GST Liability under RCM on services consumed outside India

Introduction:

In today’s world, the cross-border trades have eased up and even the country is encouraging exports. India is exporting various goods and services  and is also procuring goods/services from foreign countries. Some of the services which are procured from foreign countries are consultancy, exhibition services, commission agency services, accommodation services outside India, etc. For these services, the Indian customer makes a payment to the foreign service provider. Now the question arises whether GST is required to be paid under reverse charge on such services received from a foreign service provider. In this article, the author has tried to analysed this issue in light of a recent judgement of Rajasthan High Court in the case of Savio Jewellery [D.B. Civil Writ Petition No. 1910/2024].

Taxability on services received from a foreign service provider

Notification 10/2017-IT(R) provides the list of services on which GST is required to be paid under reverse charge. Sl. No. 1 of the notification provides as under:

Relevant definitions:

• Non-taxable territory [Section 2(79) of CGST Act]: It means the territory which is outside the taxable territory.
• Taxable territory [Section 2(109) of the CGST Act]: It means the territory to which the provisions of this Act apply. As per section 1 of the CGST Act, the CGST Act extends to the whole of India.
• Non-taxable online recipient (NTOR) [Section 2(16) of the IGST Act]: It means any unregistered person receiving online information and database access or retrieval services located in taxable territory.

Summary of the above reverse charge entry:

Tax is liable to be paid under RCM only when:

• Supplier of service is any person located in a non-taxable territory.
• Recipient of Service is located in the taxable territory other than a NTOR.

Import of service

Further, there is a concept of import of service. The scope of supply in section 7 of the CGST Act includes import of service for a consideration whether or not in the course or furtherance of business.

Import of service is defined under Sec 2(11) of The IGST Act to mean any supply of service where-

• the supplier of service is located outside India;
• the recipient of service is located in India; and
• the place of supply of service is in India;

From the definition of import of service, it appears that a transaction would be treated as import of service only in case where the place of supply is in India. On harmonious reading of the reverse charge entry and the definition of import of service, the importer will be liable to pay IGST on reverse charge basis and the same will have to be discharged by cash only and credit cannot be utilized for discharging such a liability.

What is place of supply?

In principle place of supply is the destination of supply attracting tax under the GST law. It plays utmost significance in determining the nature of tax payable on a supply.

In case of the following services, the foreign country could be the place of supply and the location of the recipient would be in India:

1. Supply of services in relation immovable property – Section 13(4) of the IGST Act

2. Services supplied by way of admission to, or organisation of a cultural, artistic, sporting, scientific, educational or entertainment or a celebration, conference, fair, exhibition or similar events, and services ancillary to such admission or organization – Section 13(5) of the IGST Act.

3. Intermediary services – Section 13(8)(b) of the IGST Act

4. Passenger transportation services – Section 13(10) of the IGST Act

5. Services provided on board a conveyance during the course of a passenger transport operation – Section 13(11) of the IGST Act.

The question arises whether GST need to be paid on services where the place of supply is outside India. We now analyse this aspect in detail.

We know that GST is understood as a ‘destination-based consumption tax’. This is also evident from the way in which the provisions of ‘place of supply’ have been drafted. One of the salient features of GST is that it is a destination-based tax wherein tax is levied at each stage of the supply chain, from the manufacturer to the consumer. It is applied to the value addition at each stage, allowing for the seamless flow of credits and reducing the tax burden on the end consumer.

Thereby, even though the reverse charge entry [sl. no. 1 of 10/2017-CT(R)] does not specifically excludes transactions where the place of supply is outside India, in principle, the place of supply should be considered to determine the taxability. If the place of supply is in India, it can be said that the consumption is said to happen in India and where the place of supply is outside India, it can be said that the service is consumed outside India.

Further, section 1 of the CGST Act and Section 1 of the IGST Act provides that the provisions of the Act shall extend to the whole of India. Consequently, goods/services consumed outside India should not be taxable under GST in India.

There have been various cases under the erstwhile law regime in this regard which would have persuasive value under GST as well. Few of them are as follows:

• All India Federation of Tax Practitioners Vs. UOI [2007 (7) S.T.R. 625 (S.C.)]: It was held that service tax is leviable only on services provided within the country and is on value addition by rendition of services.
• Cox & Kings India Ltd [2014 (35) S.T.R. 817 (Tri. – Del.)]: It was held that Finance Act, 1994 authorized levy and collection of tax for providing destination and consumption based taxable service. Hence, consideration received towards outbound tours is not liable to levy and collection of Service Tax. This case was affirmed by the Hon’ble Supreme Court in 2015 (39) S.T.R. J308 (S.C.).
• Orient Crafts Ltd. Vs Union of India [2006 (004) STR 0081 Del]: It was observed that taxable services provided from outside India and received in India alone are chargeable to service tax. Though this decision was in the context of earlier law, whereby in the absence of receipt of service in India, the charge of service tax does not arise.
• Intas Pharmaceutical Ltd Vs CST [2009 (16) STR 748 (Tri-Ahmd)]: Impugned order held that recipient is liable when services fully performed outside India is not correct. A service tax levy applies only to services rendered in India and where the taxable event takes place in India. The question of shifting liability to the recipient under the reverse charge mechanism does not arise when liability is absent.
• Suntec Business Solutions P. LTD [2012 (25) S.T.R. 159 (Tri. – Bang.)]: It was held that though the activities undertaken by such subsidiaries in a foreign country on behalf of the applicant in relation to the agreement entered in between the applicant and customer, no evidence of import of services as services prima facie carried out in foreign countries.
• Aegis Limited [Service Tax Appeal No. 13528 of 2013-DB]: Ahmedabad CESTAT held that the whole of service rendered and consumed outside India is beyond the taxable territory as per Finance Act, 1994, hence not liable to service tax.
• Indian Hotel Co. Ltd. [2017 (7) G.S.T.L. 67 (Tri. – Del.)], it was held that since the services being provided and consumed outside India, appellant is not liable to Service Tax under reverse charge mechanism in terms of Section 66A of Finance Act, 1994
• Infosys Ltd v. Commissioner of Service Tax, Bangalore vide final order nos. 20282, 20294 & 20293/2014 dated 26.02.2014 by CESTAT: It was held that the expenditure reimbursed to the overseas branches or permanent establishments of the appellant abroad by the main office situated in India, is not chargeable to ST under Section 66A of the Finance act, 1994 as such reimbursement of expenditure cannot be considered as a consideration for the services rendered.

These rulings of service tax regime would have persuasive value under GST as service tax also was consumption-based tax and these rulings clearly brings out the point that services consumed outside India cannot be taxable in India.

Under GST, in the case of Lalitha Muraleedharan Vs. Range Forest Officer, Marayoor, and Others [WP(C). No. 24675 OF 2018 (H)], it was observed by the Kerala High Court that tax is finally payable where goods and services are consumed.

In the case of Dry Blend Foods Pvt Ltd [Ruling No. 01/2022-23 dated 1 April 2022], the Uttarakhand AAR held that the applicant is not required to pay GST on reverse charge mechanism on commission paid to the agent.

It is important to note that advance rulings are applicable only to the assessee who has applied for and the corresponding officer. These are not applicable and binding on other assessee’s. However, AAR’s could be used to understand the department’s view and confirm our understanding of the law and interpretation.

However, recently, in the case of M/s. Savio Jewellery [D.B. Civil Writ Petition No. 1910/2024], the High Court held that the supply of services i.e., exhibition services occurred outside India and the recipient, registered in the taxable territory of India, is liable to pay tax on a reverse charge basis.

The Hon’ble High Court did not examine the fundamental ratio that GST is a consumption-based tax and since the services were consumed outside India i.e., exhibition took place outside India, tax cannot be levied in India.

Conclusion: In the view of the author, the judgement in the case of Savio Jewellery supra may not be correct. However, demands may be raised by the departmental officers citing this decision. Hence, the GST council should come up with a circular providing clarity on this issue to avoid unnecessary demands and increasing the burden on the judiciary system. As per the author, GST is not required to be paid under reverse charge where the supplier is outside India, recipient is in India and place of supply is outside India as the goods/services are said to be consumed outside India.

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In case of any clarifications/doubts/feedback, the author may be reached at [email protected].