Inter branch supply to be done at transfer price under GST


One of the many pangs of having SGST and CGST structure within GST and which is likely to continue is tax on inter-branch supply
For companies with a presence in multiple states, the Karnataka Appellate Authority for Advance Rulings has upheld the levy of goods and services tax on services rendered by one office branch to other centres. 

In-house service functions such as human resources and payrolls, if carried out from a centre in one state for offices in other states, will attract GST for which it will have to issue an invoice. 

A large business based in New Delhi with centralised finance, IT and HR unctions for branches across states would be deemed to be providing support services to the other locations and would need to raise invoices charging GST. 

“We uphold the ruling dated 27.07.2018 passed by the Karnataka Authority for Advance Ruling…,” the AAAR said in its order. 
The decision has wide ramifications for companies with offices in many states, adding to their transaction costs and compliance burden even though the tax paid can be adjusted against their final GST liability. 

However, adjusting the tax paid on in-house transfers is not an option for companies that deal in goods or services that are exempt from GST. These include sectors such as healthcare and education, which are exempt from GST, and petroleum and liquor, which are out of the ambit of the tax.

The Authority for Advance Rulings had in response to an application by Bengaluru-based Columbia Asia Hospitals held that the employer-employee relationship in the corporate office exists only there and not with other office units even if they are part of the same legal entity, as far as the GST law is concerned. 

The company then approached the appellate body against the ruling, saying that the Authority for Advance Rulings had erred in holding that activities carried out at the India Management Office in relation to employment such as accounting, other administrative and IT systems maintenance, which indirectly benefit units located in the other states, was between distinct persons as per Section 25 (4) of the act and shall be treated as supply as per entry 2 of Schedule I of the act. 

“The Appellant has placed reliance on a few CESTAT (Central Excise and Service Tax Appellate Tribunal) decisions to buttress their case. We have gone through all case laws relied upon and hold that the said decisions will not be applicable to the matter at hand since they were rendered in the context of the Service Tax law,” the Appellate Authority said. 

Although these rulings are case specific, they have a persuasive impact on tax assessment of other companies under similar circumstances. Tax experts said the salary of employees should not to be added as the employment contract is specifically kept outside the ambit of GST. 
“This ruling, however, clearly states that employee cost also has to be added as well, though it indicates that strategic, control, coordination and policy related work done from head office may not qualify as a ‘service,’” said Pratik Jain, national indirect tax leader at PwC. 

Companies will need to undertake a proper transfer pricing study to comply. “The GST council needs to examine this issue in detail and either come up with a clarification or amendment in law so that this concept does not cause undue hardship for the industry,” Jain added. 

By  Deepshikha Sikarwar 
ET Bureau | Dec 29, 2018