CBIC vide Circular No. 161/17/2021-GST dated 20th Sep, 2021, clarifies doubts on whether the supply of service by a subsidiary/ sister concern/ group concern, etc. of a foreign company in India, which is incorporated under the laws in India, to the foreign company incorporated under laws of a country outside India, will hit by condition (v) of sub[1]section (6) of section 2 of IGST Act i.e. whether will be merely an establishment of a distinct person.
Section 2(6) of the IGST Act 2017 as under defines export of service:
“export of services” means the supply of any service when,––
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and
(v) 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.
In terms of Explanation 1 of the Section 8 of the IGST Act, Where a person has:-
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory,
then such establishments shall be treated as establishments of distinct persons.
Further, “Explanation 2. States that a 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.”
Furthermore, the definitions of company and foreign company have been provided under section 2 of Companies Act 2013, as under:
(20) “company” means a company incorporated under this Act or under any previous company law;
(42) “foreign company” means any company or body corporate incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner
Also, we can refer general meaning of Agency and Branch as mentioned below:-
An agency, is not an autonomous operation but acts on behalf of the head office. The agency may display and demonstrate sample merchandise, take orders, and arrange for delivery. The orders typically are filled by the head office because agency. Merchandise selection, advertising, granting of credit, collection on accounts, and other aspects of operating the business usually are conducted by the head office.
Whereas, a branch office usually has more autonomy and provides a greater range of services than an agency does. A branch typically maintain stocks, makes sales to customers, passes on customer credit, collects receivables, incurs expenses, and performs other functions normally associated with the operations of a separate business enterprise.
In view of the above, it can be stated that supply of services made by a branch or an agency or representational office of a foreign company, not incorporated in India, to any establishment of the said foreign company outside India, shall be treated as supply between establishments of distinct persons and shall not be considered as “export of services” in view of section 2(6) of IGST Act. Similarly, any supply of service by a company incorporated in India to its branch or agency or representational office, located in any other country and not incorporated under the laws of the said country, shall also be considered as supply between establishments of distinct persons and cannot be treated as export of services.
Whereas, a subsidiary/ sister concern/ group concern of any foreign company which is incorporated in India, then the said company incorporated in India will be considered as a separate “person” under the provisions of CGST Act and accordingly, would be considered as a separate legal entity than the foreign company i.e. not being the establishments of distinct persons and thus qualify as export of services.
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