In re Behr-Hella Thermocontrol India Pvt. Ltd. (GST AAR Maharashtra)
The argument of the applicant is that the services provided by the applicant in this case, as per the agreement, are completed only when the test reports are sent to their overseas clients is not tenable for the reason that first of all the service of testing provided by the applicant on the basis of examination and physical verification of prototypes is in respect of verification of traits, characteristics and defects, if any, in respect of prototypes sent to the applicant and this service of testing is over once on the basis of examination and verification of prototype, the test report is generated and sent via mail as stated by the applicant and therefore provision of testing service is over and it is clear as per detailed discussions above, that the service is completed and is clearly provided in India.
Thus the event and provision of testing service is over and the service is clearly provided in India as per Section 13(3) of the IGST Act, 2018.
The applicant’s main arguments are that the service is completed only when it is used by the applicant in manufacture of goods and their upgradation or removal of defects if any, on the basis of this test report is not sustainable and maintainable as the agreement between the applicant and the service recipient is only with respect to conducting of tests and providing of test report and is not with respect to its further use or otherwise by the service recipient as we can clearly see that even if the findings of test report are not used in any way by the service recipient, it cannot be said that the service of testing is not provided by the applicant to the service recipient as the provision of testing services as per the agreement between them is clearly there whether or not the test report is used by the service recipient. Thus the applicant’s argument does not hold any ground and we are of the opinion that in the present case it can safely be inferred from a reading of the provisions of Section 13(3) that the services supply of which has been rendered by the applicant to their overseas client as per the agreement is taxable under IGST Act.
Further we specifically find that in the SGS case cited by the applicant, the facts are different. In that cases the overseas clients of SGS used the services of SGS in inspection/test analysis of the goods which the clients located abroad intended to import from India. The tests w’ere conducted on sample goods and the said goods were not made physically available bv their overseas client. In fact the overseas clients would import the goods only after the goods were tested by SGS and a report was sent to that effect. The import would occur only the reports sent were found to confirm that the goods imported complied with requisite specifications and standards. In the subject case the situation is different. Here the overseas client had made the goods physically available to the applicant in order to enable them to conduct the tests. If the goods were not made physically available to the applicants for testing purposes, the tests could not have been conducted and therefore no reports could be generated. Hence it is clear that the facts of the SGA case are different from the facts of the subject matter. It is also seen that the applicant have also cited other case laws but the facts of the cited case laws are different from the facts of the matter at hand and therefore the decisions in those cases cannot be applied to the present case.
In view of the discussion made under ‘Observations’ above we hold that the testing services being provided by the applicant in the present case is liable to IGST and cannot be treated as zero rated supply
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING MAHARASHTRA
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Behr-Hella Thermocontrol India Pvt. Ltd., the applicant, seeking an advance ruling in the respect of following question.
Whether in the facts and circumstances of the case, the Applicant is liable to pay Integrated Goods and Services Tax on the testing services provided to its overseas group entities, being a zero-rated supply?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the “GST Act”.
02. FACTS AND CONTENTION – AS PER THE APPLICANT
The submission (Brief facts of the case), as reproduced verbatim, could be seen thus –
Statement of the relevant facts having a bearing on the question(s) on which the advance ruling is required (refer SI. No. 15 of Form ARA-01)
1. The Applicant is a private limited company incorporated under the Companies Act, 1956. The registered office of the Applicant is situated at Elpro Compound, City Survey No. 4270, Chinchwadgaon, Pune – 411033. The Applicant is a 100% subsidiary of Behr-Hella Thermocontrol GmBH, Lippstadt, Germany (hereinafter referred to as BHTC Germany”). The Applicant is registered under GSTIN No. 271800000581ARQ.
2. In the normal course of business, the Applicant has entered into service agreements with BHTC Germany and its other overseas group entities such as Behr-Hella Thermocontrol, Inc. (hereinafter referred to as “BHTC USA”) and Behr-Hella Thermocontrol (Shanghai) Co. Ltd. (hereinafter referred to as “BHTC Shanghai”), inter alia, for providing testing services. Hereto annexed and marked as Exhibit “A” is the copy of the Service Agreement entered into by the Applicant with BHTC Germany.
3. The testing services provided by the Applicant are in relation to the prototype goods supplied by the overseas group entities to determine whether the products so tested function in accordance with the requisite standards based on certain identified parameters such as temperature, environment, durability, etc. The tests are directly carried out on the prototype goods provided by the overseas group entities.
4. By way of deliverable, the Applicant sends across the testing report to the overseas group entities usually through emails. The prototype goods are usually not sent back. Hereto annexed and marked as Exhibit “B” is the specimen test report prepared and sent by the Applicant.
5. For providing the said testing services, the Applicant receives the consideration in convertible foreign exchange. Hereto annexed and marked as Exhibit “C” are the specimen invoices raised by the Applicant on its overseas group entities for providing the said testing services.
Based on the above facts, the Applicant now wishes to confirm its analysis that the “Place of Supply” of the testing services rendered by the Applicant to its overseas group entities is “outside India”, as detailed in Annexure-Il of this application, and accordingly, the Applicant submits this Advance Ruling application to the Hon’ble Authority for Advance Ruling.
The Applicant craves leave to submit such further facts as may be relevant after admission of the application or at the time of hearing.
Statement containing the applicant’s interpretation of law and/or facts, as the case may be, in respect of the questions(s) on which advance ruling is required
In light of the facts of the case (as explained in Annexure I) and the question in respect of which the Applicant seeks an Advance Ruling, the Applicant’s interpretation of facts and law in respect of the aforesaid questions is as follows:
Question: Whether in the facts and circumstances of the case, the Applicant is liable to pay Integrated Goods and Services Tax on the testing services provided to its overseas group entities, being a zero-rated supply?
Applicant’s submissions
1.1 With effect from 01 July 2017, indirect tax regime in India has shifted from multiple taxes by multiple authorities at multiple times to a consolidated Goods and Services Tax (“GST”) regime.
1.2 Conceptually, GST is a “destination based tax on consumption of goods and services”, meaning thereby that the tax would accrue to the taxing authority which has jurisdiction over the “place of consumption” which is also termed as the “place of supply”. In this regard, a reference is made to the Frequently Asked Questions on GST issued by the Central Board of Excise & Customs, New Delhi dated 31 March 2017 (2nd Edition) which highlights the conceptual understanding of GST as under:
Q 1. What is Goods and Services Tax (GST)?
Ans: It is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In a nutshell, only value addition will be taxed and burden of tax is to be borne by the final consumer.
Q. 2 What exactly is the concept of destination based tax on consumption?
Ans: The tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply.
1.3 Section 7(5) of the Integrated Goods and Service Tax Act, 2017 (hereinafter referred to as the “IGST Act”) provides that supply of service shall be treated as a supply of service in the course of inter-State trade or commerce when the supplier is located in India and the place of supply is outside India.
1.4 As per Section 16 of the IGST Act, “export of service” shall qualify as “Zero rated supply” and can be supplied without payment of IGST.
1.5 Thus, even if a supply is in the course of inter-State trade or commerce, the same can be supplied without payment of IGST if it qualifies as an export of service.
1.6 In terms of Section 2(6) of the IGST Act, a supply of service shall qualify as export of service when:
(a) the supplier of service is located in India;
(b) the recipient of service is located outside India;
(c) the place of supply of service is outside India;
(d) the payment for such service has been received by the supplier of service in convertible foreign exchange; and
(e) 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;
1.7 The terms “supplier of service” and “recipient of service” defined under Section 2(105) and Section 2(93) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) are reproduced herein below for ease of reference:
2. Definitions
****
(93) “recipient” of supply of goods or services or both, means –
where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and
where no consideration is payable for the supply of a services, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both.
*****
(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied
*****
1.8 In the facts and circumstances of the present case, it is not in dispute that the Applicant is the “supplier of services” in terms of Section 2(105) of the CGST Act, and the overseas group entities, being liable to pay the consideration for the services supplied by the Applicant, are the “recipient of services” in terms of section 2(93) of the CGST Act.
1.9 Thus, condition provided under clause (a) and (b) of Section 2(6) of the IGST Act are satisfied in the present case.
1.10 It is not in dispute that the Applicant is receiving the consideration for the supply of the service in the form of convertible foreign exchange from the overseas group entities. Thus, condition provided under clause (d) of Section 2(6) of the IGST Act is also satisfied.
1.11 Further, the Applicant and its overseas group entities are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of the IGST Act.
1.12 Explanation 1 to Section 8, inter alia, provides that where a person has an establishment in India and another establishment outside India, then such establishments shall be considered to be establishments of distinct persons.
1.13 In the present case, the Applicant and the overseas group companies are not merely establishments of a singular entity but are separate entities in themselves.
1.14 Thus, condition provided under clause (e) of Section 2(6) of the IGST Act is also satisfied.
1.15 Now the only condition that needs to be satisfied for the testing service provided by the Applicant to its overseas group entities to qualify as export and therefore a “zero rated supply” which can be supplied without payment of IGST is whether the “place of supply” is outside India.
1.16 Hence, the “place of supply” is relevant to decide the taxability and the status of taxability of the testing services provided by the Applicant to its overseas group entities.
1.17 The provisions for determining the place of supply of services are contained under Section 13 of the Integrated Goods and Service Tax Act, 2017 (hereinafter referred to as the “IGST Act”). The relevant extracts of Section 13 of the IGST Act are reproduced below for ready reference:
13. Place of supply of services where location of supplier or location of recipient is outside India
(1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.
(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:
Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.
(3) The place of supply of the following services shall be the location where the services are actually performed, namely:-
(a) services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services:
Provided that when such sendees are provided from a remote location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services:
Provided further that nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs and exported after repairs without being put to
any other use in India, than that which is required for such repairs;
*****
1.18 The terms “location of the recipient of services” and “location of the supplier of services” have been defined under Section 2(14) and Section 2(15) of the IGST Act as under:
Definitions
2. In this Act, unless the context otherwise requires, –
*****
(74) “location of the recipient of services” means, –
(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and
(d) in the absence of such places, the location of the usual place of residence of the recipient;
(15) “location of the supplier of services” means, –
(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 has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier;
1.19 The term “usual place of residence” has been defined under Section 2(113) of the CGST Act as under:
Definitions
2. In this Act, unless the context otherwise requires, –
*****
(113) “usual place of residence” means –
(a) in case of an individual, the place where he ordinarily resides;
(b) in other cases, the place where the person is incorporated or otherwise legally constituted;
1.20 In view of the above, while the location of the Applicant is in India in terms of Section 2(15)(a) of the IGST Act, the recipient of services (i.e., the overseas group entities) are located outside India in terms of Section 2(14)(d) of the IGST Act.
1.21 Further, a bare perusal of Section 13 of the IGST Act would reveal that generally, the place of supply of services shall be the location of the recipient of services in terms of Section 13(2) of the IGST Act, except in case of the services specified in sub-sections (3) to (13) of Section 13 of the IGST Act.
1.22 The Applicant understands that sub-sections (4) to (13) of Section 13 of the IGST Act are irrelevant in the present case for the purpose of determination of the “place of supply” of the testing services provided by the Applicant to its overseas group entities.
1.23 It is further submitted that the case of the Applicant does not fall within the ambit of Sub-section (3) of Section 13 of the IGST Act as well.
1.24 In terms of section 13(3)(a) of the IGST Act, the place of supply of services provided in respect of goods which are required to be made physically available to the supplier of services shall be the location where the services are actually performed.
1.25 In the present case, having regard to the nature of services rendered by the Applicant to its overseas group entities, it is mandatory for the overseas group entities to provide prototype goods to the Applicant. Further, the Applicant would be conducting tests in India and thereafter sending the test reports outside India to the overseas group entities on whose behalf the Appellant has carried out the testing services.
1.26 The Applicant is required to submit a test report and the contractual obligation of the Applicant towards overseas group entities in terms of the provision of testing services is complete only when the test reports are delivered to them. In other words, the provision of service is complete only when the test report is delivered to the overseas group entities.
1.27 It is submitted that the delivery of the test report by the Applicant to its overseas group entities is the most important part of the services rendered by the Applicant. In fact, the overseas group entities, as recipient of Services, are expecting the test report and nothing apart from that.
1.28 As stated above, GST is a destination based tax on consumption of goods and services. Further, “Services” are something intangible in nature. Thus, service is something which is not visible but the person receiving the same is deriving some benefit from its performance. Thus, GST is levied where the service is actually getting consumed.
1.29 It is submitted that Section 13(3)(a) of the IGST Act covers within its ambit those cases where the ultimate deliverable is the performance of a particular activity on the “goods”. Thus, the recipient is concerned with the goods and performance of the desired activity on the goods. For example, in case of storage of goods, the service recipient is concerned with the storage of goods for a particular time period. The provision of service is complete once the goods are stored for the said period.
1.30 In the instant case, the overseas group entities are neither concerned with the prototype goods made available by them nor with the tests performed by the Applicant on the said goods. The provision of service by Applicant is not complete by merely testing the said prototype goods. The Applicant is under an obligation to prepare the test report recording the findings of the tests performed by it and submit the report to the overseas group entities. In other words, the ultimate deliverable or the actual provision of service is the provision of the test report.
1.31 Further, there is no compulsion on the Applicant to return the prototype goods to the overseas group entities which further confirms that the overseas group entities are not concerned with the goods. Therefore, the actual consumption of the testing services performed by the Applicant is happening outside India in the form of the test reports.
1.32 The aforesaid position is further substantiated by the second proviso to Section 13(3)(a) of the IGST Act which provides that even though the repairing of goods is done in India, the place of supply shall be outside India if the goods after repairs are exported out of India. The rationale behind such exclusion appears to be that no GST should be levied as the goods will be ultimately used or consumed outside India.
1.33 The above contention is also supported by the judgment of the Hon’ble Bombay High Court in the case of Commissioner of Service Tax, Mumbai – II v. SGS India (P.) Ltd. reported in 2014 (34) S.T.R. 554 (Bom.), wherein the Hon’ble Bombay High Court held that service tax is a destination based consumption tax and therefore, even though the testing of goods has happened in India, the service will be treated as export of service as the benefit of service is accruing outside India. In a nutshell, the Hon’ble Bombay High Court held that since the delivery of the test report to the foreign clients was an essential part of testing services, the said services must be treated to be consumed abroad and therefore, falling within the ambit of “export of services” not liable to service tax. The relevant extracts of the judgment are reproduced below for ready reference:
24. In the present case, the Tribunal has found that the assessee like the respondent rendered services, but they were consumed abroad. The clients of the respondents used the services of the respondent in inspection/test analysis of the goods which the clients located abroad intended to import from India. In other words, the clients abroad were desirous of confirming the fact as to whether the goods imported complied with requisite specifications and standards. Thus, client of the respondent located abroad engaged the services of the respondent for inspection and testing the goods. The goods were tested by the respondents in India. The goods were available or their samples were drawn for such testing and analysis in India. However, the report of such tests and analysis was sent abroad. The clients of the respondent were foreign clients, paid the respondent for such services rendered, in foreign convertible currency. It is in that sense that the Tribunal holds that the benefit of the services accrued to the foreign clients outside India. This is termed as ‘export of service’. In these circumstances, the Tribunal takes a view that if services were rendered to such foreign clients located abroad, then, the act can be termed as ‘export of service’. Such an act does not invite a Service Tax liability. The Tribunal relied upon the circulars issued and prior thereto the view taken by it in the case of KSH International Pvt. Ltd. v. Commissioner and B.A. Research India Ltd. The case of the present respondent was said fo be covered by orders in these two cases. To our mind, once the Hon’ble Supreme Court has taken the view that Service Tax is a value added tax which in turn is destination based consumption tax in the sense that it taxes non-commercial activities and is not a charge on the business, but on the consumer, then, it is leviable only on services provided within the country. It is this finding and conclusion of the Hon’ble Supreme Court which has been applied by the Tribunal in the facts and circumstances of the present case.
25. The view taken by the Tribunal therefore, cannot be said to be perverse or vitiated by an error of law apparent on the face of the record. If the emphasis is on consumption of service then, the order passed by the Tribunal does not raise any substantial question of law.
1.34 The aforesaid judgment of the Hon’ble Bombay High Court has been followed by it in the case of The Pr. Commissioner of Mumbai Commissionerate v. QIndia Investment Advisory Pvt. Ltd. reported in 2017-TIOL-2171-HC-MUM-ST.
1.35 Since GST is also a “destination based consumption tax” on goods and services, relying upon the judgment of the Hon’ble Bombay High Court in SGS India (P.) Ltd. (supra) and QIndia Investment Advisory Pvt. Ltd. (supra), it is submitted that the place of supply in case of the testing service provided by the Applicant to its overseas group companies is also outside India.
1.36 In this regard, it is further submitted that even if the services are provided from India, since the actual consumption of the testing services is taking place outside India, the place of supply of services ought to be outside India in terms of Section 13(2) of the IGST Act.
Basis the above discussion, it is submitted that the “place of supply of service” in respect of the testing services provided by the Applicant to the overseas group entities is to be determined in terms of Section 13(2) of the IGST Act which provides that the place of supply shall be the location of the recipient of service i.e. Outside India
1.38 In view of the above, it is submitted that the testing services provided by the Applicant to its overseas group entities qualify as export of services and therefore, zero rated supply as defined under Section 16 of the IGST Act, further, the Applicant can supply the said testing services to its overseas group entities without payment of IGST in terms of Section 16(3)(a) of the IGST Act.
TESTING SERVICE AGREEMENT
Effective as of January 1, 2014
BETWEEN
Behr-Hella Thermocontrol GmbH, a company incorporated under the laws of the Federal Republic of Germany, having its registered office at Stuttgart, register court HRB 20260, and its principal place of business at HansastraBe 40, 59557 Lippstadt, Federal Republic of Germany, represented by its Managing Directors Mr. Thomas Schulte and Dr. Andreas Teuner (hereinafter called “BHTC”) of ONE PART
AND
Bebr-Hella Thermocontrol India Private Limited, a Company incorporated in India and having its Registered
Office at Elpro Compound, City Survey No. 4270, Chinchwadgaon, Pune – 411033, India,, represented by its Director and CEO Mr. Shrivardhan Gadgil (hereinafter called “BHTCIN”) of OTHER PART.
Whereas –
a) BHTC,IN was incorporated on February 10, 2006. BHTCIN is in the process of undertaking activities as developer, manufacturer, producer, purchaser, seller, importer, exporter, distributor, dealer, commission agent and market representatives of all kinds of Control Equipment and Units for Air conditioning and Climate Control systems and to render services related to design, development and testing of Control Equipments and Climate Control systems;
b) BHTC desires to engage BHTCIN for testing services related to Control Panel projects with BHTC and its group companies. The nature of work inter alia include:
Providing testing services for automotive specifically related to air condition control panel and accessories, on physical product sample for the customers located in different geographies. Activities carried out broadly include:
