act, 2017 states that ‘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’ to be treated as supply even if made without consideration.
Section 25(4) of CGST Act, 2017 states that ‘a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
Explanation to Section 15 of CGST Act, 2017 states that ‘For the purpose of this Act,-
(a) persons shall be deemed to be ” related persons ” if-
(i) such persons are officers or directors of one another’s businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
(b) the term ” person ” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
8.6 From comprehensive reading of the statutory provisions of relevant Acts, any supply of service between two registrations of the same person in the same State or in different States attract the provisions of Section 25 (4) and Section 7 read with Schedule I (2) and Section 15.
Even the services of employees deployed in a registered place of business to another registered premises of the same person will attract the provisions discussed in para 8.6 supra, as the employees are treated as related person in terms of explanation to Section 15 and treated as supply by virtue of Schedule I (2) to CGST Act, 2017. 9.
In view of the above, we rule as under;
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
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