R&D services provided to the foreign company considered as export of service

The AAR, Gujarat, in M/s. Hilti Manufacturing India Pvt. Ltd. [Advance Ruling No. GUJ/GAAR/R/2023/26 dated July 12, 2023] held that, services provided by the assessee to the entities located outside India is covered under section 13(2) of the Integrated Goods and Services Tax Act, 2017 ("the IGST Act"). Accordingly, such services would qualify to be treated as export of service.

Facts

M/s. Hilti Manufacturing India Pvt. Ltd. ("the Applicant") is a part of HAG group. The Applicant is registered under the Companies Act, 2013 having registered office in India and is engaged in the manufacture and supply of diamond cutting tools, other innovative tools required by the construction industry and provides in-house research and development service on diamond inserts.

The Applicant had a separate Research and Development ("R&D") unit wherein activities are carried out for their own purposes as well as for other customers, that they carry out R&D activities on behalf of entities situated outside India i.e. on the product samples/goods sent by the foreign entities for R&D purposes and they submit a detailed report.

The Applicant had entered into an agreement with M/s. HAG ("a foreign company") for carrying out various R&D activities on the product samples, testing & engineering activities for developing new products.

The Applicant stated that the result report of R&D activities was provided to the foreign company comprising of findings, performances, parameters, know-how, inventions, developed processes, objects and programs in the form of a report and an illustrative copy of such an R&D report was submitted to the Revenue Department ("the Respondent").

The Applicant further stated that periodic invoices were raised inclusive of IGST @ 18% for such services to the foreign company for which consideration is received in foreign currency and they were discharging IGST on such services.

The Applicant filed advance ruling for seeking clarification on services provided to the foreign entities can be treated as export of service.

Issue

Whether the R&D services provided by the Applicant to the foreign company can be considered as export of service?

Held

The AAR, Gujarat, in Advance Ruling No.GUJ/GAAR/R/2023/26 held as under:

• Observed that, the Applicant is located in India and HAG (the Recipient) is located outside India and the place of supply is the location of the Recipient of service, since the prototype on which R&D is conducted and whose report is supplied to HAG was not supplied by HAG but was developed by the Applicant. Thus, the service of R&D would not fall within the ambit of second proviso of section 13(3)(a) of the IGST Act.
• Held that, services provided by the Applicant to the foreign company is covered under Section 13(2) of the IGST Act and is eligible to be treated as a 'zero rated supply' under Section 16 of the IGST Act.
• Further held that, the services provided by the Applicant would fall under 'export of service' more so in view of the fact that all the five conditions as enumerated under section 2(6) of the IGST Act viz the Applicant (the Supplier) is located in India and HAG (the Recipient) is located outside India as in the application the payment of the supply is received in foreign exchange.

Relevant Provisions

Section 13(2) of the IGST Act

Place of supply of services where location of supplier or location of recipient is outside India

13(2) The place of supply of services except the services specified in sub-sections (3) to shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.

Section 13(3)(a) of the IGST Act

(3) The place of supply of the following services shall be the location where the services are actually performed, namely: -

(a) services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services:

Provided that when such services are provided from a remote location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services:

Provided further that nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or process and are exported after such repairs or treatment or process without being put to any use in India, other than that which is required for such repairs or treatment or process.