Facts:
·
Company A registered in India providing software services to its global
customers.
·
To serve its Global customers, Company A
opened foreign branches in different parts of the world.
· These overseas branches provide onsite service and sales & marketing services to the clients of the Company A. For these onsite services rendered by the branches, the concerned branch of the Company A would raise the invoice directly on the clients/customers. However, the amounts are collected or received directly into the Indian banks of the Company A. The Company A would transfer funds to its overseas branches to meet the expenses of the respective branch
Tax Department view.
·
In terms of the Explanations below
section 8, an establishment in India and a branch or an agency or a
representation office outside India shall be treated as establishments of
distinct persons for the purposes of the IGST Act. Thus, the Company A having
an establishment in India and also have overseas branches outside India shall
be treated as establishments of distinct persons. .
·
Company A is taking software services
and marketing services from its overseas branches and in consideration of that
making payment to this branches.
·
As per section 7(4) of IGST Act, Company
A requires to pay GST under RCM on the payment made to overseas branches &
claim input credit & refund if applicable.
Company A View.
·
Absent
of Import & Service: The expression “import of
service” is not defined in the CGST Act, but it is defined in section 2(11) of
the IGST Act which definition is made applicable for CGST Act as well by virtue
of section 2(120) of the CGST Act. As per section 2(11) of the IGST Act,
“import of services” means the supply of any service, where – (i) the supplier
of service is located outside India; (ii) the recipient of service is located
in India; and (iii) the place of supply of service is in India. All the above
criteria is cumulative and if any one of the criterion is absent/missing, then
it would not be “import of service”. If
there is no “import of service” by a person from any of his other
establishments outside India, then merely because some money transfers or money
transaction is made between such establishments, the same would not be
construed as “supply” and consequently there is no question of levying GST on
such money transactions amongst different establishments of a person.
·
If there is mere transfer of money between
head office and its branch to meet expenses of the latter, etc, there being no
supply of service of any kind between the two establishments, then such an
activity is not “import of service” as per law. There is no liability to pay
GST at all. Similarly, assuming that there is supply of service by one of the
establishments, but the other criteria i.e. supplier of service situated
outside India or the recipient of service is located in India and the place of
supply of service in India should also be established to be present. If any of
these criterion is missing, then again the definition of “import of service” as
defined in section 2(11) would fail.
·
The expression “supply of service” is
defined in section 7 of the CGST Act which is made applicable to IGST Act as
well as stated above. The expression ‘location of the recipient of services’ is
defined in section 2(14) of the IGST Act. The expression ‘location of the
supplier of service’ is defined in section 2(15) of the IGST Act. Section 13 of
the IGST Act provides for determining of the place of supply of service in the
context of international trade. Therefore, based on facts the involved in each
and every case and examining of various evidences like documents, agreements,
invoices, etc including circumstantial evidences, one has to examine whether in
a given set of facts, one can come to a conclusion that all the criteria is
satisfied between a head office located in India and the overseas branches.
Merely because some money transfer or money transaction has taken place between
a head office and overseas branch and/or vice versa, one cannot blindly
conclude that there is ‘import of service’ and proceed to demand GST on the
head office located in India under RCM on the ground that head office has
imported service from its overseas branch.
·
The overseas branches of Company A is directly raising
invoice on their overseas customers with local VAT/GST. Hence,
it is possible for the Company A to take a contention that since it is a fact
on record that their branches are situated outside India and the customers are
also situated outside India and hence the location of provider of service as
also the location of recipient of service are outside India. Further, the
Company A is also entitled to plead/content that the place of provision of
service is entire outside India. Thus, the services are performed outside
India, received outside India and delivered outside India. Therefore, the
definition of “import of service” as discussed above are not attracted and as a
consequence the question of applying the provisions of section 7(1)(c) read
with Sl.No.4 of Schedule I of CGST Act does not arise in law and also in facts.
·
Destination
based consumption tax: In addition, It would also hasten to
add that it is well settled that the GST as also service tax is a ‘destination based consumption tax’.
In the totality of facts and circumstances as discussed above, the service
provider, service recipient, place of performance of service and the
destination of consumption of the services being outside the taxable territory,
the provisions of section 7(1)(c) read with Sl.No.4 of Schedule I to the CGST
Act are inapplicable. We would also invite the attention to the decisions in Tech Mahindra Ltd v. CCE, 2014 (36) STR
332 (Tri-Mum.); Torrent Pharmaceutials
Ltd v. CST, 2015 (39) STR 97 (Tri-Ahmd.); Milind Kulkarni v. CCE, 2016 (44) STR 71 (Tri-Mum.); Infosys Limited v. CST, 2015 (37) STR
862 (Tri-Bang.); Korean Air v. CST, 2018
(8) GSTL 428 (Tri-Mum.); 3i Infotech Ltd
v. CST, 2017 (51) STR 305 (Tri-Mum.); KPIT
Cummins Infosystems Ltd. v. CCE, 2014 (33) STR 105 (T) and KPIT Technologies Ltd v. CCE, 2017 (7)
GSTL 468 (T).
·
Further invite the attention to the
judgment of the Delhi High Court in the case of Indian
Association of Tour Operators v. UOI, 2017 (5) GSTL 4 (Del.) wherein in
para-19 and para-44 of the reported judgment the High Court examined the
territorial aspect of levy of service tax which is extracted below –
“19. A collective reading of Section 66B read with Section 64(1) and Section
65B(52) makes it plain that Service Tax is leviable only on services provided
or agreed to be provided in the ‘taxable territory’ i.e. the whole of India
except Jammu and Kashmir. Such service alone is ‘taxable service’ which is
defined under Section 65B(51) to mean that “any service on which Service Tax is
leviable under Section 66B.” The net result is that services rendered outside
the taxable territory of India would not be a ‘taxable service’ for the
purposes of the FA. This is of utmost significance since the entire Chapter V
applies, in terms of Section 64(3) of the FA only to “taxable services provided
on or after the commencement of this Chapter.
….
44. Turning to Section 94(2), it basically lists out
the topics on which rules can be made. It talks of laying down the procedure
for carrying out various tasks set out in the FA or to provide the form in
which returns are to be filed, appeals preferred. Specific to the case on hand,
Section 94(2)(f) empowers Central Government to make rules for ‘determining’
when export of ‘taxable services’ can be said to take place. It does not
empower the Central Government to determine whether there can be an export of
non-taxable services viz., services provided outside the taxable territory.
Secondly, it does not empower the Central Government to make rules levying or
making amenable the provision of certain services to Service Tax. Section
94(2)(hhh) also permits making rules regarding the ‘date for determination of
rate of Service Tax’ and ‘place of provision of taxable service’. It does not
provide for making rules on determination of taxability of a service.
‘Subjecting certain types of services to tax is an essential legislative
function. In this case, since the FA envisages Chapter V applying only to
taxable services, bringing non-taxable services within the ambit of Service
Tax, is impermissible”.
·
The above decisions can be relied upon
to contend that the services which were provided outside the taxable territory
would not attract the levy of service tax under section 66B of the Finance Act,
1994 and also there was no deeming fiction which was envisaged in erstwhile
section 66A of the Act which was omitted w.e.f.1.7.2012.
·
Same
Legal entity: The fact of bringing separate distinct
entity within a same legal person requires a review by the government. Right
now, the activities undertaken by the overseas branches of Company A, both
being part of same legal entity, will be said to be a service to self and there
cannot be any provision of service to self and hence should be outside the
preview of tax.
·
Amount
paid on account of the salary to its own staff cannot be made liable to service
tax : The major portion of the reimbursement
which company A does to its overseas branches is comprise of only Salary of
their own staff located at overseas branches and as per schedule III of the
CGST act, there cannot be any GST on salary payment to employees.
·
Double
Taxation: In most of
the cases the overseas branches of the Company A have paid local Value Added Tax (‘VAT’)/Goods
and Service Tax (‘GST’) as per the provisions of the local VAT/GST Regulations
applicable in the respective countries where the branches are situated.
Therefore, demanding GST/ service tax on the said component of onsite services
which are liable to local VAT/GST in the foreign countries under reverse charge
mechanism would also lead to double taxation of services.
·
Revenue
Neutral : In case Company A required to pay GST under RCM on
the payment made to their overseas branches, then Company A can claim input
credit of the GST paid under RCM and in case of excess payment, refund is
available to Company A. Thus, the exercise of demanding GST under RCM in
respect of branch related transactions is revenue neutral.
Appeal
to government
·
The captioned issue is debatable due to
lack of clarity and existence of
multiple views. Recently CBIC issued three circular on September 20, 2021 to clarify definition of intermediary
services which is indeed a relief to the industry. We expect a similar
clarification from government in this matter too as same will resolve the on-going
litigation between industry & tax department.
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