Gauging a service

Many Appellate Authorities in India are working overtime to give rulings on the clarifications sought from them. Benches of the National Company Law Tribunal (NCLT) have been flooded with requests under the Insolvency and Bankruptcy Code (IBC). Offices of the Authority for Advance Rulings(AAR) set up under Section 97 of the Central Goods and Services Act, 2017 have been deciding on an eclectic variety of matters under the GST laws.

Though the decisions of the AAR do not become the law of the land and are only a guidance, some of the rulings raise a concern that litigation appears inevitable due to a lack of clarity in GST laws. A recent ruling of the AAR-Karnataka, on a clarification sought by Columbia Asia Hospitals (CAH), lends credence to this thought [2018 96 taxmann.com 245 (AAR-KARNATAKA)].

Deemed cross charges

CAH has an India Management Office (IMO) whose employees in accounting, administration and IT systems maintenance perform their jobs for CAH as a whole, which include units registered in other States. As per their internal accounting policy, the IMO invoiced its units in other States their share of expenses incurred by the IMO.

The question raised before AAR-Karnataka was whether the activities performed by the employees at the corporate office for the units located in the other States as well — that is, 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 (supply of goods or services between distinct persons) or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act (supply of services by an employee to an employer)?

Paying particular attention to Section 15(a) of the CGST Act (persons who will be deemed to be related persons), the AAR ruled that any supply of goods and services from the IMO to the separately registered units would amount to supply of goods and services, even if made without consideration.

The AAR considered the fact that there is an employee-employer nexus in the transaction but felt that the specific provisions of the CGST Act on related parties would prevail over a general exemption.

While the decision of the AAR surprised many, a fact that needs to be considered while analysing the decision is that CAH had an internal policy to cross-charge units located in other States their share of expenses. This policy may have guided the AAR to ask CAH to attribute a value to the services provided by their accounting, administration and IT employees. One can possibly conclude that in case an entity does not have an internal cross-charge policy, there would not be a deemed supply of goods or services since the employee-employer nexus would prevail.

An all-encompassing law such as GST cannot possibly visualise every type of supply and whether they are taxable or not. The various decisions of the AAR provide inputs for the Central Board of Indirect Laws and Customs (CBIC) to clarify matters on a regular basis, particularly when two Benches of the AAR provide different rulings on the same issue. Instead of using the already over-burdened notifications/circulars/orders route, the CBIC should issue FAQs on different types of supply such as employer-employee, related parties, transactions with job workers and exempt supplies. This would pre-empt many cases that have been decided by the AAR landing up before the Tribunal.

The writer is a chartered accountant.

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