Introduction:
1. Let us take a case where XYZ Limited is a company registered under GST. During FY 2017-18 said company has incurred certain expenditure in the nature of payment of fees to USFDA in connection with certain registrations/approvals.
Issue:
2. Whether the payment of fees to USFDA shall tantamount to import of services and hence shall require payment of tax under reverse charge mechanism ?
Analysis:
3. Sec. 5(3) of the IGST Act, 2017 provides that the Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of the Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
4. By virtue of the said provision, Notification No. 10/2017-Integrated Tax (Rate) has been issued wherein at Sr. No. 1 it is provided that tax in respect of any service supplied by any person who is located in a non-taxable territory to any person, other than non-taxable online recipient, shall be payable by the person located in the taxable territory. In other words, tax on import of services shall be paid by the recipient.
5. With the above background we must now examine whether the payment of fees to USFDA shall tantamount to “services” and secondly if the same is held as “services”, whether the payment of fees by XYZ Ltd shall tantamount to “import of services” ? We shall also examine whether any exemption is available under law ?
6. The Food and Drug Administration (USFDA) is an agency within the U.S. Department of Health and Human Services. It consists of the Office of the Commissioner and four directorates overseeing the core functions of the agency viz. Medical Products and Tobacco, Foods and Veterinary Medicine, Global Regulatory Operations and Policy, and Operations.
7. Scope of USFDA inter alia includes regulating certain product categories which includes drugs and medicines. To fund its expenditure and to fulfill its mission of protecting the public health and accelerating innovation in the industry, USFDA charges certain fees in respect of various activities which includes product approvals/registrations/facility inspection, etc.
8. In a nutshell, USFDA is an arm of the US Government formed for regulating certain product categories. To generate resources for carrying out the said functions, it charges fees for various activities from pharmaceutical companies.
Services ??
9. With the above factual background, can it be said that the payment of USFDA fees is towards “services” ?
10. The word “services” has been defined u/s 2(102) of the CGST Act, 2017 as under:
“(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged”
11. Above definition casts a wider scope as it includes anything which is not in the nature of goods as services. Whether any activity done by the Government under a sovereign function for a fee can be regarded as a “service” ?
Sovereign functions – Service Tax History:
12. To appreciate the issue, we must look at the clarifications issued under the Service Tax Regime.
13. Before the passage of the Finance Act, 2015 the scope of taxable services provided by the Government/Local Authority to business entities was restricted to only “support services” (see Section 66D(a) of FA, 1994). Scope of said “support services” was clarified vide para no. 4.1.7 of the Service Tax Education Guide as under:
“Support services have been defined in section 65B of the Act as ‘infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis.
Thus services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services).”
14. Even before the said Education Guide, the CBEC vide Circular No. 89/7/2006 – S.T dated December 18, 2006 had clarified that fee collected by sovereign/public authorities while performing statutory functions/duties under the provision of law would not be exigible to Service tax. Said circular reiterated an established principle that payment/fee levied and collected by Government authorities under the mandate of a statute are in the nature of compulsory levy and cannot be treated as provision of any service (by such Government authority) to any person/ entity for a consideration.
15. The term “support services” in Section 66D(a)(iv) was omitted and replaced by “any service” vide the Finance Act, 2015 and corresponding amendments to Rule 2(1)(d)(i)(E) of the Service Tax Rules, 1994 (vide Notification No. 05/2015- S.T. dated March 01, 2015) and Clause (I)(A)(iv)(C) and S. No. 6 of Table of Notification No. 30/2012 – S.T. dated June 20, 2012 (vide Notification No. 07/2015 – S.T. dated March 01, 2015) were also undertaken. Consequent to this, in the Budget of 2016-17, both the amendments were brought into force from April 01, 2016 through Notification No. 17/2016 – S.T. dated March 01, 2016 and Notification No. 16/2016 – S.T dated March 01, 2016 respectively.
16. The impact of the aforesaid amendment has been that all the services provided by the Government/Local Authority are taxable w.e.f. April 01, 2016 unless specifically excluded.
17. To clarify the scope of the amendment, Circular No. 192/02/2016 – Service Tax dated April 13, 2016 came to be issued which provided inter alia that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It further provided that it is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) forgetting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. Further it provided that circular No. 89/7/2006-Service Tax dated December 18, 2006 was no longer valid.
18. Hence a clear indication to bring to tax all the services provided by the Government (whether sovereign function, mandatory function or otherwise) was manifested. Only taxes, cesses or duties levied which are not a consideration against a particular service shall not be leviable to tax. Hence tax shall be payable on any amount collected by the Government where a service is provided in return subject to any express exemptions granted under the law.
19. Above discussion will thus illuminate the point that the Circular does not distinguish between an activity which is carried out as a sovereign function and an activity carried out otherwise to decide the taxability of such activity. Unless specifically excluded by an exemption notification, all such activities performed by the Government for fee shall be taxable.
20. Applying the same to GST regime, we are of the view that the distinction of not subjecting to tax those activities which are performed out of sovereign function and at the same time subjecting other activities (not out of sovereign function) to tax is not supported by the language as well as clarification in the earlier regime. Hence all the activities, which are not in the nature of goods, rendered for a fee shall be regarded as services.
21. Even if we presume that the activities carried out by the Government out of the “sovereign function” shall not suffer the tax, also suffers from an issue. That is, what is a “sovereign function” ?
22. Seven judges’ Bench of the Hon. Supreme Court in the case of Bangalore Water Supply and Sewerage Board v. A. Rajappa, [1978] 2 SCC 213 had an occasion to examine as to what can be considered as a “sovereign function” in connection with a dispute under the Industrial Disputes Act, 1947.
23. There was a difference of opinion in the said case between the Judges as to what can be considered as a “sovereign function”. By majority a restricted meaning was given to the said term to only specified categories of so called ‘inalienable functions’ like defense, making peace or war, foreign affairs, acquisition of a territory and the like where the State is not answerable to the Courts. After more than 27 years from the said decision, in 2005 Hon. Supreme Court in the case of State of UP v. Jai Bir Singh (Appeal (Civil) 897 of 2002) expressed doubts on the earlier decision and observed as under:
“We also wish to enter a caveat on confining ‘sovereign functions’ to the traditional so described as `inalienable functions’ comparable to those performed by a monarch, a ruler or a non-democratic government. The learned judges in the Bangalore Water Supply and Sewerage Board case seem to have confined only such sovereign functions outside the purview of ‘industry’ which can be termed strictly as constitutional functions of the three wings of the State i.e. executive, legislature and judiciary.
The concept of sovereignty in a constitutional democracy is different from the traditional concept of sovereignty which is confined to ‘law and order’, ‘defense’, ‘law making’ and ‘justice dispensation’. In a democracy governed by the Constitution the sovereignty vests in the people and the State is obliged to discharge its constitutional obligations contained in the Directive Principles of the State Policy in Part -IV of the Constitution of India. From that point of view, wherever the government undertakes public welfare activities in discharge of its constitutional obligations, as provided in part-IV of the Constitution, such activities should be treated as activities in discharge of sovereign functions falling outside the purview of ‘industry’.”
24. To resolve the dispute, Hon. Chief Justice has now referred the matter to a nine-judge bench. The final decision is pending as on date.
25. Hence the point to consider is that even if it is presumed that sovereign functions performed by the Government cannot be regarded as a “service”, the determination of such “sovereign functions” will itself be extremely difficult till the ruling is given by the nine-judge bench. On a narrow test, product registration fees/ facility inspection fees cannot be considered as a sovereign function.
Import of services:
26. Next question to examine is whether the payment of such USFDA fees shall tantamount to “import of services” so as to subject the same to tax under reverse charge mechanism ?
27. Import of services is defined u/s 2(11) of the IGST Act, 2017 as under:
“(11) “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”
28. In the given case, supplier (i.e. USFDA) is clearly located outside India. Recipient is located in India. Now to determine place of supply one needs to refer to Sec. 13 of the IGST Act, 2017. Default rule (as applicable to the present case) provides that the place of supply shall be the location of the recipient of services (i.e. India). Hence said payment of USFDA fees shall be regarded as “import of services” subject to tax under reverse charge mechanism.
Any exemption ??
29. Now this brings us to the last connected issue. Whether there is any exemption provided in law in respect of such fees paid to USFDA ?
30. Sr. No. 49 of Notification No. 9/2017-Integrated Tax (Rate) provides that services provided by the Central Government, State Government, Union territory or local authority by way of registration required under any law for the time being in force shall be exempted. Whether the payment of fees to USFDA for registration under a foreign law can be covered by the said exemption ?
31. The term “Central Government” as defined u/s 3(8) of the General Clauses Act, 1897 covers the President (all executive action of the Central Government is to be taken in the name of President). Hence the federal Government of USA cannot be regarded as the “Central Government” for the purpose of above referred exemption. Thus on strict construction, payment of registration fees to USFDA (though constituted by the USA Government) cannot be exempted from tax.
32. It is indeed ironical that similar product registration fees payable to Drug Control Authority of India shall enjoy exemption by virtue of the above referred entry whereas the same payable to the Foreign Government will be taxable.
33. Author thus urges CBIC to issue a clarification in this regard to put this issue to rest. Till that, it will be wise to pay under RCM and avail ITC.
Author Bio
Any Status – “The point to consider is that even if it is presumed that sovereign functions performed by the Government cannot be regarded as a “service”, the determination of such “sovereign functions” will itself be extremely difficult till the ruling is given by the nine-judge bench”