A CEO or CFO of a company typically works for the company as a whole and not just the head office. Likewise, any expenditure incurred by a company on marketing, consultancy, legal expenses, etc., is for the entire organisation and not just the head office. Hence, can a company apportion this expenditure amongst its branches? But, what about the GST implications on the same?
The Appellate Authority for Advance Ruling (AAAR) has recently ruled that the recovery of salary apportioned by the head office to a branch will be subject to Goods and Services Tax (GST). Let’s dissect the case in question. Cummins India had sought clarity from the AAAR on whether the allocation of costs relating to employees’ salaries by the head office to a branch would be liable to GST. It further sought a clarification on the applicability of GST on allocation and recovery of salaries of head office employees from the branches.
The Maharashtra bench of the AAAR ruled that both of the above allocations would be liable to GST. It further said that the head office could not avail input tax credit on the GST paid on common services. Under GST, there exists a mechanism for input tax credit distribution, under which a company takes up an input service distributor (ISD) registration to allocate the input tax credit to the branches, arising from expenses common to the organisation.
This is the second similar ruling in this regard. Last year, an Authority for Advance Ruling (AAR) had ruled that companies must value services provided by their chief executive officers and charge them to their subsidiaries. In other words, it would make for a cross charge of common expenses across the branches.
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