Service Tax Implication
Murali
(Querist) 27 May 2010
This query is : Resolved
Facts:
Company is a based out of Chennai which has incubated several companies to fill its mission and acts as holding entity.
The above companies ( 100% subsidiary of IFMR Trust ) are separate legal entities in the eyes of law. Now due to the issue of capacity utilization at those companies, few core functions like Human Capital, Accounts, IT, Administration, Travel Booking etc are centralized at the Holding entity level and not built in the respective entities, however at the end of the FY when Book closure happens , Trust allocates the cost to the respective entities based on the number of head count in the respective companies.
To give an example, Total salary cost incurred by the Company under various cost center is as follows:
Human Capital Rs 5 lakhs
Accounts Rs 3 lakhs
Admin Rs 2 lakhs
Total Cost is Rs 10 lakhs
Now, if there are 20 employees across 5 different companies, the total expenses of Rs 10 lakhs is divided by total head count which comes to Rs 50k per person which is then allocated to each companies based on the count. So if Trust has 5 employees, it will absorb, 50K*5 = Rs 2.5 lakhs, Company B has 10 employees- it will absorb Rs 50* 10 = Rs 5 lakhs and so on and so forth. . “There is not even Rs 1 mark up on the entire cost allocation”
“So , based on the above principle, expenses are apportioned on the group companies and booked as expenses in the respective companies by giving credit to the overall expenses”
Query: Sir, based on the above facts, we would like to approach your good self to have a formal opinion on the above said transaction with specific focus on the applicability of Service Tax Act.
Also , we would like to understand in details, the type of records or documents to be maintained by the company and the companies to substantiate these expenses – like MOU.
Is there any other implication from any other regulation perspective.
Currently the offer letters are issued from the company but those employees are working for other groups also .
Further neither the Trust intends too no desires to view this transaction as a service from an overall perspective
Sumit Batra
(Expert) 27 May 2010
Let me put it this way a,b,c,d are entities and they merge into a consortium called D which is a trust.
Now D has centralised key facilities and D distributes the expenses as incurred by a,b,c and d.
The expenses are distributed to a,b,c,d based upon head count and on basis of actuals.
Where is the service element involved????
Had it been a case that a,b,c are providing some kind of service as prescribed under Section 65(105) then only the service tax element could have been examined for providing output service.
In this case, whatever services are procured by a,b, c for or on behalf of D will be paid by the centralised entity D. so the input credit will be available to D.
U need to elaborate on the exact nature of services that are being consumed and provided to enable the community to comment on ur transaction.
Murali
(Querist) 29 May 2010
Dear Sir,
Thanks for response, there is no such merger. The Trust basically is the Holding entity which has incubated 5 companies to achive its mission. The companies are all start up and it will be costly for us to create separate teams in each company to carry on the operation.
To avoid this situation, the Trust has Accounts, HR, IT, Admin Deptt who provide service to these companies. The Trust pays salaries which is then debited to the respective companies based on head count basis and credited to salaries account.
The recovery of the cost is done on actual amount spent and not adding any mark up on the same.
the attached file can bring some more clarity
thanks
Murali
