Supply of services by employees in corporate office for managing distinct units constitutes Supply

Facts: In this case, the Appellant is a private limited company engaged in providing health care services categorizing them as In-patient (IP) and Out-patient (OP) services. The appellant is also and is an international healthcare group operating a chain of modern hospitals across Asia. The Appellant is currently operating across six different states having eleven hospitals out of which six units are in the state of Karnataka. The Appellant has its India Management Office (“IMO”) i.e. Corporate Office in Karnataka and some of the activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by the employees from IMO which forms part of the registered person in Karnataka.

GST paid on certain expenses such as rent paid on immovable property and other equipments, travel expenses, consultancy services, communication expenses etc., which are incurred towards services used by the IMO are availed by the registered person in the state of Karnataka and subsequently, registered person in Karnataka is discharging IGST on the expenses proportionately attributable to the other units located outside the State of Karnataka treating the same as taxable supplies. But, with respect to employee cost there are no invoices raised by the management office treating the same as activities carried out by employees in the course of or in relation to his employment which does not amount to supply of services.

Issue: Whether the activities performed by its employees at the corporate office such as accounting, IT or other administrative duties for the units located in other States shall be treated as supply or not.

Held: The Appellate Authority has upheld the ruling of the Authority of Advance Rulings (AAR) Karnataka, saying that services by staff in main office for branches in other States will attract GST. The ruling said it shall be treated as supply, which means GST can be levied on the salary cost of employees working at the head office. The hospital chain moved to Karnataka’s Appellate Authority for Advance Rulings. Here, it 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; and that the organisation as a whole is to be treated as an employer and not a particular branch.

It was also argued that the mere allocation of expenses incurred by the IMO will not entail that there has been a supply of service by it to its units which should be taxed. It was submitted that although the appellant has adopted the cross-charge mechanism for allocating the expenses to the other units on the basis of proportionate turnover, the correct route to be followed is the ISD route. It pleaded that the allocation of expenditure incurred by the IMO to units located in other States shall not be held as a ‘supply’ and not liable to GST.

The Appellate Authority dwelled on the question that emerged in the appeal whether the IMO provides 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. In view of our findings and discussions above, we clearly answer the question in the affirmative.” Accordingly it upheld the ruling dated July 27, 2018 passed by the Karnataka Authority for Advance Ruling.

 

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