A conjoint reading of AAAR Decisions in the matter of Columbia Asia and Cummins India

Karnataka AAAR decision in the matter of Columbia Asia Hospitals (Order No. KAR/AAAR/05/2018-19 dt. 12.12.2018) has sent shock waves across industry on the vexatious question of apportionment of head office employees salary costs, when they render services to their branches. The decision made it clear that the employees of the head office cannot be treated as employees of the branch office situated in a different state or registered as a distinct entity under GST viz., SEZ. The employer and employee relation cannot be attributed to them in order to seek exemption from payment of GST as provided under Schedule III of CGST Act, 2017 which exempts the levy of GST on services rendered by an employee to his employer as part of his employment contract and in the course of his employment. Such service by the head office employees to their branch offices was taxable under Section 7(1)(a) of CGST Act, 2017.

After this ruling, the industry is struggling on how to value the services in order to pay the taxes thereon. The valuation provision under Sec 28 of CGST Act, 2017 has given an order to be followed in cases, where the valuation is in question as under:

1. Open market value
2. Value of goods/services of like kind or quality
3. Rule 30 of CGST Rules, 2017 based on cost of production
4. Rule 31 of CGST Rules, 2017 based on reasonable means consistent with Sec 15 and provision of CGST Rules, 2017
5. If the recipient is able to avail the input tax credit, then the value declared in the invoice is construed as open market value. This is option under second proviso to clause (c) of Section 28 of CGST Act, 2017.

In the above chain, if option 1 is not available, then only option 2 can be explored and the order needs to be followed strictly.

In the case on hand, it is clear that option 1 or option 2 cannot be explored as the services of head office employees cannot be ascertained from the open market or no parallel can be made with any other service provider. Resorting to option 3 or option 4 is a cumbersome method and not a practical solution in all cases. Some consultants have suggested adopting a second proviso to clause (c) of Section 28 of CGST Act, 2017. But doubts continued in the minds as it may be questioned during the course of audit or investigations and litigation may ensue in due course. However, Cummins India has raised this query in their application before the advance ruling authority in Maharashtra. It is a pleasant surprise that the authorities have given a well-reasoned order (Order No.MAH/AAAR/AM-RM/01/2021-22 dt.21.12.2021) on the lines of Karnataka authorities while clarifying the issue.

The Karnataka authorities have explained the difference between cross charge and ISD mechanism vide Para 30 & 31 of the above referred to the decision in a detailed manner. The Maharashtra authorities have clarified the necessity of having ISD registration in place in order to be able to distribute the apportionable expenses. They made it abundantly clear that in the absence of an intention to apportion the expenses, the input credit will be denied in the hands of the head office as the expense incurred is not entirely to the benefit of such head office. If it is the case that the head office has picked invoice only for the purpose of making a payment, the resort can be made under Pure agent as provided under Rule 33 of CGST Rules, 2017. However, if the expenses are towards the common benefit of the head office as well as a branch office, in all such cases resort has to be made to ISD registration as the PAN is the same and the allocation can be made accordingly.

The essence of these two AAARs from Karnataka and Maharashtra remains the same on several fronts and they complement each other to give ample clarity to the industry on the vexatious question of distribution of common expenses across registrations under the same PAN. The lessons to learn from these two decisions are summarized hereunder:

1. When there are several registrations under the same PAN, one needs to have an ISD registration separately which facilitates the common services received to be apportioned across all registrations.
2. It is important to have a separate registration at the head office in order to meet the reverse charge obligation, in case the head office is not into any taxable activity but receives services on which reverse charge is applicable or receives invoices in order to make payments in the capacity of Pure agent.
3. Cross charge mechanism is an option to be used only when the head office is commonly incurring the expenses, the benefits of which are attributed to the branches viz., rental services of the head office, employee expenditure of the head office, statutory audit fee, etc
4. Now for cross charging the other entities, the second proviso to clause (c) of Rule 28 of CGST Rules, 2017 can be resorted to as clarified vide Maharashtra AAAR ruling cited supra and a nominal value can be attributed to such services for the purposes of such cross charging.
5. When under the same group, several companies with distinct PAN numbers exist, the option to be followed is the cross charge, as ISD is always to be under a single PAN and it cannot be between different PAN numbers.
6. When there is no intention to apportion the expenses incurred on behalf of the branches by the head office, the head office is not entitled for such input credit as the expenses towards the branch are not in course of business for the head office.

There is an apprehension in the minds of industry that the advance ruling mechanism is not serving the intended purpose, but is leading to conflicts. But the point to be noted is to frame the question in the right manner in order to get the needed reply, which is an art which needs to be mastered in GST advance ruling regime.