M/s Baker Tilly DHC has released an update about the latest ruling of the Karnataka AAR.

The Karnataka AAR has ruled that activities performed, in course of or in relation to employment by employees at corporate office, for units located in other States shall be treated as "supply" in terms of Entry 2 of Schedule I of Central Goods and Services Tax Act, 2017 (CGST Act). This decision has taken the entire industry by surprise, since it has serious implications in the operation of multi-locational organization. This decision in effect proceeds to tax every management activity performed for or in relation to its units situated outside state. The gist of the decision, its sustainability in
law and procedure, its implications are discussed hereinafter.

1. Issue for which ruling was sought

“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 as well i.e. distinct persons as per Section 25(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) shall be treated as supply as per Entry 2 of Schedule I of the CGST Act or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act?"

2. Assessee’s Contention

The employment relationship exists between the employee and employer, i.e. legal entity as a whole and not confined to the location of registered person from where the said employee renders services.

The service rendered by an employee to distinct persons of the same legal entity, the nature of activities still assumes the character of services by an employee to the employer in the course of or in relation to his employment as he is an employee for the legal entity as a whole.

That the activities carried out by the employees based at the corporate office shall not be treated as supply of services in terms of specific relaxation provided in Entry 1 of Schedule III which states that "services by an employee to the employer in course of or in relation to his employment” shall be neither treated as a supply of goods not a supply of services.

3. Findings of the Authority

That the employer - employee relationship in the corporate office exists only there and not with other office units. Hence, the activities provided by the said employees of the corporate office in respect of other units (distinct persons) would amount to supply of service by the Corporate office to the units.

On the question of valuation of the purported service, the AAR has given a ruling that all costs incurred by the Corporate office including costs incurred on the employees should be included in the value for payment of GST since they are related persons.

4. Final Ruling of AAR

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 shall be treated as supply as per Entry 2 of Schedule I of the CGST Act.

5. Our view:

 This ruling pronounced by AAR, though binding only on the applicant, Department may start using it to proceed and initiate suitable actions on other taxable persons at large.

 This pronouncement may adversely affect entities having pan-India network. Though revenue neutral, this would unnecessarily complicate GST compliance by distinct persons within the same organisation.

 We have observed many infirmities in the decision and believe that this will be subjected to further challenge / litigation and is not likely to ultimately survive.

 Tax payer Community may also expect a clarification from the CBIC, shortly.

 In any case, this decision is in the facts and circumstances of that particular case and will not apply to all cases as a precedence.