Related Company Services under GST

Para 2 of Schedule I of the Central Goods and Service Tax Act, 2017 states that supply of goods or services or both undertaken between the related persons or undertaken between the distinct persons, as per provisions specified in section 25, when carried out in the course or furtherance of business would be taxable under

GST even when such supply has been undertaken without consideration. In this article, we look at the impact of GST on related company services. Definition of the word ‘related persons’ is contained in Explanation to section 15 of the Central Goods and Service Tax Act, 2018 which covers a whole lot of related persons. As per the said explanation, the person would be deemed to be a related person in case they are covered under any of the following categories –

Persons who are either officers or directors of one another’s business;
Persons who are partners in the business;
Persons who are employer and employee;
Persons who directly / indirectly owns, controls, holds 25% or more of the outstanding voting stock or share or both of them;
Persons who directly / indirectly control one another;
Persons who directly / indirectly are controlled by the third person;
Persons who directly / indirectly control the third person;
Persons who are the member of the same family.

The above definition of related person is very broad and it covers the transaction between one unit and another unit of the same company. As per section 2 (85) of the Central Goods and Service Tax Act, 2017, the definition of ‘place of business’ includes a place from where the business is ordinarily carried on. Thus it means that business carried out from more than one state will have to

obtain a separate registration in each such state. In continuation, as per section 25 (4) of the Central Goods and Service Tax Act, 2017, person who has obtained or person who is required to obtain more than one registration, whether in one State or Union Territory or whether in more than one State or Union Territory would be treated as ‘distinct person’ in respect of each such registration.

Latest Advance Ruling

In the case of Columbia Asia Hospitals Pvt. Ltd. 2018 (8) TMI 876 – Advance Ruling Authority, Karnataka has given the ruling which is relevant in the present matter. The facts of the case are summarized hereunder –

M/s. Columbia Asia is engaged in providing health care services;
They are operating in 6 states and have total 11 hospitals;
They have 6 hospitals in Karnataka itself;
Their corporate office is located in Karnataka and accounting, administration and IT system is maintained in the corporate office;

The question against the

AAR authority was that whether the services of accounting, other administrative and IT system maintenance provided by the employees at the corporate office in the course of employment for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGSTAct, 2017 would be treated as supply as per Para 2 of Schedule I of the CGST Act or it would not be treated as supply of services as per Para 1 of Schedule III of the CGST Act? The AAR authority has ruled that services provided by the employee at the corporate office in the course of or in relation to employment would be treated as supply as per Para 2 of Schedule I of the CGST Act, 2017 on the basis of following points –

AAR states that employees employed by the corporate office are providing services to the corporate office in the nature of the employer-employee relationship. On the other hand, corporate office and branches are distinct persons under the Act and there is no relationship between the employee of one distinct entity and another distinct entity, as per GST law, even if they belong to the same legal entity.
Activities undertaken between related persons are treated as supplies. Further valuation includes costs even the employee costs need to be accounted for at the time of valuating the goods / services provided by one unit to another unit.

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Frequently Asked Questions

Common questions about Related Company Services and GST Impact in India.

Schedule I, Para 2 of the Central Goods and Service Tax Act, 2017 states that supply of goods or services or both between related persons or distinct persons, when carried out in the course or furtherance of business, would be taxable under GST even when such supply has been undertaken without consideration. This provision has a significant impact on related company services and transactions between distinct persons of the same legal entity.

The definition of 'related persons' is contained in the Explanation to section 15 of the Central Goods and Service Tax Act, 2017. It covers a wide range of relationships, including persons who are officers or directors of each other's businesses, partners, employer-employee, persons owning or controlling voting stock or shares, persons directly or indirectly controlling each other, and members of the same family.

According to section 25(4) of the Central Goods and Service Tax Act, 2017, a person who has obtained or is required to obtain more than one registration, whether in one state or multiple states, would be treated as a 'distinct person' for each registration. Therefore, transactions between units of the same company located in different states would be considered a 'supply' between distinct persons, making them liable for GST.

The definition of 'place of business' under section 2(85) of the Central Goods and Service Tax Act, 2017 includes a place from where the business is ordinarily carried on. This means that if a business is carried out from multiple states, separate registrations are required in each state, leading to the treatment of units in different states as 'distinct persons' for GST purposes.

In the case of Columbia Asia Hospitals Pvt. Ltd., the Advance Ruling Authority in Karnataka ruled that services provided by employees at the corporate office to units located in other states (distinct persons) would be treated as a 'supply' under Para 2 of Schedule I of the CGST Act, 2017, even though the services were rendered as part of the employer-employee relationship.

According to the ruling in the case of Columbia Asia Hospitals Pvt. Ltd., the valuation of goods/services includes costs, such as employee costs. Therefore, when one unit provides services to another unit (distinct person), the employee costs incurred by the first unit must be accounted for and valued as part of the supply.

The broad definition of 'related persons' under the GST Act covers a wide range of relationships, including those within the same legal entity. This means that transactions between units or branches of the same company may be considered a 'supply' between related persons, attracting GST liability, even if no consideration is involved.

According to the ruling in the case of Columbia Asia Hospitals Pvt. Ltd., even though employees at the corporate office provide services in the nature of an employer-employee relationship, their services to units located in other states (distinct persons) are considered a 'supply' under GST.

Under the GST regime, cross-state transactions between units or branches of the same legal entity are considered a 'supply' between distinct persons. This means that such transactions are liable for GST, even if no consideration is involved, as per Para 2 of Schedule I of the CGST Act, 2017.

The concept of 'distinct persons' introduced in section 25(4) of the Central Goods and Service Tax Act, 2017 is crucial in determining the treatment of related company services under GST. Transactions between units or branches of the same legal entity located in different states are considered a 'supply' between distinct persons, attracting GST liability.