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CBIC issues clarification on ‘distinct entity’ under GST

CBIC vide its Circular No. 161/17/2021- GST dated 20th September’ 2021 provided clarity on the concept of ‘distinct entity’ under Section 2(6)(v) of the IGST Act, 2017 read with explanation therewith. The authority in order to remove difficulty and ensuring uniformity in the implementation of the said provisions, have issued the captioned Circular. The relevant extract of the provision reads as Section 2 (6) of CGST Act, 2017 defines “export of services” to mean:

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

;

Good Service Tax (GST) concept with finanical elements

Explanation 1 (Section 8 of IGST Act, 2017) reads as

‘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’

Further, Explanation 2 (Section 8 of IGST Act, 2017) reads as

‘A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.’

The tax authority, before analyzing the said issues, have relied on these relevant definitions :

  • Section 2 (84) of CGST Act, where ‘person’ includes the ‘Company’
  • Section 2 (20) of Companies Act 2013 which defines ‘company’ means a company incorporated under this Act or under any previous company law;
  • Section 2 (42) of Companies Act 2013 which defines ‘foreign company’ to mean any company or body corporate incorporated outside India which—

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.

Analysis & clarification of the issues

  • In reference to above cited provisions, have laid down that company incorporated in India and a foreign company incorporated outside India, are separate ’person’ under CGST and thus, separate legal entity under GST
  • Further, the tax authorities even moved on to submit that by the above analysis even the ‘subsidiary/ sister concern/ group concern’ of any foreign company in India would be a separate ‘person’, i.e. legal entity than the foreign company

Authors Comments 

This is a welcome move given the ambiguity and hardship caused by tax authorities, specifically w.r.t tagging such transaction as ‘export of service’ and thereby claiming GST refunds. Tax authorities during its assessment, following arbitrary approach were grading such transaction as domestic supplies [since condition (v) of the export of service was not being met] & thereby issuing notices involving huge quantum to registered assessee.

Given that the present clarification has been issues vide Circular, which means that the said Circular would not only be binding on the tax authorities but the said interpreted adopted needs to be followed since the inception of the corresponding law (i.e. to be followed for transaction undertaken since July’2017).

It would also be relevant to note that under the GST regime there have been no judicial precedent on this issue. Although, there have been several judicial pronouncement on this under the erstwhile regime (Linde Engineering India Private Limited vs Union of India, Civil Application No. 12626 of 2018).

Hope this was helpful. I welcome people’s suggestion/ opinion/ comments on the above. 🙂