Maharashtra Authority for Advance Ruling has recently vide Order No.GST-ARA- 38/2019-20/B-27 has adjudged in the ruling sought by M/s. Hitachi Power Europe GmbH that GST is NOT applicable on the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees.
Facts of the case
- Hitachi Power Europe GmbH (Head Office) (HO), a Company incorporated under the Laws of Germany has been awarded contracts for supply of goods and supervisory services by M/s. BGR Boilers Private Limited (BGRB) in relation to Projects of M/s. NTPC Limited, M/s. Meja Urja Nigam Private Limited end M/s. Damodar Valley Corporation (‘DVC) being Mega power projects, located in Maharashtra, Uttar Pradesh and West Bengal respectively..
- Under the FEMA, 1999 a Foreign Company executing projects in India is permitted to open an office in India to undertake such project, commonly referred to as “Project Office”. Accordingly, HO has constituted 3 Project Offices for undertaking onshore portion of the said Projects in India at Chennai.
- Hitachi Power Europe GmbH – Project Office (Applicant), being a Project Office (PO) in India of the Hitachi Power Europe GmbH -HO, is established under the FEMA, 1999 and is permitted to undertake only activity of execution of project (wholly or partly) in India that is awarded to the Foreign Company i.e., the HO, outside India.
- Few employees of the IIO (Expat employees) work in the Project Office in India, for whom 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.
- Since most of these Expat employees have their primary bank accounts outside India, salary is paid to these employees from the HO’s bank account located abroad, for administrative convenience.
- As per the Indian Companies Act, 2013, any PO of a Foreign Company is required to maintain its financial books of accounts in a manner which would reflect a true and fair view of the business of the Company in India. Thus, in order to keep record of the expenses of salary cost of Expat employees working from India, the Project Office makes an accounting entry in its financial books of accounts in India for the salary cost of the Expat employees.
Question on which Ruling was sought
Whether the Goods and Services tax is applicable on the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees?
Highlights and Ruling in order of Maharashtra AAR
- The basic issue before us is whether a foreign company and its Project Office in India can be considered as distinct entities or as part of the same entity.
- As per the RBI Directions / FEMA Act / Regulations a foreign company can establish a project office in India either on a temporary basis or a permanent project office, provided the foreign company has been awarded a project to be executed by them in India from the government or private sector. Registration of Project Office with RBI & ROC must be completed before it starts operating and certain conditions are required to be fulfilled before an application can be made for registration of a Project Office.
- A project office can be considered as a branch office set up with the limited purpose for executing a specific project and to execute the project. The Project Office can enter into transactions for receipt of supply of goods and services which would enable them to complete the project. Foreign companies engaged in turnkey construction or installation projects normally set up a project office for their operations in India. A ‘Project Office’ represents the interests of the foreign company executing a project in India and undertakes commercial activities related to the particular project.
- Applicant has stated that, as a Project Office in India they supply goods and services for undertaking onshore portion of the project on payment of applicable GST to customers in relation to the specific projects carried out at the various sites in India and for this purpose, the project Office has obtained registration under the GST legislation in various states in India.
- The Project Office has its own employees and also some employees of the Head Office (Export employees) who work in the Project Office in India, for whom 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.
- As per the provisions of the Companies Act, 2013, applicant is required to maintain its financial books of accounts in a manner which would reflect a true and fair view of the business of the Company in India. Thus, in order to keep record of the expenses of salary cost of Expat employees working from India, the Project Office makes an accounting entry in its financial books of accounts in India for the salary cost of the Expat employees even though the salary’ is paid by the Head Office (HO). We also observe that the PAN and TAN has been allotted to the Project office in the name of the HO situated abroad, by the Income Tax Authorities. Hence we find that a project office is an extension of the foreign HO, and as in the subject case shall carry on all activities relating and incidental to execution of the Project in India. Thus we find that the expat employees are employees of the employer i.e. the HO and since the Project Office is an extension of the HO, there is a relation of employer and employee between the Project Office and the expat employees.
- For GST to be applicable on the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees paid by the HO, such accounting entry should be seen as a supply of goods, services or both. Since we find that there is a relation of employer and employee between the Project Office and the expat employees, the provisions of Schedule III of the CGST Act comes into play in this case as per which services by an employee to the employer in the course of or in relation to his employment will not be considered as a supply and therefore will not attract GST.
In view of above Maharashtra AAR adjudged that GST is NOT applicable on the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees.
For ready reference of the readers the order of Maharashtra AAR is given below:
The Order can also be downloaded from button given below:
[wpdm_package id=’2642′]
***
A BIG THANKS to you for visiting our site and reading this article. Kindly provide your feedback on the above article in comment section below. Also please intimate about other GST issues on which you would require our team to pen down articles.
Doubts on GST may be lodged on ‘Ask GST query tab‘ under ‘Your GST queries’ tab on home page. National level GST experts will provide their reply on the matter raised at the earliest and same can be seen under ‘GST query resolved’ tab under ‘Your GST queries’ tab.
You can also subscribe to our free newsletter to always be updated on GST Law by filling the subscription form at home page.
TW Editorial Team comprises of team of experienced Chartered Accountants and Advocates devoted to spread the knowledge of GST amongst the various stakeholders.
