Indirect Tax Alert - Service supplied by the employees working in a branch office to its head office located in a different state is leviable to GST

Facts of the Case

  • M/s. Profisolutions Pvt. Ltd. (‘Taxpayer’ or the ‘Company’) is a company registered in the State of Karnataka, having a branch office in Chennai, Tamil Nadu. The branch office is registered under GST law for providing engineering services for industrial and manufacturing projects.
  • The branch office provides various support services such as engineering services, designing services, accounting services, etc. to the Head Office in Bangalore, Karnataka (which is also registered under the GST law).
  • To determine the applicability of GST on the aforesaid services, the Taxpayer approached the AAR in Tamil Nadu.

Questions before the AAR, Tamil Nadu

  • Whether the provision of service by a branch office in one state to its head office in another state through employees who are common to the Company constitutes a supply of service in terms of Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act)? If so, whether such services attract GST liability?

Contentions by the Taxpayer

  • The services are provided by the employees who are appointed and work for the Company as a whole and not for its head office or branch specifically which are distinct persons under the GST law.
  • Salary and benefits paid to the employees are in relation to the employment, which is neither a supply of goods nor a supply of services under Para 1 of Schedule III to the CGST Act, which stipulates that 'Services by an employee to the employer in the course of or in relation to his employment'.
  • Thus, the employees, being common to both the branch office and the head office, provide the aforesaid support services viz., engineering services, design services, accounting services etc. for which no invoice is issued, and no GST is paid for the provision of said services.

Contentions by the Tax Authorities

  • The aforesaid services provided to Head Office will attract GST liability as per Para 2 of Schedule I to the CGST Act.

Observations and Rulings by the AAR, Tamil Nadu

  • The service of an employee working in a branch office flows only through the branch to the head office or customer. If the employee is deployed in a branch of an entity, his services that are rendered directly to the head office will be in his representative capacity as an employee of the branch.
  • Para 2 of Schedule I to the CGST Act 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.
  • On a comprehensive reading of the relevant provisions, any supply of service between two registrations of the same person in the same State or in different States attracts the provisions of Section 25(4) and Section 7 read with Para 2 of Schedule I and Section 15 of the CGST Act.
  • Even the services of employees deployed in a registered place of business to another registered place of business of the same person will attract the aforesaid provisions, as employees are treated as related persons as per Explanation to Section 15 and the said service is treated as supply by virtue of Para 2 of Schedule I to the CGST Act.
  • Given the above, services, including the services of common employees of a person, provided by the branch office to its head office and vice versa, each having separate GST registration, will attract GST liability under the respective Acts.

BDO Comments

This advance ruling is in line with other advance rulings, which effectively hold that the activity carried out by common employees located in one State for other States is leviable to GST. While a draft circular on this issue was considered in the 35th meeting of the GST Council, it was not finalised. Given that multiple views prevail in the industry regarding the taxability of such services and also regarding the valuation of such services, the GST Council must clarify the position at the earliest.

 

[AAR Tamil Nadu, M/s. Profisolutions Pvt. Ltd., 2023 (4) TMI 541, dated 31 March 2023]

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