Reimbursement among related entities- Supply or not. Beware of potential consequences

What we may tend to overlook would boom with its consequence in an untimely manner. In this context over this article, lets understand various dimensions that we should be mindful of with respect to how to treat re-imbursements under GST. Whether is this a supply or not?

For any transactions to be regarded as "Supply" under sec 7 of CGST Act 2017, we have to satisfy that

1. Its done for consideration
2. Its in the course or furtherance of business

Exception to this definition are  

• for Import of services, consideration alone matters, not essentially the business test to be satisfied as per sec 7(b)
• Also for the notified transactions as per Schedule I, consideration test is not relevant as per sec 7(c).
• Transactions should not forming part of Schedule III

Lets build a perspective on these components making a transaction as " Supply" under GST.

Sec 2 (17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

4[(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and]

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Sec 2 (31) “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

Valuation of Supply:

Sec 15 (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Sec 15(2) (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

Sec 15(2) (c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

Schedule I - ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

Entry 2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business

 Rule 33- the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply

To summarise, re-imbursement can be broadly fit into the following circumstances as depicted in the picture below:

 

Lets flip to our topic now, re-imbursement among related persons are indeed supply as long as business test is satisfied and consideration is no longer relevant as per entry 2 of Schedule I. For the purpose of valuation we may resort to valuation rule 28 of CGST Rules 2017. 

Some of the typical transactions as an illustrations are given below to better our approach towards it appropriate treatment under GST to avoid potential consequences:

• When a group company undertakes the renewal of software licenses as a whole for the group companies, even in the absence of cross-charge to relevant group entities, it will be regarded as supply under GST based on place of supply
• Common infrastructure and facilities shared by group entities might trigger aspects such as who incurred the original cost and who uses it within the group will certainly points to supply under GST irrespective of the fact whether its settled or not. Cloud applications and its penetration are unavoidable as to how businesses are conducted these days across the geographies
• Travel or accommodation undertaken whether reimbursed or not will trigger a consequence under GST. Lets see this with more appropriate example further as below
• Lets say an entity in USA set up their subsidiary in India to support their global business operations. For this purpose, both entities travel to each other locations on business needs basis
• When the Parent entity in USA travels to India, the Indian entity undertakes to book their travel and accommodation needs during their stay, and vice-versa when its other way around
• When Parent entity reimburses the cost incurred by Indian entity towards travel and accommodation, it becomes a supply. 
• The key question is whether its zero-rated supply or not is to be ascertained as per sec 2(6) of IGST Act, which is reproduced below:

                                “export of services” means the supply of any service when,––

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange 1[or in Indian rupees wherever permitted by the Reserve Bank of India]; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8

• So in order to claim these transactions as "zero-rated supply", the conditions set in Sec 2(6) of IGST Act 2017 to be satisfied. If you closely observe the place of supply under sec 13 of IGST Act 2017 for services such as Travel ( return travel from India) and Accommodation are India. Thus, it shouldn't considered as "zero-rated supply" under GST and fails the definition of sec 2(6) for " export of services". 

• When parent entity incurs similar cost on behalf of Indian subsidiary entity undertakes a travel, you may view in similar lens that the place of supply for these services are outside India, so no need to consider as import of services to avoid paying on IGST on reverse charge basis. As per Sec 15(2) (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both should be part of the value of supply in the hands of Indian Entity.

When I conducted a poll on LinkedIn with my connections, the responses received apparently indicates the gaps. 

Hope you like this article, welcome your comments too.

- LDR

The opinion or thoughts expressed in this article is purely as that of the author, please exercise adequate caution at your end before applying the same and seek appropriate technical advises as deem necessary.