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Breaking the ice on much-debated taxability of inter-company supply of services in GST, the Hon'ble Authority for Advance Ruling, Karnataka while deciding the application filed by M/s Columbia Asia Hospitals Private Limited [Advance Ruling No. KAR ADRG 15/2018 dated July 27, 2018], has ruled that the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGST Act, 2017 ('the CGST Act') shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.

Though the ruling of AAR is case-specific meant to determine taxation impact on particular transaction of the applicant, but this ruling of Hon'ble Karnataka AAR will go long way in adding fire and unsettling the GST implementation of various Industries operating through various offices in different States.

This GST Charcha decrypts the relevant provisions of the GST law giving rise to aforesaid ruling of Hon'ble Karnataka AAR along with summarizing the matter involved with corresponding implications and safeguards required for other taxpayers.

Taxability of inter-company supply of services in GST: An underthought area of taxation:

In terms of Entry 2 of Schedule I to the 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, is chargeable to GST even if no consideration is flowing between them.

Definition of related persons given under Explanation to Section 15 of the CGST Act is wide enough to cover two persons wherein one directly or indirectly controls the other and also if both these persons are directly or indirectly controlled by a third person.

Further, 'place of business' in GST includes every place from where the business is carried on. Thus, the entities having operations from more than one state will have to obtain separate registration in each such state where from they are supplying goods or services i.e. they are operating. Each operating location in different states or same state if separate registration is taken, will be treated as distinct persons [Section 25] and transactions between the two distinct persons, whether with consideration or without consideration, will be liable to GST.

In the context of supply of goods, the scenario may not create an issue as physical movement of goods between different units/branches of a company is easily traceable. As far as supply of services are concerned, in erstwhile service tax regime, tax was levied only when services were rendered by a person to another for consideration [subject to exceptions that:

  1. an establishment of a person located in taxable territory & another establishment of such person located in non-taxable territory; and
  2. an unincorporated association/body of persons and a member thereof,

would be treated as distinct persons].

In GST, even supply of services within the company, say head office providing services to branch office or vice versa, will be covered under the taxable net as Entry 2 of Schedule I is applicable on supply of such services even without consideration. It is in the light of above that it becomes important for any business entity to identify all the transactions between their distinct entities, which may or may not be apparently identifiable.

Facts & Summary of ruling by Hon'ble Karnataka AAR:

Facts: M/s Columbia Asia Hospitals Private Limited ('the Applicant') is a private limited company and is an international healthcare group operating a chain of modern hospitals across Asia. The Applicant is currently operating across six different states having eleven hospitals out of which six units are in the state of Karnataka. The Applicant 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 equipment's, 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 the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states i.e. distinct persons, shall be treated as supply to attract GST?


  • As per Para 2 of Schedule I, any supply of goods and services from IMO to the separately registered units (i.e. related persons) would amount to supply of goods and services, even if made without consideration;
  • The valuation of such services is to be done as per the provisions of Section 15 of the CGST Act and if any consideration is charged by issue of invoice by the IMO to the respective units would amount to transfer and hence supply as it is in the course of business under clause (a) of sub-section (1) of Section 7;
  • The employees employed in the Corporate Office are providing services to the Corporate Office and hence there is an employee-employer relationship only in the IMO. The other offices are distinct persons and therefore the employees in the IMO have no employer employee relationship with other offices – Hence Entry 1 of Schedule III (i.e. neither a supply of goods nor supply of services) is not applicable;
  • Further, the activities made between the related persons are treated as supplies and the valuation includes all costs, the employee cost also needs to be taken into consideration at the time of valuation of goods or services provided by one distinct entity to the other distinct entities.

Our Comments:

Implications on multi-state operational companies - This ruling is going to have outspread ramifications if suitable clarification as to exact scope of Para 2 of Schedule I in respect of inter-company supply of services is not clarified immediately. Undoubtedly, any inter-company supply of goods or services is under the taxable net of GST but extending the same to even cover employees' cost will create chaos in multi-state operational companies. It is not just practically impossible to track all such employees' cost but shall also burden companies with enhanced compliance procedures. Situation will worsen if the other recipient unit of the Company turns out to be engaged in supply of exempted goods or services, as they will not be entitled to avail credit of GST charged by supplier unit of their Company.

Employees cost should neither be treated as supply of goods nor services: We are of the considered view that employees cost should neither be treated as supply of goods nor supply of services in terms of Entry I of Schedule III i.e. services by an employee to the employer in the course of or in relation to his employment. As employment contract is executed with the legal entity as a whole and not with particular unit of a company, any services provided by an employee to any of the units of the company must be treated as neither supply of goods nor services. Ideally, there should not be any taxability on employees cost.

Exemption to services provided by Indian establishment to foreign establishment: It is also to be noted that Notification No. 15/2018 - Integrated Tax (Rate) dated July 26, 2018, exempts 'services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation I in section 8 of the IGST Act' provided the place of supply is outside India in accordance with Section 13 of IGST Act. Thus, Indian entities/branches/project offices/liaison offices of foreign companies are relived from paying GST when place of supply falls outside the taxable territory of India as these transactions are exempted from July 27, 2018. However, the benefit of exemption was not extended on import of services made by such establishments in India from related persons outside India [i.e. Para 4 of Schedule I].

Now, taxability of domestic inter-company supply of services is going to get momentum and with this Advance Ruling debate will get more heated up as majority of companies might not have actually quantified the share of employees providing services to other units.

Impact on sales/ marketing offices: Most of the companies have sales offices providing assistance to head offices and/or manufacturing units, by procuring simple sales orders throughout the country. In other words, various orders which are executed by head office through manufacturing plants are procured by sales and marketing offices. Now, the question in respect of these sales and marketing offices will arise as to supplying services to head office or manufacturing units and thus required to get registered. A comprehensive clarification in this regard is immediately required from the CBIC to avoid unwanted litigation.

DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.


Published by

Bimal Jain
Category GST   Report

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