A recent observation by Maharashtra Authority of Advance Rulings (AAR) resulted in the ruling that GST will not be applicable if the Indian project office (PO) of an MNC is accounting for the salary of an expatriate employee. The AAR also observed that considering, the expat employee, in such cases, is on the payrolls of the foreign company and the project office is just a temporary extension in India, such employees should be considered as employees of the project office as well. This in turn implied that there was an employee-employer relationship, between the project office and the expat and thus gave GST relief to several MNCs with expat employees on need basis in India.
The Maharashtra AAR ruling came in the case of M/s. Hitachi Power Europe GmbH, Germany, which is the foreign company and it decided that a mere accounting entry made by the project office, which was required as per the Indian accounting standards, would not attract the levy of GST.
In this case, the foreign company based out of Germany was awarded a contract for the supply of goods and supervisory services from Indian customers. The said supply of goods and services was to be performed in India for which the foreign company formed a PO in India. Typically the PO represents the interest of the foreign company executing the project in India and undertakes commercial activities related to the particular project.
The PO had its own employees and few employees were sent by the foreign company, known as expat employees, to help in the execution of the project. The employer's obligation under the Income Tax Act 1961 like Tax deducted at source etc was done by the PO for such expat employees.
As per the Companies Act, 2013, the foreign company is required to maintain its financial books of accounts in a manner that reflects a true and fair view of the business of the company in India. Thus, in order to keep records of the expenses of the salary cost of expat employees working from India, the PO made an accounting entry in its financial books in India. However, the salary was actually paid by a foreign company in Germany.
PAN and TAN were allotted to PO in the name of the head office of the foreign company by the Income Tax authorities. Hence, the PO was an extension of the foreign company in India. The expats were the employees of the head office of the foreign company and since the PO was an extension of the foreign company, the expats were to be considered as employees of PO as well. Meaning thereby that there was an employer-employee relationship between the PO and the expats.
Further, as per GST law, if there is an employer-employee relationship, it is considered that there is an absence of any supply of services and hence non-applicability of GST.
For GST to be applicable to the accounting entry made by PO with respect to salary of expats, it is crucial that there should be a supply of a taxable service between the head office of the foreign company and PO. Since the expats were also considered as employees of PO, mere accounting entry made by PO which was required as per Indian accounting standards, would not attract the levy of GST.
Hailing the decision of the AAR, Anita Rastogi, Partner GST and Indirect Taxes at PwC said, "This ruling reinforces the concept that applicability of GST is to be seen only from the perspective of GST law. A requirement under any other statute like Companies Act, 2013 which necessitates an accounting entry to be made by PO cannot lead to levy of GST if the underlying GST provisions do not mandate that. In the case in hand it was observed that there is an absence of any supply of service and hence albeit the cost of salary of expats was reflected in the accounting entry, no GST was required to be paid. "
Rajat Mohan, Senior Partner, AMRG & Associates too feels that “This ruling comes as a legal, logical and balanced ruling by the advance ruling authority, whereby project offices are confirmed to a legal extension of foreign head office and thereby no GST needs to be paid on the services received from expat employees of such overseas Head office. This ruling would bring relief to numerous multinational companies operating in India through a project office or liaison office and ailing oil and gas sector is expected to immediately benefit from this pronouncement, as this ruling save upfront payment of GST on reverse charge basis.”