Export of services under GST to foreign entities vs branch offices

Background

It would do good to recall that under GST law, services supplied are treated as export of services when the following conditions are fulfilled.

1. The supplier of Service is located in India;
2. The recipient of Service is located outside India
3. The place of supply of Service is outside India
4. The payment for such service has been received by the supplier of Services in convertible foreign exchange or INR as permitted by RBI; and
5. 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;

Such services can be supplied under LUT without charging GST and avail eligible ITC related to same/go refund. Alternatively can export services on payment of GST and claim a refund of ITC.

From the above,one of the conditions for qualifying as export of service is that the supplier of service and the recipient of service are not merely establishments/branch offices of same entity. Several assesses had been facing issues from department due to allegation thatservices are notbeing supplied to a different legal entity but on other hand such supplies were being done to a distinct person under GST and demands made/refund claim were being questioned on said grounds as well.

In this backdrop, the paper writer has examined the concept of the establishment of distinct persons as well as the implications on export of services.

Concept of the establishment of distinct persons

Establishments of a distinct person in accordance with Explanation 1 to section 8 of the IGST Act, 2017: …Where a person has,

• an establishment in India and any other establishment outside India;
• an establishment in a State or Union territory and any other establishment outside that State or Union territory; or …..

Explanation 2 to section 8 of the IGST Act, 2017 states that person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.

A combined reading of explanation 1 and 2 of section 8 of the IGST Act, 2017, it is clear that:

• Where an Indian entity hasa branch /agency / representational office outside India, then such branch/agency / representational office it is the establishment in the other territory. In such case, the establishment in India and such branch /agency / representational office outside India are establishments of distinct persons.
• Where an Indian entity carries on a business through a separate legal entity outside India which is not a branch or an agency or a representational office of an Indian entity, the Indian entity and the other legal entity cannot be said to be establishments of distinct persons.

For example, if A&D Software Limited based in Delhi has a foreign branch in Singapore then such establishments would be considered as distinct persons. The supply of software development services between Delhi and Singapore branch cannot be treated as export of services.In such cases,applicable GST should be paid.

However, when the parties are not branches of the same entity but are totally different legal entities such as A&D Software Limited based in Delhi and A&D Software LLC of the USA in our example, then such parties are distinct legal entities. Such parties cannot be treated as establishments of distinct persons and such supplies would be treated as the exported services on fulfilment of other conditions to treat as export.

Clarification under Circular no.161/2021-GST

In circular no. No. 161/17/2021-GST, CBIC had clarified that the supply of services to a subsidiary/ sister concern/ group concern, etc of a foreign company, by a company which is incorporated in India under the Companies Act, 2013, would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017, and not barred from treating as exported service for such reason.

This clarification has helped to clear the ambiguity which was there on services supplied to subsidiaries/group companies being covered under export of services or not.

The circular has clarified as under: Relevant extracts are given as below:

1. Company incorporated in India and foreign company incorporated outside India are separate legal entities: it is clarified that a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under CGST Act, and thus are separate legal entities[para 5.1]
2. Not establishments of distinct person: Accordingly, these two separate persons would not be considered as "merely establishments of a distinct person in accordance with Explanation 1 in section 8". [para Para 5.1]
3. Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013, to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the sub-section (6) of section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017.
4. Qualifies as export of services provided all other conditions also fulfilled: Similarly, the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would not be treated as supply to merely establishments of distinct person under Explanation 1 of section 8 of IGST Act 2017. Such supplies, therefore, would qualify as ‘export of services’, subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of IGST Act.[ Para 5.2]

Implication of above clarification

This circular has only given clarification on an issue which it was clear all along that when the supplier of service and the recipient of service are two separate legal entities then these cannot be said to be the establishment of distinct person. Consequently, the benefit of export of services cannot be denied by alleging non fulfilment of condition citing that the services being between establishments of a distinct person.

However, this circular has come as a boon whereby the assessee can claim shelter of this beneficial circular to support cases where refunds were being denied citing that it is services supplied to establishments of distinct persons.

Further, the paper writer highlights that the incorporation of entities which is evidenced by the certificate of incorporation under the respective laws could also be further supporting evidence that the entities are not establishment of distinct entities and the bar under clause (v) of the definition of export of service under GST law cannot be applied.

Similarly held in the AAR in case of Tandus Flooring India Private Ltd [(2013) 64 VAT 56 (AAR)] under erstwhile ST law[which had condition similar to clause (v) of GST to treat as export of service]which was affirmed in 2015 (39) S.T.R. 424 (Kar.).

Jurisprudence in this regard

Under erstwhile ST regime[negative list based taxation] similar to position in GST law, one of condition to treat as export of services was that the services not being provided between establishments of a distinct person.

In this background, in Linde Engineering India Pvt. Ltd. & Ors. Vs Union of India (Gujarat High Court) 2020-TIOL-1285-HC-AHM-ST where the 100% Indian subsidiary was providing consulting engineering services outside India to parent company and claiming the benefit of export of service, without the payment of Service tax;

The following allegations levelled against the petitioner:

"(i) Linde AG, Germany are legal entities, were mere establishments of the petitioner as contemplated under Rule 6A of the STR read with Explanation 3 of the Section 65B(44) of the Act;

(ii) in view of (i) above, the services rendered by the petitioner to Linde AG, Germany would not fall within the ambit of "Export of Services"

Analysis and decision

On analysis of the aforesaid provisions, it appears by no stress of imagination, it can be said that the rendering of services by the petitioner to its parent Company located outside India was service rendered to its other establishment so as to deem it as a distinct person as per item (b), explanation 3 of clause (44) of Section 65B of the Act, 1994.

Therefore, the services rendered by the petitioner Company outside the territory of India to its parent Company would have to be considered "export of service" as per Rule 6A of the Rules, 1994 and Clause (f) of Rule 6A of the Rules, 1994 would not be applicable in the facts of the case as the petitioner, who is the provider of service and its parent Company, who is the recipient of services cannot be said to be merely establishment so as to be distinct persons in accordance with item (b) explanation 3 of Clause (44) of Section 65B of the Act, 1994.

The services rendered by the petitioner to its parent Company are not within the purview of levy of service tax under the provisions of the Act.

Conclusion

Where the services are provided by Indian companies to companies incorporated outside India, on satisfaction of all the conditions of export of services as discussed above, it could be treated as export of services. Such exported supplies could be done under LUT without charging GST, ITC related to such supplies can be availed alternately go for refund.

The author can also be reached at roopa@hiregange.com