In re Sutherland Mortgage Services Inc. (GST AAR Kerala)
Whether supply of services by India Branch of M/s. Sutherland Mortgage Services Inc. USA to the customers located outside India shall be liable to GST in the light of the Inter Company Agreement with M/s. Sutherland Mortgage Services Inc. USA.
The supply of services by the applicant as per the Inter-Company Agreement with M/s Sutherland Mortgage Services mc, USA is liable to GST for the period from 01.07.2017 to 26.07.2018 and thereafter is exempted from GST as per entry at Sl No. 1OF of Notification No. 09/2017 – Integrated Tax (Rate) dated 28.06.20 17 as inserted by Notification No. 15/2018 – Integrated Tax (Rate) dated 26.07.2018.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING,KERALA
M/s. Sutherland Mortgage Service Inc, 5th Floor, 1, Technopolis, Cochin Special Economic Zone, Kakkanad, Ernakulam 682037 (hereinafter referred to as the applicant) is an Indian branch of M/s. Sutherland Mortgage Service mc, USA. (hereinafter referred to as “SMSI, USA”) The Applicant is registered under Goods and Services Tax in the State of Kerala and are holders of GSTIN 32AARCS6969G1ZQ.
2. At the outset, the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act) and the Kerala State Goods and Services Tax Act, 2017 (hereinafter referred to as KGST Act) are same except for certain provisions. Accordingly, a reference hereinafter to the provisions of the CGST Act, Rules and the notifications issued there under shall include a reference to the corresponding provisions of the KGST Act, Rules and the notifications issued there under.
BRIEF FACTS OF THE CASE:
3. The applicant is primarily engaged in the business of providing information technology enabled services such as mortgage orientation and related services. The applicant was established as a branch of SMSI, USA as the mortgage laws of United States of America prevented its Head Office from outsourcing of its work to any other third party. The applicant is set up as a branch in accordance with Reserve Bank of India general permission under Master Circular No. 07/2013-14 dated 01.07.2013 of foreign companies in SEZ to undertake service activities. The applicant has entered into an Inter-Company Agreement (hereinafter referred to as the “Agreement”) with their Head Office SMSI, USA for providing services to the customers located outside India. SMSI, USA requires the following services performed on behalf of its customers who are located outside India; (i) Mortgage Orientation; (ii) Primary Servicing; (iii) Special Servicing; (iv) Cash Management and (v) Analytics and Reporting. The applicant is providing such services covered by the Agreement dated 22.06.2012. The Agreement is entered only for the purpose of transfer pricing regulation as the branch has no separate legal entity. SMSI, USA has also entered into agreement with customers outside India for providing the services from USA and India branch. SMSI, USA is reimbursing the applicant for the costs incurred to perform the services. The valuation is done as mark cost plus 10% up to comply with the Transfer Pricing Regulation. The applies issues commercial to SMSI, USA their Head Office and therefore services would qualify as export of services, which is considered as Zero-rated supply in terms of section i.e IGST Act, 2017. Hence the applicant requested advance ruling on the following:
Whether supply of services by India Branch at M/s. Sutherland Mortgage Services Inc. USA to the customers located outside India shall be liable to GST in the light of the Inter Company Agreement with M/s Sutherland Mortgage Services Inc. USA.
4. The Authority for Advance Ruling by Ruling No. KER/32/2019 dated 24.05.2019 held that it is evident that the question raised is whether the supply made by the applicant would qualify as export of service as defined in Section 2(6) of the JGST Act, 2017 and it essentially involves the determination of place of supply which is not included in Section ti7 (2) of the CGST Act, 2017 a a question on which advance ruling can be sought. Accordingly, the Authority stated that it is helpless to answer the question raised in the application, as it is lacking jurisdiction to decide the issues involving determination of ‘place of supply’.
5. Aggrieved by the above decision of the Authority that it is lacking jurisdiction to issue ruling on the question raised the applicant filed writ Petition (Civil) No. 32 of 2019 before the Hon’ble High Court of Kerala challenging the decision of the Authority on Advance Ruling. The Hon’ble High Court by Judgment dated 03.02.2020 quashed the decision. of the Authority for Advance Ruling and remttedd the application to the Authority for Advance Ruling for fresh consideration and decision after affording s reasonable opportunity of being heard to the petitioner. The Hon’ble RIL Court in the above judgment observed as follows;
“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 clause (a) to (g) of sub-section (2) of Section 97 and all those clauses other that 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 la*s 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 applicants would require clarity and precision about various aspect or both.
in cases of this nature, entities which come with foreign investment 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 maximized so as to bring in a “win win situation” riot 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 thai1 the Parliament has taken a very proactive role with a very wide vision. the Parliament in its wisdom has decided to mandate sue-h a provision as in Cause (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 in view of such a scenario, the Advance Ruling Authority is obliged to entertain such plea and consider is on merits and then render its opinion/answer to such a plea that may be raised an 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 he any two arguments that the said issue relating to determination of place of supply, which is one of the crucial issues to be determined us whether or not it fulfills the definition of place or 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 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 t 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.”
PERSONAL HEARING:
6. In compliance of the direction of the Hon’ble High Court as detailed above the Authority for Advance Ruling granted opportunity of hearing to the Applicant on 28.10.2020 by virtual mode. S/Shri, K. Sivarajan, Debasi Nayak and Smt Nisha Menon, Pricewater House attended the hearing on behalf the applicant. They invited attention to the written submissions made along with the application and also submitted additional submissions. They also made a detailed presentation emphasizing and elaborating the various grounds relying on case laws in support of their contention that the actual recipient of the services rendered by them are the overseas customers and hence the service rendered by them satisfies all the conditions prescribed itt Section 2 (6) of the IGST Act, 2017 and accordingly qualify as export of services and consequently would be a zero rated supply in terms of Section 16 (2) of the IGST Act 2017. During the personal hearing they primarily relied on the Judgment of the Hon’ble High Court of Mumbai in Tech Mahindra Limited Vs CCE, Pune 111 reported in 2014 (36) 241 Mumbai HC and also produced flow chart comparing the flow of services in the case of Tech Mahindra Ltd and in their case in support of their contention that the overseas customers of SMSI, USA are the recipient of the services rendered by them.
7. In the written submission made along with the application and the additional written submission made at the time of personal hearing and in the course of personal hearing on 28.10.2020 they stated as follows;
7.1 They are the India Branch of SMSI, USA and are providing services to the customer and not merely a cost centre. They had entered in to the Agreement for providing the services to the customers located outside India. The Agreement is entered only for the purpose of transfer pricing regulation as the as they not separate legal entity but only the branch of SMSI, USA Consequent SMSI, USA has entered into agreements with the customer outside India for providing the services from USA and India Branch, SMSI, USA is reimbursing them the cost to perform such services. The valuation done as cost plus 10% mark up to comply with transfer pricing regulations. They issue commercial invoice on SMSI, USA and the amounts are received by them in convertible foreign exchange. They made a diagrammatic presentation showing the flow of the transaction. The flow of the transaction shows that they are providing the services to the customer located outside India and not to Head office and therefore services would quality as export of service which is considered as zero rated supply in terms o Section 16 of the IGST Act, 2017.
7.2. The term supplier is defined Section 2 (105) CGST Act, 2017 follows “supplier” in relation to any goods or services or both, shall mean the person supplying tie goods or services or both and shall include a agent acting as such on behalf of such supplier in relation to the cods or services or both supplied”. The contracts for servicing the clients between SMSI, USA and the customers located outside India. SMSI, USA and the applicant are the same legal entity and therefore the supplier transaction is the applicant.
7.3. The applicant was established as a branch of SMSI, USA as mortgage law of USA prevented outsourcing of work. separate entity. Therefore SMSI, USA has set up a branch office in India and provides services to the customers in USA from the branch office in India Section 2 (71) of the CGST Act, 2017 defines the term “location supplier” as follows;
“(71)” location of the supplier of services” mean,-
(a) where a Supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business for which registration Las been obtained (a fixed establishment elsewhere the location of such fixed establishment;
(c) where a supply is made from more than one establishment merit, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision the supply; and
(d) in absence of such Daces the location of the usual place of residence of the supplier.”
The perusal of the above definition makes it clear that the location of the supplier is the place for which registration has been obtained. In their case the contract is entered by the SMSI, USA with the customers and the service is executed by the Indian branch; i,e; the applicant Further, even if it is held that the service is provided from multiple locations; namely USA and India the establishment most directly concerned is the Indian branch location. Therefore, the location of the supplier in this tr3nsaction is the location of the applicant.
7.4. The recipient of the service rendered by them is the customer of SMSI, USA and not SMSI, USA itself. The applicant was established as the mortgage laws of USA prevented outsourcing of work to separate legal entity. Therefore, SMSI, USA set up a branch office in India and provided service from India. Therefore, they render service to their customers located in USA. Section 2 (93) of the CGST Act, 2017 defines the recipient of supply of goods or services or both to mean, in case where consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration and in case where no consideration is payable for the supply of a service, the person to whom the services are rendered.
7.5. The applicant has provided the services directly to the customers in USA and not to Head office located in USA. The Scope of Work (SOW) between SMSI, USA and the customers in USA specifically provide that the India branch office is the service provider. The agreements were produced as annexure (to the application and referring to pages 55 and 56 of the paper book, the relevant extract of the SOW of one customer was reproduced as follows;
“Staffing and facilities: Customer acknowledges that vendor (SMSI mc) personnel performing the Conventional Mortgage Loan Underwriting or Compliance Underwriting services or Independent Valuation Review may be performed by the vendor personnel located in Vendor’s secure off-shore facility located in India unless specifically instructed otherwise by AFOI or AFOI customers.”
Further the applicant quoted the relevant extracts of the contracts between SMSI, USA and the customers in support of their contention that the services are provided to the customers of SMSI, USA at USA as follows;
