In the case of Re Foster Wheeler (GB) Limited (GST AAR Tamil Nadu), the applicant, M/s Foster Wheeler (G.B.) Limited, sought an advance ruling on two critical questions related to the Goods and Services Tax (GST). This article delves into the details of this ruling, analyzing whether the legal cost apportionment by FWEL (Foster Wheeler Energy Limited) to the applicant amounts to a supply under GST and whether the applicant is required to pay tax under the Reverse Charge Mechanism (RCM).
Legal Cost Apportionment as a Supply: The crux of this case revolves around whether the legal cost apportionment made by FWEL to the applicant qualifies as a supply under GST. The applicant argued that this transaction does not constitute a supply as defined in Section 7(1) of the CGST Act, 2017, primarily because it lacks the necessary commercial nature and mutual understanding required for a transaction to be considered a service. They relied on judgments and guidelines to support their argument.
Reverse Charge Mechanism (RCM): The second question pertains to whether the applicant is obligated to pay tax under RCM for the legal cost apportionment. The applicant contended that since the transaction doesn’t qualify as a supply, there is no requirement for them to discharge tax under RCM. They supported their stance with legal precedents and argued that the payment made to FWEL does not constitute consideration for any identifiable supply.
In this case, the State jurisdictional authority asserted that the legal cost apportionment by FWEL should be taxable under RCM. However, after a thorough examination of the facts, submissions, and multiple opportunities for the applicant to present their case, the applicant decided to withdraw their advance ruling application.
Therefore, without going into the merits or detailed facts of the case, the ruling was disposed of as withdrawn as per the request of the applicant.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, TAMIL NADU
The Applicant is M/s Foster Wheeler (G.B.) Limited, Project Office, 6th Floor, Zenith Building, Ascendas IT Park, CSTR Road, Taramani, Chennai , Tamilnadu 600 113 (hereinafter referred as the Applicant) is registered under the GST Act, 2017 vide GSTIN No. 33AABCF3459NIZF. The Applicant has sought Advance Ruling on the following questions:
1. Whether the legal cost apportionment by FWEL to the Applicant amounts to the supply under GST?
2. If so, whether the Applicant is required to pay tax under Reverse Charge Mechanism(RCM)?
2. In this regard the Applicant stated the following:
• That the Applicant is a Project Office established in India by M/s Foster Wheeler (G.B.), United Kingdom (“FWGB”) for the purpose of carrying out onshore services in India, as FWGB and M/s Amec Foster Wheeler Energy Limited, United Kingdom (“FWEL”), were awarded the onshore and offshore contracts respectively for providing consultancy services to Paradip Refinery Project(“Project”) by M/s Indian Oil Corporation Limited(“IOCL”).
• That IOCL entered into an umbrella agreement with FWEL and FWGB on 09.07.2009 for overall management of various services(copy submitted).
• That the Project Office was established in India based on the permission given by Foreign Exchange Management Act(FEMA), 1999 and as per its guidelines.
• That FWEL entered into an inter-company agreement (copy submitted) with FWGB on 29.04.2009 for assisting FWGB in providing various services in relation to the execution of the Project and as per the said agreement, FWEL shall raise monthly invoices on FWGB for the services provided.
• That a notice of arbitration was issued by FWEL and FWGB to IOCL initiating arbitration proceedings in India. After hearing both the parties, Arbitral Tribunal issued four partial awards primarily in favour of FWEL and FWGB. IOCL contested and filed petitions for their annulment before the High Court of Delhi.
• That since the Project was nearing completion, IOCL, FWEL and FWGB entered into a Settlement agreement dated 11.10.2017 and as a result FWEL received a sum of money for the dues from IOCL.
• That FWEL would directly make the payment for expenses related to arbitration proceedings to the third party service providers, invoices raised by the service provider on FWEL, then the expenses will be recharged by FWEL to FWGB(Project Office) by apportioning the expenses incurred on cost to cost basis without any mark-up and the Applicant would pass an accounting entry in the books upon receiving invoice in respect of such apportionment.
• That FWEL raised an invoice for GBP 45,68,086 (INR 41,33,69,300/-) on 28.03.2018 (copy submitted) on the Applicant towards such legal expenses and the Applicant accounted for such expenses in its book of accounts during March 2018.
3.0. In their interpretation of law in respect of the questions raised, the Applicant has stated the following:
3.1. The amount charged by FWEL is not leviable to GST as the transaction does not involve any supply. The activity of mere recharge of legal cost does not satisfy the specified requirements in the term ‘Supply’ as per Section 7(1) of the CGST Act, 2017, such as existence of mutual understanding/agreement to provide goods/services in the form of sale, transfer, barter, exchange, license, rental, lease or disposal, which will signify that there is an understanding of commercial nature to qualify as a service. Since the activity itself does not fall under the scope of supply under Section 7(1) of CGST Act, 2017, the same would not be subject to GST under reverse charge mechanism.
3.2. They had relied on various judgments to understand the term ‘supply’. They also relied on Education Guide for taxation of services released by CBEC, which provides when an activity would qualify as a service.
3.3. They further stated that the apportionment of legal cost by FWEL to the Applicant does not qualify to be an import of service since in the first place, it does not qualify as ‘Supply’ itself. Moreover, the term consideration defined in Section 2(31) of the CGST Act, 2017, implies that there has to be a sufficient nexus between the payment and supply; Mere payment alone cannot constitute a supply unless such payment has a direct nexus with an underlying supply; In the instant case, there is clearly no identifiable activity for which the amount of legal expenses has been apportioned towards the Applicant; There is no positive act done by FWEL that could result in a supply except making payment for incurring expenses for the Applicant.
3.4. They relied upon some judgments that no tax can be levied on attendant monetary transactions and they contended that the Applicant is not required to discharge any tax under RCM for payment made to FWEL towards reimbursement of legal expenses incurred. They also quoted few judgments to establish that sharing of expenses will not amount to service.
3.5. Hence they submitted that the payment to be made by the Applicant to FWEL is not for provision of any service by FWEL and thereby the Applicant is not liable to pay tax under RCM.
4. The State jurisdictional authority vide their letter dated 12.05.2022, submitted that legal cost apportionment by FWEL are taxable under RCM under GST Act. In respect of Centre jurisdictional Authority, no comments were received and hence it is presumed that there are no pending proceedings against the Applicant in Centre.
5.1. The applicant, after consent, was given an opportunity to be virtually heard on 17.05.2022. The Authorized Representatives (AR) of the applicant Mr. Sivarajan, (Partner PwC), Mr. Hariganesh V (Director PwC) and Mr. Anil Gobind Khiani (Manager PwC) appeared before the Authorities and reiterated the submissions. He stated that the services were performed before 01.07.2017 and therefore to such extent as per Section 142(11)(b) of GST Act, GST is not liable to be paid. He stated that the transaction is cost sharing between the partners and therefore not an activity liable to tax. He relied on the decision of the Apex Court in the case of Gujarat State Fertilizers and Chemicals Ltd & Anr Vs Commissioner of Central Excise, Gujarat and certain other tribunal decisions. For the question raised by the Members that when the Arbitration was completed, he stated that it was initiated in 2012 and settlement arrived in 2017 and since the cost allocation is during the GST regime, they had raised in question. The AR requested for another hearing.
5.2. Further to this the Applicant was given next opportunity to appear for virtual hearing on 20.07.2022 and again on 17.08.2022. The Applicant sought adjournment vide their mail dated 18.07.2022.
5.3. Since there was change in the Advance Ruling Authorities, another opportunity to be heard in person was given to the Applicant on 27.07.2023. The Applicant vide their letter dated 26.07.2023(sent by mail on 26.07.2023) stated that the Project Office has decided to withdraw the Advance Ruling application filed by them.
6. We have carefully examined the statement of facts, supporting documents filed by the Applicant along with application, submissions/Additional submissions made during personal hearing. We take on record, the letter dated 26.07.2023 (sent by email on 26.07.2023) of the Applicant wherein they have stated that they have decided to withdraw the ARA application filed by them. As the Applicant has requested for withdrawal of their Advance Ruling Application, the application is treated as withdrawn without going into the merits or detailed facts of the case.
In view of the above, we rule as under:
The ARA Application SI.No.18/2022/ARA dated 08.04.2022 filed by the Applicant seeking Advance Ruling is disposed as withdrawn as per the request of the Applicant.