GST on overseas branches.

Facts

An Indian company has branches in other countries. These branches earn money by providing services to customers in those countries. The company pays local taxes (VAT/GST) in each country and pays income tax there on the money they earn. Since the income comes from the branches, it is combined in the accounts of the main headquarters.  

Present practice:

The foreign branch raised invoices with local taxes, which were then collected from customers and deposited in that country. The money earned in a foreign country is not considered an export from India. As a result, it's not reported in the monthly returns, and in the annual GST return, it's categorized as non-GST supplies.

GST department view:

i)      The customers abroad are customers of the Indian headquarters, not the overseas branch, as the agreement is made directly with the Indian headquarters. However, the services provided are considered as exported services with a zero-tax rate. The Indian headquarters, unfortunately, did not properly report this zero-rated turnover.

ii)     The Indian headquarters repeatedly purchases the same service from its overseas branch and resells it to the overseas customers.

iii)    Therefore, the Indian headquarters is essentially importing the service from its overseas branch, and GST needs to be paid under the reverse charge mechanism.

iv)    Since the company did not pay the tax under the reverse charge mechanism in their self-assessment return, they will not be able to claim credit for the tax paid. This will result in an additional cost to the company, along with interest and penalties.

 

Company/taxpayer view:

i)      According to the law of contract, only the Head Office has the authority to enter into contracts. The initial claim that there is no contract with the branches reflects a misunderstanding of the law of contract by the department.

ii)     The department also aims to categorize the same turnover as an export from India, which is simultaneously considered a domestic taxable sale in another country. Consequently, according to the department's perspective, the same revenue is subject to taxation in two different countries.

iii)    The department has overlooked section 13(2) of the IGST Act, which specifically addresses the place of supply. According to the law, when both the service provider and receiver are outside India, the place of supply is also considered outside India.

iv)    The department remains silent on instances where the same turnover is subject to VAT/GST in other countries.

v)     The Indian HO has other branches within the country, and they diligently pay their respective GST in their respective jurisdictions. Surprisingly, the department has not raised any concerns or challenges regarding the company paying tax in the wrong jurisdiction for other Indian branches.

vi)    The department has failed to consider its own circular, specifically Circular No. 199 of August 2023. This circular clearly states that in the case of inter-unit self-generated services, the value is considered NIL. Therefore, according to the circular, any exchange of services between India and overseas branches for self-generated services should result in NIL tax under the reverse charge mechanism.

vii)  The logic presented by the department lacks support from any law, circular, or case laws. Contrarily, there are CESTAT judgments, such as those of Tech Mahindra and Torrent Pharma, that contradict the department's stance.

viii)  Lastly, the Supreme Court recently ruled in the case of Vegetable Oil Ltd that when there are multiple views, the one that is more beneficial to the taxpayer should be adopted. This principle should be applicable in this case as well.

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