AUGUST 20, 2018

By Pritam Mahure, CA

RECENTLY, the Advance Ruling Authority (ARA) in the case of Columbia Asia Hospital - 2018-TIOL-113-AAR-GST delivered its ruling with respect to applicability of GST on the transaction/ services provided by Head Office (HO) to its Branch Office (BO) located in other States.

In this article, the Author discusses the Ruling, its implications and way forward.

What the AR states?

The issue under consideration before the ARA was regarding applicability of GST on the activities performed by the employees at the corporate office such as accounting, other administrative and IT system maintenance services etc.for the units located in the other States.

In this regard, the ARA held that the activities performed by the employees at the corporate office such as accounting, other administrative and IT system maintenance services for the units located in the other States [which qualify as 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 and thus, liable to GST.

In the erstwhile regime, whether these transactions were liable to?

In the erstwhile Service Tax regime, before 30th June 2017, the taxpayer had option of obtaining either separate premises-wise registrations or centralized registration. However, irrespective of the registration (i.e. whether the separate premises-wise registrations or centralized registration), Service Tax was not applicable on intra-entity services as charging section (i.e. section 66B) stated that levy would be triggered only when services are provided 'by one person to another'. This aspect was also upheld in various judgments of the Tribunal, particularly, in the case of Precot Mills Ltd v. CCE - 2006-TIOL-818-CESTAT-BANG.

In GST regime, can a 'person' having multi-State presence be treated as 'distinct' persons?

In GST regime, Section 25 of CGST Act prescribes that 'Every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory'. Thus, effectively if a person has multi-State presence then it is required to obtain separate State-wise registrations.

As per section 25 (4) of CGST Act' 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. Similar, clarification is provided in section 25 (5) of CGST Act. Thus, GST law prescribes that each registration will be considered as 'distinct persons'.

Whether GST is applicable on the transactions between 'distinct persons' even without consideration?

Section 7 (1) (c) of CGST Act specifies that ' the activities specified in Schedule I, made or agreed to be made without a consideration' will qualify as 'supply' .

As per Entry 2 of Schedule I of CGST Act'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'. Given this provision, the supply between distinct persons (i.e. separate GST registrations either in multiple States or in one State) could be subject to GST.

On what value GST is payable?

As per Rule 28 of CGST Rules, the value of the supply of goods or services or both between distinct persons (as specified in sub-section (4) and (5) of section 25) is, typically, open market value or value of supply of like kind and quality. Practically, it is not possible to determine the 'open market value' and thus, mostly the GST payers, may consider the 110% cost of provision of such services for valuation purposes (as per Rule 30 of CGST Rules).

Another important issue that crops up while determining the value is should the value be determined based on overall basis or on specific basis. For e.g. while the cost of providing accounting, IT support services can be identified (say by apportioning total cost by turnover - though whether its open market value is questionable), however, how to determine value of specific support given such as printing of few marketing material at head office? Should all such specific instances be identified? If yes, it casts an onerous responsibility on the GST payer to micro manage such transactions.

Rule 28 of CGST Rules, through a Proviso,states that where the recipient is eligible for full input tax credit , the value declared in the invoice shall be deemed to be the open market value of the goods or services. This Proviso, to some extent, addresses concerns of over/under-valuation. However, concerns of over/under-valuation, in cases where recipient is not eligible for full input tax credit (such as rent-a-cab services or recipient engaged in provision of both taxable and exempt supplies), remain unanswered.

Who is supplier?

The dilemma in transactions between distinct persons is:

a. Whether HO is providing services to BO/ Sales offices?

b. Whether BO/ Sales offices is providing services to HO?

c. Both are providing services to each other?

The aforesaid Ruling, as per the facts of the case, clarifies that the HO should raise invoice on BO for supply of support services. However, it may be stated that of the presence of Sales offices in other State is for marketing/ business development purposes and thus, Sales office is providing services to HO and accordingly, they raise invoice on HO for all the cost (including cost debited, if any, by HO for support services). If this aspect is considered then this will effectively, nullify the invoice raised by HO (as BO will raise invoice for cost including amount charged by HO).

What is the compliance plan for the GST payer?

Given the above, business entities, having multi-State presence, would be required to:

1. Identify who is providing services (HO to BO or BO to HO)

2. Identify the value of services

3. Identify the time of supply (i.e. monthly, quarterly or annually?)

4. Raise invoice for the services

5. Pay applicable GST

6. Reflect the same in the GST returns (GSTR-1 and GSTR-3B)

7. Credit, if eligible, to be claimed by the recipient unit

8. Substantiate the determined value of service, during audit/ assessment, if any

Way forward

Globally, B2B business transactions within a legal entity as well as between separate legal entities within 'Tax Group' (refer earlier TIOL article titled 'GST Groups' - Is it good to join hands? ) are dis-regarded for VAT / GST purposes.

However, in India, the rationale for introduction of Entry 2 of Schedule I of CGST Act seems to be to transfer the SGST to respective consuming States. There are few other provisions as well which seem to transfer taxes to consuming State (such as section 77 of CGST Act and place of supply provisions dealing with immovable-property based services etc.). While the intentions of these provisions are to ensure transfer of funds to appropriate States, it is apparent that the GST payer is getting repeatedly caught between the cross fire of these GST provisions.

As a way forward, the GST Council should have detailed analysis of aforesaid provisions, including their rationale, and ensure that if GST revenue is paid (though in other States) by the GST payer then can there be any alternate mechanism to transfer funds to rightful States without penal / interest consequences on GST payer to ensure that GST actually achieves its motto of 'One Nation, One Tax'.

(The Author is a Chartered Accountant and has authored books on GST and Gulf VAT. The views expressed are strictly personal.)