GST & IGST Applicability on India-based Monitoring of UK Software Contracts

In re Luksha Consulting Private Limited (GST AAR Tamilnadu)

The case of “In re Luksha Consulting Private Limited” throws light on the implications of GST & IGST for monitoring software contracts in the UK by an India-based company. This article delves deep into the ruling, analyzing its various facets and implications.

Determining the Nature of the Service: From the facts presented, it’s evident that Luksha Consulting offers IT-enabled services to an offshore company. The services, prima facie, seem to align with the criteria for “export of services”.

The Definition of Export of Services: According to section 2(6) of the IGST Act, 2017, “export of services” is characterized by five conditions: supplier’s location in India, recipient’s location outside India, the place of supply outside India, payment in convertible foreign exchange, and distinctness of the supplier and recipient.

Hon’ble High Court of Kerala’s Observations: The court observed that Advance Ruling Authorities should also consider “determination of liability to pay tax on any goods or services or both.” The aim is to provide clarity, especially for entities with foreign investments in India, ensuring they can operate effectively.

Criteria Examination of the “Export of Services”

On examining the conditions under section 2(6) of IGST Act, 2017, the following was ascertained:

1. Location of Service Supplier: Luksha Consulting, being situated in India, meets the first criterion.
2. Recipient’s Location: The services are rendered to Luksha Limited, UK, which is outside India.
3. Place of Supply: Since the service recipients are based outside India, the place of supply also lies outside India.

Ministry of Finance’s Clarification: A clarification issued emphasized the distinctness of companies incorporated in India and foreign companies. The condition asserts that services provided by one establishment to another establishment of the same person, as considered under Explanation 1 of section 8 of IGST Act, cannot qualify as an export.

Luksha Consulting, being incorporated in India, and Luksha Limited, UK, are distinct entities. This distinction allows the services rendered by Luksha Consulting to potentially qualify as “export of services”.

Conclusion: The IT services provided by the applicant for monitoring software applications for a UK customer qualify as an “export of services” under section 2(6) of the IGST Act, 2017. Consequently, these services are deemed as a zero-rated supply as per section 16 (l)(a) of the same Act.

FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, TAMILNADU

M/s. Luksha Consulting Private Limited, Elampillai, Salem (herein after referred to as The Applicant’), with GSTIN 33AAECL3474C1ZU have filed an application for Advance Ruling under section 97 of GST Acts read with Rule 104 of GST Rules, 2017, in Form ARA-01 paying the prescribed fees of Rs. 5000/- each under the CGST and TNGST Act,2017.

2. The Applicant has stated that they are primarily engaged in providing information technology enabled services such as enhancing / fixing programs in SAP and Microsoft products and also providing services to create reports and insight using tools like SAP business warehouse, Data sphere, SAC, Power BI. They have also stated that they do not develop full products or support data Centre activities.

3. The Applicant has sought Advance Ruling on the following:

The team in India will monitor the customer applications running in UK and provide any fix or update required in case of issues. Contract amount will be receivable in UK currency only. Whether IGST is applicable for the above export online monitoring software contract work and if applicable rate of GST.

4.1. The Applicant is a Private Limited Company incorporated in India under the Companies Act, 2013. They have been awarded Projects by M/s. Luksha Limited, UK and M/s. Spovens Limited, UK to provide the following services;

A. M/s. Luksha Limited, UK:-

• Development of Functionalities and Dashboards based on the SAP Application. Delivery of specific features by usage of the BW, DWC, SAC and analysis for Office.
• Technical advice on feasibilities based on the SAP solution.
• Supporting Team Members to proper plan the Sprints and support for keeping the committed scope and timelines.
• Proper Testing of the deliveries ensuring high quality and less incidents within the productive Environment.
• Following Guidelines on documentation, testing and transportation of technical developments.
• Full compliance to any Quality Assurance Guidelines.
• Strong communication towards the Project Manager and/ or technical Product Owner.
• Introducing best practices for helping to increase organizational effectiveness.

B. M/s. Spovens Limited, UK: Consulting Services for monitoring / changing/ fixing SAP objects.

4.2. In view of the above contracts/ projects, the Applicant wants to know whether the service rendered by them to the foreign clients would qualify export of service under the provisions of GST Act or not.

Personal hearing

5.1. The applicant, after consent, was given an opportunity to be virtually heard on 15.03.2023. The Authorized Representative (AR) of the applicant Sri. N. Sakthiraj, appeared before the authority and reiterated the submissions.

5.2. The AR has been asked to furnish the following details/ documents;-

• Incorporation certificate of the foreign entity viz., M/s. Luksha Limited, UK.
• Agreement between foreign entity and its customer
•  Copy invoice issued by the Applicant to foreign entity
• Detailed write up on the nature of service associated with monitoring of customer applications running (like software, machinery, etc.,) in UK, as mentioned in the AR application.

5.3. Subsequently, the applicant has submitted the following documents:-

Certification of incorporation of a Private Limited Company of Luksha Limited issued by the Registrar of Companies for England and Wales.

• VAT certificate issued to Luksha Limited in UK
• Copy of the agreement dated 10.01.2022 between Luksha Limited, UK and Luksha Consulting P. Ltd, India
• General Service Agreement between Spovens Limited, UK and Luksha Consulting P. Ltd, India
• Copy of invoice No.INV-000001 dated 30.03.2022 issued by Luksha Consulting P. Ltd, India to Luksha Limited, UK.

6.1. The Applicant is assigned to State jurisdiction. The State jurisdictional authority, the Assistant Commissioner (ST), Sankari Assessment Circle has reported that, on physical verification of the place of business, it is found that M/s. Luksha Consulting Pvt Limited is functioning with two employees in the address mentioned in the application filed by the applicant. So far, they have reported only one transaction in the returns filed for the month of March 2022 and made tax payment of Rs.15239/-

6.2. The Joint Commissioner, Salem Commissionerate has reported that there are no pending proceedings in the applicant’s case in their jurisdiction on the issue raised by the applicant in the ARA. application.

Discussions and Findings

7.1. We have carefully examined the statement of facts, supporting documents filed by the Applicant and the additional submissions made during the hearing and the issue to be discussed in the instant case is the taxability of the services rendered by the Applicant based on the details and documents furnished.

7.2. Based on the facts presented, it is seen that the applicant is supplying Information technology enabled services to a company located outside India, on his own. Prima facie, the services rendered by the applicant appears to be falling under export of services.

7.3. In this connection, it is observed that, Export of services as defined under section 2(6) of the IGST Act, 2017 essentially involves determination of place of supply which is not included as a question under section 97(2) of the CGST& TNGST Act, 2017 on which Advance Ruling can be sought. However, this case is admitted based on the following observations made by the Hon’ble High Court of Kerala in Writ Petition (Civil) No. 32634 of 2019, challenging the decision of the Advance Ruling Authority, Kerala in a similar issue;-

” A reading of clauses (a) to (g) of sub-section (2) of Section 97 of the CGST Act would make it clear that 7 items are enumerated as per clauses (a) to (g) of sub section (2) of Section 97 and all those clauses other than clause (e) thereof, are in specific terms. Whereas clause (e) of sub-section (2) of Section 97 of the CGST Act clearly mandates that the larger issue of “determination of liability to pay tax on any goods or services or both” would also come within the ambit of the questions to be raised and decided by the Advance Ruling Authority on which advance ruling could be sought and rendered under the said provisions. Whereas Clauses (a), (b), (c), (d), (f) & (g), i.e. the clauses other than clause (e), are in specific “pigeon holes” the provision as per clause (e) of sub-section (2) of Section 97 is in wide terms and the Parliament has clearly mandated that the latter issue of determination of liability to pay tax on any goods or services or both, should also be matters on which the applicant concerned could seek advance ruling from the Advance Ruling Authority on which the said authority is obliged to render answers thereto. The Parliament has made the said provision envisaging that in transactions in nature, where India is now a growing economy and has to make its substantial performance in economic growth and development not only domestic investments, but even foreign investments would also be heavily required and that host of tax laws has been subsumed into the overarching umbrella of the goods and services tax regime introduced by the Parliament and the parliament would have certainly taken cognizance of the fact and has intended that very often applications would require clearly and precision about various aspects of taxation in the transactions and that there should be certainty and precision in those matters, so that the applicant concerned is given the right to seek advance ruling even in such a larger issue as the one as per clause (e) of Section 97 (2) of the CGST Act, which deals with issue of determination of liability to pay tax on any goods or services or both.

In cases of this nature, entities which come with foreign investment in India would also require certainty and precision about the tax liability so that they can plan and decide in advance about their functioning as business entities in India so that its efficacy is maximised so as to bring in a “win win situation” not only for such foreign entities, who are permitted to make such investments in India, but also for the economy of India. It is in the light of these dynamic scenario in the fast changing global economy that the Parliament has taken a very proactive role with a very wide vision, the parliament in its wisdom has decided to mandate such a provision as in clause (e) of Section 97 (2), whereby the applicant is empowered to seek advance ruling even on the said larger issue of determination of liability to pay tax on goods or services or both and m view of such a scenario, the Advance Ruling Authority is obliged to entertain such plea and consider it on merits and then render its opinion/ answer to such a plea that may be raised and to render its advance ruling on those aspects in accordance with the provisions contained in the above said Acts.

In the instant case, it is true that the issue relating to determination of place of supply as afore stated is not expressly enumerated in any of the clauses as per clauses (a) to (g) of Section 97(2) of the CGST Act, but there cannot be any two arguments that the said issue relating to determination of place of supply, which is one of the crucial issues to be determined as to whether or not it fulfills the definition of place of service, would also come within the ambit of the larger issue of “determination of liability to pay tax on any goods or services or both” as envisaged in clause (e) of Section 97 (2) of the CGST Act. The Advance Ruling Authority has proceeded on a tangent and has missed the said crucial aspect of the matter and has taken a very hyper technical view that it does not have jurisdiction for the simple reason that the said issue is not expressly enumerated in Section 97 (2) of the Act. This Court has no hesitation to hold that the said view taken of the Advance Ruling Authority is legally wrong and faulty and therefore the matter requires interdiction in judicial review in the instant writ proceedings. In that view of the matter, it is ordered that the above said view taken by the Advance Ruling Authority is legally wrong and faulty and is liable to be quashed and accordingly declared and ordered. “

Thus, this case is admitted based on the above observations made by the Hon’ble High Court of Kerala cited supra. Now it is imperative to analyze whether the said transactions satisfy the conditions stipulated under section 2(6) of IGST Act, 2017 to qualify it as export of service.

7.4.1. The export of services has been defined in subsection (6) of the section 2 of the IGST Act, 2017 as extracted below;

“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;

Explanation 1 of the Section 8 of the IGST Act provides for the conditions wherein establishments of a person would be treated as establishments of distinct persons, which is reproduced as under:

Explanation 1.- For the purposes of this 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.

7.4.2. As per the above Explanation, an establishment of a person in India and another establishment of the said person outside India are considered as establishments of distinct persons.

7.4.3. Further, Ministry of Finance has issued clarification relating to export of services in Circular No. 161/17/2021, dated 20.09.2021 and the relevant paragraphs are extracted as below;

Analysis of the issue:

4.1 Clause (v) of sub-section (6) of section 2 of IGST Act, which defines “export of services”, places a condition that the services provided by one establishment of a person to another establishment of the same person, considered as establishments of distinct persons as per Explanation 1 of section 8 of IGST Act, cannot be treated as export. In other words, any supply of services by an establishment of a foreign company in India to any other establishment of the said foreign company outside India will not be covered under definition of export of services.

4.2 Further, perusal of the Explanation 2 to section 8 of the IGST Act suggests that if a foreign company is conducting business in India through a branch or an agency or a representational office, then the said branch or agency or representational office of the foreign company, located in India, shall be treated as establishment of the said foreign company in India. Similarly, if any company incorporated in India, is operating through a branch or an agency or a representational office in any country outside India, then that branch or agency or representational office shall be treated as the establishment of the said company in the said country.

4.3 . 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 condition (v) of sub-section (6) of section 2 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.

4.4 From the perusal of the definition of “person” under sub-section (84) of section 2 of the CGST Act, 2017 and the definitions of “company” and “foreign company” under Section 2 of the Companies Act, 2013, it is observed that a company incorporated in India and a foreign company incorporated outside India, are separate “person” under the provisions of CGST Act and accordingly, are separate legal entities. Thus, 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.

Clarification:

5.1 In view of the above, 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. Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.

5.2 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 (and thus qualifies as a ‘company’ in India as per Companies Act), 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 the 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 . 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.

7.4.4. On perusal of the incorporation certificate submitted by the applicant, it is seen that the Applicant M/s. Luksha Consulting Private Limited are incorporated in India under the Companies Act, 2013 with Shri V. Natarajan as Director and the establishment at UK , M/s. Luksha Limited has been incorporated as a Private Limited Company with the Registrar of companies for England and Wales, with Mr. Sakthiraj Natarajan as the Director of the Company. Thus, it is evident that M/s. Luksha Consulting Private Limited in India and M/s. Luksha Limited, UK are not considered as establishments of distinct person as the directors of both the establishments are different persons, as evident from the certificate of incorporation furnished by the applicant.

7.5. The Applicant M/s. Luksha Consulting Private Limited has entered into an agreement with M/s. Luksha Limited, UK and Spovens Limited UK and submitted copy of the agreement. The Applicant has also stated that they have potential business with M/s. Exigo solution, Stockport.

7.6. In this context, it is imperative to ascertain whether the services rendered by M/s. Luksha Consulting Private Limited as per the agreement satisfies the conditions prescribed under Section 2(6) of the IGST Act, 2017;

7.7. Thus, it is clear that the supply of information technology enabled services rendered by the applicant to the recipient qualifies to fall under export of services on fulfilling the conditions specified under section 2(6) of the IGST Act, 2017, which in turn is considered as a zero rated supply in terms of section 16 (l)(a) of the IGST Act, 2017.

In view of the above discussions, we rule as under;

RULING

The supply of information technology enabled services rendered by the applicant to the recipient qualifies to fall under export of services on fulfilling the conditions specified under section 2(6) of the IGST Act, 2017, which in turn is considered as a zero rated supply in terms of section 16 (l)(a) of the IGST Act, 2017.