1. One more ruling has come from an AAR which seems to have created havoc and panic in the industry. The ruling talked about is in the case of COLUMBIA ASIA HOSPITALS PRIVATE LIMITED given by the Karnataka Authority. Let us first understand the said ruling and then ponder on its correctness.
2. The applicant is a private limited company engaged in providing health care services as well as supply of medicines (pharmacy) to in-patients and out-patients. It also operates Restaurant/Canteen in its premises which is used for supplying food and other eatable items to its patients and their attendants. It is currently operating across six different State’s having eleven hospitals out of which six units are in the State of Karnataka. Hence applicant is registered in all the concerned State’s where it is in operation. Further it has a corporate office (i.e. India Management Office (“IMO”)) 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 said corporate office. With this background, applicant sought ruling on the following question:
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?
3. AAR decided as under:
“Regarding the second issue related to the activities performed by the employees at the corporate office in the course of or in relation to employment, 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.
Entry No.1 of the Schedule III which is related to the activities which are to be treated neither as a supply of goods nor supply of services reads as under:
“Services by an employee to the employer in the course of or in relation to his employment.”
The services provided to the employer, i.e. the corporate office by the persons employed by the corporate office are in the nature of the employee-employer relationship. Further, since the corporate office and the units are distinct persons under the Act, there is no such relationship between the employees of one distinct entity with another distinct entity, at least as per the Goods and Service Tax Acts, even if they are belonging to the same legal entity.
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.”
4. Hence the logic adopted by the AAR seems to be as under:
a) An employee working at the head office is only an employee of such head office.
b) Employee of head office hence do not have an employer-employee relationship with other offices. Thus it will not fall under Entry No. 1 to Schedule III to the CGST Act, 2017.
c) Once the above logic is accepted, it would tantamount to supply of services by one distinct person (i.e. head office) to another distinct person in respect of services performed by the employees of the head office.
5. AAR thus concluded that it will fall under Entry No. 2 to Schedule I of the CGST Act, 2017 and hence shall be treated as a taxable supply.
6. The entire conclusion of the AAR rests on the premise that an employee at the head office is only an employee of the said head office and not the branches. Let us now check the correctness of the said premise.
7. Entry No.1 of the Schedule III which is related to the activities which are to be treated neither as a supply of goods nor supply of services reads as under:
“Services by an employee to the employer in the course of or in relation to his employment.”
8. Before we reach any conclusion we need to appreciate the terms “employer” as well as “employee” as well as the phrase “in the course of or in relation to his employment”. Both these words as well as the phrase are not defined in the CGST Act, 2017.
9. Word “employer” is defined u/s 2(1)(e) of the Employee’s Compensation Act, 1923 as under:
“employer includes any body of persons whether incorporated or not and any managing agent of an employer and the legal representative of a deceased employer, and, when the services of an employee are temporarily lent or let on hire to another person by the person with whom the employee has entered into a contract of service or apprenticeship, means such other person while the employee is working for him”
10. Said term is also defined u/s 2(e) of the Minimum Wages Act, 1948. Only relevant portion is reproduced below:
“employer means any person who employs, whether directly or through another person, or whether on behalf of himself or any other person, one or more employees in any scheduled employment in respect of which minimum rates of wages have been fixed under this Act”
11. Sec. 115W(a) of the Income Tax Act, 1961 in the context of FBT defined employer as under:
(i) a company;
(ii) a firm;
(iii) an association of persons or a body of individuals, whether incorporated or not;]
(iv) a local authority; and
(v) every artificial juridical person, not falling within any of the preceding sub-clauses”
12. Hence an “employer” under various laws is always considered to be a legal person recognized in general as having a separate existence as compared to other legal persons.
13. In contrast let us consider the definition of the term “employee”. Relevant portion of the definition u/s 2(f) of the Employees Provident Fund Act, 1952 is reproduced below:
“employee means any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer”
14. One may refer to number of other definitions of the said term in other Statutes. From the above, one can observe a common thread that an “employer” and an “employee” are legal persons. Employer can be any legal entity and employee is an individual. Employer is a person who employees another in service. Hence it is submitted that when an employee is engaged by an employer, it signifies the legal category of that person (viz. individual, firm, company, etc.). Hence the word “employer” and “employee” referred under Entry No. 1 of Schedule III would constitute a legal person.
15. Can the deeming fiction of “distinct person” apply to employer-employee services ? Sec. 25(4) which invents the concept of “distinct person” is relevant and hence reproduced below:
“(4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”
16. From the above it may be observed that the word “person” appearing in the GST Laws (because of the words “for the purposes of this Act”) who has obtained or is required to obtain more than one registration shall be treated as “distinct person” if it is under the same legal entity. Entry No. 1 to Schedule III does not use the word “person”. It does not say that “services by an employee to the person in the course of or in relation to his employment” should be treated as neither supply of goods nor supply of services. It rather says that services by an employee to the “employer”.
17. It must be noted that employer-employee relationship is not decided by the GST Laws. It is covered under the labour laws. Thus the concept of “distinct person” as promulgated u/s 25(4) is only for the limited applicability of the GST laws in the context of goods or services supplied by one distinct person to another. Use of the words “employer” and “employee” under Entry No. 1 to Schedule III to the CGST Act, 2017 has to be construed as per the ordinary meaning and the concept of “distinct person” cannot vitiate the same.
18. We must also note that what is covered under Entry No. 1 is the services of an employee “in the course of or in relation to his employment”. This is in contrast to the phrase “employed in a factory or in any establishment” as used under certain other laws (refer U.P. Industrial Disputes Act, 1947 or Beedi and Cigar Workers (Conditions of Employment) Act, 1966). Hence what is sought to be covered under Entry No. 1 to Schedule III is all the services in the course of or in relation to his employment and is not limited to his place of work.
19. Once the services of an employee are covered under Entry No. 1 to Schedule III to the CGST Act, 2017, there is no question of cross charging the same.
20. Thus we conclude that the AAR has not correctly appreciated the legal provisions while delivering the judgment. It is hoped that CBIC steps in (as it often does) to allay the fears created by the ruling.
(views are strictly personal)