GST & TDS on Cross-Border Procurement of Software Assistance Services

Cross-Border Procurement of Software Assistance Services: GST & TDS Implications under Indian Law

Introduction

With increasing global collaboration in software development and support services, Indian businesses often procure technical services from foreign vendors. These services may range from customization, installation, configuration, development, and troubleshooting of software systems. This article examines the GST implications under the IGST Act, 2017 and TDS implications under the Income Tax Act, 1961, particularly when an Indian company engages such services from a non-resident.

2. GST Perspective – Import of Services

2.1 Relevant Statutory Definitions

As per Section 2(11) of the IGST Act, 2017:

“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.

Hence, all three conditions must be fulfilled for a service to qualify as an import of service.

2.2 Determination of Place of Supply – Section 13 of the IGST Act

Section 13(1) of the IGST Act, 2017:

“The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.”

Section 13(2) further provides:

“The place of supply of services except the services specified in sub-sections (3) to (13) 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.”

In this case, none of the specific rules from Section 13(3) to 13(13) are applicable because:

• It is not a service in respect of goods [Section 13(3)(a)],
• It does not require the physical presence of recipient [Section 13(3)(b)],
• It is not related to immovable property [Section 13(4)],
• It is not about events, OIDAR, or transport [Sections 13(5)–13(12)].

Thus, Section 13(2) applies, and Place of supply = Location of recipient = India

Therefore, Condition (iii) of Section 2(11) is also satisfied.

2.3 Reverse Charge Mechanism (RCM)

Under Section 5(3) of the IGST Act, and Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June 2017:

Any service supplied by any person who is located in a non-taxable territory to any person located in the taxable territory shall be subject to reverse charge.
The Indian recipient shall pay IGST under RCM and may claim  Input Tax Credit  (ITC), if eligible.

2.4 Case Study 1: Services Rendered for Indian Operations

If an Indian company engages a foreign vendor for:

• Installation of software,
• Configuration of systems,
• Customization of code, or
• Any other support service within India,

Then:

• Supplier: Foreign vendor (outside India)
• Recipient: Indian entity (in India)
• Place of Supply: India (under Section 13(2))

All three conditions under Section 2(11) are satisfied. Hence, import of service → RCM is applicable → IGST payable by Indian company.

2.5 Case Study 2: Services Rendered for Foreign Operations

If the foreign vendor provides services to the Indian company, but:

• The service is performed outside India, and
• It is used for the benefit of a foreign client, say a software customization project for a UAE or US-based customer,

Then:

• Place of supply under Section 13(2) is still India, as the recipient is in India.
• Import of service conditions are still met, and RCM still applies.

Note: GST law does not evaluate place of performance or end-use for import classification. It strictly follows the recipient-based test under Section 13(2).

3. Income Tax Perspective – Section 195 & FTS

3.1 Relevant Provisions of the Income Tax Act, 1961

Section 195(1):

“Any person responsible for paying to a non-resident… any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit or payment, whichever is earlier, deduct income-tax thereon…”

3.2 Scope of Income Deemed to Accrue in India – Section 9(1)(vii)

Section 9(1)(vii) of the Income Tax Act, 1961:

“income by way of fees for technical services payable by—

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.”

 Explanation 2 to Section 9(1)(vii):

“For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’.”

 3.3 Case Study 1: Services for Indian Operations

• Foreign vendor provides software configuration/customization services for an Indian project.
• Indian company uses the services in India.

Under Section 9(1)(vii)(b), this is deemed to accrue or arise in India, as the exclusion clause does not apply. Since the sum is chargeable to tax in India, TDS under Section 195 is applicable.

However, if DTAA is available (e.g., India-Germany DTAA), then:

• Article 12 of India-Germany DTAA allows taxation of FTS even without PE.
• But tax rate capped at 10% of gross amount, if beneficial ownership and TRC are in place.

3.4 Case Study 2: Services for Foreign Operations

Now assume:

• Indian company procures similar services from the foreign vendor.
• The services are utilized in a business carried on outside India or for earning income from a source outside India (e.g., project in UAE or USA).

In this case:

As per Section 9(1)(vii)(b):

“…except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India…”

TDS is not applicable, as the income is not chargeable to tax in India.

This position is supported by GE India Technology Centre (SC) 327 ITR 456 and other several Judgements

Even under India-USA DTAA, Article 12 provides that:

“fees for included services” must either “make available” technical knowledge or be ancillary to royalty.

If “make available” test is not satisfied, no tax in India.

4. Summary Comparison Table

5. Compliance Recommendations

• Collect Tax Residency Certificate (TRC) and Form 10F from foreign vendor.
• Execute 15CA/CB compliance if TDS applies or even for reporting exemption.
• For GST, discharge RCM liability in GSTR-3B and claim ITC in GSTR-2B (if eligible).
• Document purpose of services (foreign vs. domestic use) to support TDS applicability.

6. Conclusion

The taxability of cross-border software services depends not only on the location of the supplier, but also on the place of supply under GST and the nexus of service utilization under Income Tax. While GST imposes a recipient-based reverse charge, Income Tax uses a nexus-based deeming fiction with further restriction through DTAAs. Careful review of each transaction’s purpose, location, and documentation is essential to ensure compliance and avoid litigation.