1. Introduction

The taxability of the transactions between the Head Office (‘HO’) of a foreign entity and its Project Office (‘PO’) in India has been a vexed issue under Goods and Service Tax (‘GST’) Law since inception. Such transactions have always been under the lens of the tax authorities in the GST regime as well as under the erstwhile Service tax regime.

Recently, the Authority for Advance Ruling, Maharashtra (‘AAR’) in the application filed by Hitachi Power Europe GmbH[1] (‘the Ruling’) examined the transaction between the HO incorporated in Germany and its Indian PO with respect to the reimbursement of salary cost of expat employees.

Under the facts of the said ruling, expat employees of HO worked at the PO where the employer’s obligations under the Income Tax Act, 1944 were fulfilled by the PO. However, the salary of such employees was paid by the HO. In order to reimburse the HO for incurring the expenses on their behalf and to maintain proper records as per the Indian accounting requirements, the PO passed a debit entry in its books of accounts for the salary cost of the expat employees. The AAR deliberated upon the taxability of such accounting entry made by the PO and held that:

• The PO is an extension of HO, since it represents the interests of the foreign company executing a project in India and undertakes commercial activities related to the specific project;
• The expats are employees of the HO and since the PO is an extension of the HO, there is an employer-employee relation between the PO and the expat employees; and
• The accounting entries made in the books of accounts of the PO for salary cost of the expat employees shall not be considered as a ‘supply’ under the provisions of Paragraph 1 of Schedule III of the Central Goods & Service Tax Act, 2017 (‘CGST Act’) i.e., services by an employee to the employer in the course of or in relation to his employment.

2. Position under erstwhile Service tax law and under the GST Law

Before a critical analysis of the said ruling, it is imperative to examine the taxability of such transactions according to the legal provisions in the erstwhile Service tax regime as well as under the current GST regime:

• Both under the Service tax and GST regime, where any person has an establishment in India and an establishment outside India, the same are treated as establishment of distinct persons. Further, it specifically stipulates that a person carrying on a business through a branch or a representational office shall be treated as having an establishment in the territory.
• The objective of this provision was to include in the ambit of tax, the` transactions between Branch/ Project Office (‘BO/PO’) in India and an overseas Head Office or vice-versa. Such transactions are quite common in case of infrastructure projects, where for executing the project, a BO/PO is established and there are various cross charges/ reimbursements received by the BO/PO.
• Both under the Service tax and GST regime, in case the service provider (in India) and the service recipient (outside India) are establishments of a distinct persons then the transaction would not qualify as an ‘export of service’. As a result, the benefit of zero-rating of the transaction (as export of services) would not be available to the taxable person. However, in terms of taxability, initially (i.e. at the time of introduction of GST), there was a key difference under both the regimes, as under:
• Under the erstwhile Service tax regime, Service tax was not levied in respect of transactions where the place of provision was outside India, in accordance with the Place of Provision of Services Rules, 2012. Therefore, in case of a transaction between an overseas HO and its Indian PO, where the place of provision of such service was outside India, the same were not taxable in India
• However, under the GST regime, the taxability of such transactions is not linked with the place of supply. Since the benefit of zero-rating is not available, any transactions between an overseas HO and its Indian PO would be subject to IGST under Section 7(5) of the IGST Act, 2017, even if the place of supply is outside India.
• The above position under the GST Law underwent a much-needed change vide insertion of Entry No. 10F through Notification No. 15/ 2018 – IT(R) dt. 26 July 2018 (‘the Notification’) in the list of exempted services. By virtue of Entry No. 10F, w.e.f. 26 July 2018, the services by an establishment in India to an establishment of the same person outside India, which are establishments of a distinct persons, was treated as exempt, if the place of supply of the services is outside India.

Accordingly, in respect of such transactions, as long as the place of supply of an activity is outside India, the same would be exempts from GST.

3. Key comments on the Ruling

Having regard to the above legal position envisaged under the legislation, we have hereinbelow discussed some key aspects of the AAR Ruling:

• At the outset, the AAR did not deal with the aspect that from the GST Law perspective the PO and the HO are considered as ‘establishments of a distinct person’. Further, the AAR also did not deliberate on the issue of GST exemption in light of the Notification, in case the place of supply is outside India.
• The AAR while arriving at the conclusion that the PO is an extension of the HO of the foreign entity, has entirely relied upon the regulations prescribed under the Reserve Bank of India and Foreign Exchange Management Laws, considering the following key aspects:
• a PO represents the interests of the foreign company executing a project in India and undertakes commercial activities related to the particular project;
• it can enter into transactions for receipt of supply of goods and services which would enable them to complete the project;
• PAN and TAN has been allotted by the Income Tax Authorities to the PO in the name of the HO situated outside India; and
• all the employer’s obligation like Form 16 in accordance with Section 203 of the Income Tax Act, 1961 are done by the Project Office
• The AAR while clarifying that the PO is an extension of the foreign HO, held that there is an employer-employee relation between the PO and the expat employee. Accordingly, the debit entry pertains to salary of the employees of the PO and by virtue of an employer-employee transaction, the same is not considered as a ‘supply’ and will not attract GST.
• However, the applicability of advance ruling is restricted only to the instances involving ‘salary cost’ and not with respect to any other type of reimbursement. Moreover, the principle laid down in the said ruling is solely on the aspect that there is an employer-employee relationship between the PO and the expat employee, which are not considered as a ‘supply’ transaction.
• It is pertinent to not that had the intent of law was to consider the PO as an extension of HO in all cases, from an indirect tax perspective, the concept of considering separate establishment as distinct person would have become redundant.

Considering the fact that under the GST Law an overseas HO and its Indian PO are treated as establishments of distinct persons, the aforesaid principle laid down in the AAR cannot be applied to all reimbursements/ transactions. Each of such transactions should be tested independently in the context of place of supply rules and GST liability could arise in certain cases.

The said ruling has once again ignited the debate on taxability of the transaction between the PO and the HO. The intention of the Government is certainly not to tax the transaction where place of supply per se of the transaction is outside India. However, it will be pertinent to note whether the underlying principle (i.e., the PO is an extension of the HO of a foreign entity) given under the Ruling, shall be applicable on all types of the reimbursable transactions between the HO and the PO even though there is a concept of establishments of a ‘distinct person’ under the GST Law.

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[1] No. GST-ARA-38/2019-20/B-27 dated 11 March 2020