Expats salary paid by foriegn entity and booked in project office established in India as per indian laws are not liable to GST : Says AAR

Expat employees are employees of the employer i.e. the Head Office and since the Project Office is an extension of the Head Office, there is a relation of employer and employee between the Project Office and the expat employees. And since 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.

M/S. HITACHI POWER EUROPE GMBH
(AAR, Maharashtra)

(Image is for representation purpose only)

Facts of Case

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 HO (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.

Issue under consideration

Whether the Goods and Services tax (herein referred as ‘GST’) 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.

Held by AAR

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 any 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 Expart employees even though the salary is paid by the Head Office. We also observe that the PAN and TAN has been allotted to the Project office in the name of the Head Office situated abroad, by the Income Tax Authorities. Hence we find that a project office in an extension of the foreign Head Office, 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 Head Office and since the Project Office is an extension of the Head Office, 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 Head Office, 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.

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