Salary cost to be included in valuation for cross charge for supply of services between head office and branch office or vice versa

The AAAR, Maharashtra in the matter of M/S. Cummins India Limited [Advance Ruling No. MAH/AAAR/AM-RM/01/2021-22 dated December 21, 2021] held that head office using all its human resources to facilitate the operational requirements of the branch offices/units by way of procuring common input services on behalf of the branch offices/units thereby, providing the services, therefore, allocation and recovery of any amount including its employees salary cost from the branch offices/units will be subject to GST. Hence, the allocation and recovery of the salary of the employees of the head office from the branch office/units will be subject to GST.

Facts

M/s. Cummins India Limited ("the Appellant") is engaged in manufacture and sale of a variety of diesel engines, parts thereof, and related services, and undertake all day-to-day activities required therefore. The branch office/units as well as the head office of the Appellant, receives certain common input supplies on behalf of multiple/all of its units registered distinctly under GST and are procured on payment of GST and credit thereof is availed by receiving unit/head office. The Appellant sought the advance ruling on the issues w.r.t. classification of engine manufactured by the Appellant and Levy of GST on facilitation of common input services, necessity of registering as an 'Input Service Distributor' ("ISD") and determination of assessable value.

This appeal has been filed against the ruling passed by the AAR, Maharashtra in Advance Ruling No. GST-ARA-66/2018-19/B-162 dated December 19, 2018 holding availment of Input Tax Credit ("ITC") on common input supplies on behalf of other unit / units registered as distinct person qualifies as supply and attracts GST. Further, it was held that, the assessable value shall be arrived in terms of Rule 30 of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules") i.e. 110% of the cost of provision of such services) and the Appellant is required to obtain registration as ISD.

Issues

1. Whether availment of ITC on common input supplies on behalf of other unit/units registered as distinct person, and further allocation of the cost incurred for same to such other units, qualifies as supply and attracts levy of GST?
2. Whether the allocation of the cost of the employee's salary by the Head Office to the branch offices would attract levy of GST?

Held

The AAAR, Maharashtra in Advance Ruling No. MAH/AAAR/AM-RM/01/2021-22 dated December 21, 2021 held as under:

• Noted that, the GST Law has provided a very wide connotation for services, which covers any activity other than those involving goods, money and securities and it is adequately evident that the activities of providing facilitation services to their branch offices/units by way of availment of the common input services by the Appellant on behalf of its branch offices/units would be covered under services, and hence, supply in terms of Section 7(1) (a) of the Central Goods and Services Tax Act, 2017 ("the CGST Act") being provided for a consideration in the course of its business.
• Analyzed Section 16 of the CGST Act and observed that, the common input services received by the Appellant are being used or consumed by the branch office/units in the course or furtherance of their business, and not by the head office, as it is received on behalf of the branch offices/units. Therefore, the Head Office is not entitled to avail and utilize the credit of tax paid to the third-party service vendors for the common input services received by it on behalf of the branch offices/units.
• Modified the ruling of the AAR and held that, availment of common input supplies from the third-party service vendors/suppliers on behalf of the branch offices/units, will qualify as supply of services. However, the cost of such common input services availed and allocated to the branch offices/units by the head office will not attract the GST as the said costs have been incurred by the head office in the capacity of a pure agent of the branch offices/units and as such, the cost incurred by the head office shall be excluded from the value of supply of the facilitation services.
• Further held that, the assessable value of the services provided by the head office to the branch offices/units can be determined as per the second proviso to Rule 28(c) of the CGST Rules, which provides that value of the tax invoice will be deemed as the open market value of the services. Furthermore, the Appellant is bound to take the ISD registration as mandated by Section 24(viii) of the CGST Act, and comply with all the provisions made in this regard, if it intends to distribute the credit of tax paid on the common input services received by it on behalf of the branch offices/units to the branch offices/units.
• Furthermore, noted that it is evident that the employees of the Appellant's head office are working at behest of the head office, and not at behest of the branch offices/units. Further, since the head office is using all its human resources to facilitate the operational requirements of the branch offices/units by way of procuring common input services on behalf of the branch offices/units. thereby, providing the facilitation services, therefore, allocation and recovery of any amount including its employees salary cost from the branch offices/units will be subject to GST. The transaction of facilitation services are not effected between the employees and the employer, but between the head office and branch offices/units. which are distinct units in terms of Section 25(4) of the CGST Act, and the same is clearly taxable under GST in terms of Section 7 of the CGST Act. Hence the allocation and recovery of the salary of the employees of the head office from the branch office/units will be subject to GST.

Our comments

in pre-GST regime, any supply of service between head office and branch office or vice versa was not taxable thus, it has been a contentious issue since inception of GST, whether any supply of service between head office and branch office or vice versa is chargeable to GST or not. But, the above-mentioned ruling stating inclusion of salary cost also in valuation for cross charge for supply of services between head office and branch office or vice versa, will open up pandora box for the following reasons:

• Employees are appointed and working for Company as whole and not employed for head office or branch specifically, which is distinct person under the GST.

• Salary paid to employees are in relation to employment, which is neither a supply of goods nor services under Para 1 of the Schedule 3 of the CGST Act, which reads as "Services by an employee to the employer in the course of or in relation to his employment".

• Further, inclusion of salary costs in valuation for cross charge of services is more detrimental for exempted sector viz. education, health care, etc., whereby inclusion of salary costs for chargeability of GST in cross charge will lead to double whammy as GST charged on Salary cost will is not available as credit and second, it is subject to litigation.