Introduction
A branch office is a place that conducts business in parallel with the head office. While most branches are made up of smaller departments of various business functions such as human resources, marketing, and accounting, the head office is the headquarters of the business organisation and the centre of management and policymaking.
Lately, a lot of questions have arisen with respect to exchange of services between head office and branch office of a company. Does such transaction attract GST? Must an employee of the head office, working from the branch office provide invoice of their service? The matter has been clarified in the landmark case of Profisolutions Private Limited, the Tamil Nadu Authority for Advance Ruling (AAR) and is bound to lead to increased compliances burden on companies.
Legal Perspective and the Advanced Authority Ruling
Section 25(4) of the Central Goods and Services Tax Act, 2017 (the “Act”) defines “Distinct Person” as a person who has obtained or who 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. Section 25(5) of the Act denotes the same definition with respect to a person who has obtained or who is required to obtain registration in a state or union territory in respect of an establishment, i.e., each of their registration will be treated distinctly.
The landmark case, has ruled that the services, including those of common employees of the entity, provided by branch offices to the head office and vice versa each would have a separate GST registration, and would attract GST.
In this case, the applicant was registered under the Companies Act, 2013 in the state of Karnataka and held a branch office in Chennai, registered in the state of Tamil Nadu, under the GST Act.
The branch office of the applicant was engaged in providing various support services like engineering services, design services, accounting services, etc. to its head office in Bangalore, for industrial and manufacturing projects.
The applicant argued that the employee is appointed and works for the company as a whole and is not specifically employed by the head office or the branch office, and for GST purposes the head office and the branch office are legally different persons. The performance of employees working in branches only flows through the branches to headquarters and customers.
If an employee is employed by a branch of the company, the employee's work is provided directly to the head office and performed on behalf of the branch employee.
| Supply of goods or services between related persons or between separate persons under section 25, if it relates to trade or business, shall be deemed to be fall under the definition of supply, even if it was made without consideration. |
The AAR noted that any supply of service between two registrations of the same person in the same state or in different states would amount to be treated as supply and will attract GST, for the employees are required to be treated as related persons in terms of explanation to Section 15. This section states that value of the supply of goods or services or both is the commercial value, which is the price actually paid or to be paid for the same, if the supplier and the recipient of the supply are not related to each other and the price is the only consideration for the offer.
The ruling by the Tamil Nadu AAR is in line with similar decisions by the Karnataka and Maharashtra AARs in the past.
The latest ruling has further complicated the existing debate and open another Pandora’s box on the taxability of intra-company services. This ruling upholds identification of common human resources and necessitates a provision of intra-entity services. Such identification would be a challenge for companies and could open a new series of litigation on this issue.
Since the GST was introduced, cross-charging among branch offices and head offices has been a contentious issue, most companies have made a process to cross-charge common expenses except for the employee costs. There are already challenges in the valuations of such services as there is no prescribed approach, the ruling could lead to a new set of litigations if authorities initiate demanding GST on employee costs, as there are already various rulings on this matter.
There are different views on how to deal with common services. Although the prejudice is binding only on the applicant, the legal reasoning presented by the AAR is noteworthy.
The AAR said that the relationship between the branch office and the corporate office is that of "separate persons". Under the GST provisions, branches of a company are separately liable to tax, and hence all the goods/services received by one branch from another branch are regarded as "supply" even without consideration. Therefore, employees of branch offices are not treated as employees of corporate offices and vice versa. Therefore, all goods/services supplied from the branch office to the head office and vice versa are subject to GST. Therefore, appropriate invoices must be submitted for cross-industry transactions.
Conclusion
Each branch office can claim income tax credit on its input bills. However, exempt supplies to a branch may result in limitations to the input tax credit claim. With the annual reporting schedule approaching, companies can take a calibrated view of overall services based on the discussed ruling. One should not forget that the fact, GST Act provides penalties for the provision of services without invoicing and collection of GST. It is imperative that business management make an informed decision that considers several factors such as risk appetite, amount of shared costs, and penalties.
Companies should re-review their employee agreements and make amendments specific to employees who function from multiple states either at once or on different occasions. Generic clauses with respect to location of employment are best avoided.
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