Has the AAAR fixed the ‘fixed establishment’ under GST?
Whether maintenance & repair contract services (MARC) provided by an Indian branch office of a foreign company to an Indian Company would attract forward charge in the hands of the branch (or) RCM in the hands of recipient Indian Company?
Whether the branch of the foreign company in India, which would execute MARC for 17 years, would constitute ‘fixed establishment’ for the purpose of payment of GST?
In a recent interesting ruling, the AAAR-West Bengal (Iz Kartex, [2020] 121 taxmann.com 313 (AAAR-WEST BENGAL)) held that the MARC provided by a Branch of a foreign Company attracts RCM in the hands of the Indian service recipient and not forward charge in the hands of the foreign branch. Overruling the decision of the AAR (IZKartex named after P.G Korobkov Ltd. [2020] 117 taxmann.com 418 (AAR-WEST BENGAL)), the Appellate authority held that the Indian branch does not constitute ‘fixed establishment’ as envisaged U/s 2(7) of the IGST Act.
FACTS
The Applicant, a Russian company (Kartex), which had a branch office in India, entered into an agreement with an Indian Company, Bharat Coking Coal Ltd. (BCCL) for maintenance and repairs of machineries and equipment.
QUESTION BEFORE THE AAR
Whether or not the non-resident applicant (Kartex), having a branch in India, is liable to pay GST on the MARC rendered to an Indian Company. Conversely, the applicant specifically wanted to know whether or not the recipient (BCCL) is liable to pay GST under RCM in terms of Notification No.10/2017–IT (Rate) dt.28.06.2017.
SUBMISSION OF THE APPLICANT BEFORE THE AAR
Before the AAR, the applicant, referring to the provisions of Section 13(3)(a) of the IGST Act, submitted that the place of supply of the service (POSS) for the MARC of machineries is the location where the services are performed i.e. India. The applicant also submitted that all the conditions of import of services within the meaning of section 2(11) of the IGST Act are satisfied and hence the recipient of service is liable to pay GST under RCM.
AUTHORITY’S RULING (AAR)
The AAR observed that it is a long-term contract spanning over 17 years and the non-resident is responsible for supply of the spares, components, and consumables over the entire period. It was also observed that officers, support staff and system expert will be deputed at site for maintenance and repair of equipment and train the BCCL personnel. The AAR concluded that the Applicant had a ‘fixed establishment’ U/s 2(7) of the IGST Act and hence the provisions of Section 12(2)(a) of the IGST Act were attracted (not Section 13(3)(a) as claimed by the applicant). Consequently, the AAR held that the supply attracts GST under forward charge in the hands of the applicant and not RCM in the hands of the service recipient (since it is not an import of service).
SUBMISSION OF THE APPLICANT BEFORE THE AAAR
The taxpayer was on appeal before the AAAR against the order of the AAR. Before the AAAR, the applicant submitted that the AAR wrongly concluded that there was a ‘fixed establishment’ and that part of the contract obligations were met through subcontracting to an Indian Company and that the invoices for services were directly raised by the non-resident on BCCL. Kartex also submitted that the AAR merely asserted that the branch office is the supplier of service without adducing or relying on any substantial/material evidence, whatsoever, to establish the actual role of the branch office in the performance of stipulated services under MARC. Kartex further submitted that despite an express factual submission that the branch office does not maintain any human or technical resources which are capable of performing the technical services under the MARC, the AAR held that there was a ‘fixed establishment’. Kartex submitted that it was clearly a case of ‘import of services’ U/s 2(11) for the recipient.
APPELLATE AUTHORITY’S RULING (AAAR)
Agreeing with Kartex’s submissions, the AAAR held that a registered place of business could not constitute ‘fixed establishment’ for the purpose of Section 2(7) of the IGST Act. The AAAR further held that Kartex did not have “suitable structure in terms of human and technical resources to supply services” so as to fall under Section 2(7). The AAAR accepted the submission of Kartex that the supply satisfies all the elements of ‘import of services’ defined U/s 2(11) of the IGST Act since the services were provided by a foreign entity. The AAAR ultimately held that the Indian service recipient (BCCL) is liable to pay tax under Reverse Charge on the services imported from Kartex.
AUTHOR’S NOTE ON ‘FIXED ESTABLISHMENT’
The conclusions drawn from the above decision could also be used to test and decide the existence or otherwise of a ‘fixed establishment’ for a resident taxpayer operating in more than one State. However, there are inherent challenges in identifying the existence or otherwise of a ‘fixed establishment’ since the term is loosely and vaguely defined under the IGST & CGST Acts.
The term ‘fixed establishment’ is defined U/s 2(50) of the CGST Act and 2(7) of the IGST Act (reproduced below) only for the purpose of identifying the (A) ‘location of the recipient of services’ and (B) ‘location of the supplier of services’.
“fixed establishment” means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs;”
What is “sufficient degree of permanence” and what is “suitable structure in terms of human and technical resources to supply services” is a subject matter involving interpretation. It is this crucial twin condition, which should jointly be satisfied to decide if a service provider renders services from a particular State or not (i.e. presence of a ‘fixed establishment’). The ambiguous language used in Section 2(50) of the CGST Act and 2(7) of the IGST Act could pose challenges in deciding this and is open to disputes.
For example, an electrical installation contractor (X Ltd.) registered in Tamilnadu (TN) renders services to a customer located in Andhra Pradesh (AP) for which he charges IGST. The contractor opened an administrative office in AP and a group of 25 staffs stay in that premises to perform installation and supervision services at site, which would go on for 18 months. Can this office in AP be treated as ‘fixed establishment’? Would the administrative office, which is setup for 18 months result in ‘permanence’? Can it be said that there are suitable ‘human and technical resources’ in the administrative office in AP to supply installation services? In my view, there cannot be a ‘permanence’, in this example, since the intention is only to execute a single contract in AP. Since one of the twin condition fails, there is no ‘fixed establishment’ for X Ltd. in AP, in the given example, and the TN contractor is correct in charging IGST on its AP customer. However, it could become subjective in terms of ‘permanence’ and ‘resources’ if, for example: The contractor executes 3 projects in AP from the administrative office. The 3 contracts are executed majorly through subcontractors with slim strength of own staffs.
The ‘fixed establishment’ could pose yet another challenge to the ‘One nation One tax’ theory unless more clarity is brought to the definition similar to (or even better than) ‘Permanent Establishment’ defined under the Income Tax Act, 1961 read with DTAAs entered into with various countries. It is important to note that there is no loss of revenue to the exchequer irrespective of whether a taxpayer renders services from one State to another or by providing services after getting registered in a particular State (since the revenue goes to the consuming State only). A suitable clarification /amendment in this regard would help prevent unnecessary and unproductive litigation.
The author can also be contacted at venkat@caindia.in.
Author Bio
Informative article sir