Varsha Vasante Gowda
This article would help persons who have large number of foreign clients, persons who attend foreign business events held outside India, or have Holding company outside India.
Service sector plays an important role in technology diffusion especially in areas such as financial services, computing and information process or management consultancy. Under GST regime, Article 269A mandates that supply of goods or services or both in the course of import into the territory of India shall be deemed to be supply of goods, or of service or both in the course of inter-state trade or commerce.
As per Section 2(11) of IGST Act Import of service means supply of service where
a) Supplier of service is located outside India
b) Recipient of Service is located in India
c) The place of supply of service is in India.
Taxability of Import of Service under GST includes the following: –
a) Import of service for a consideration whether or not in the course or furtherance of business
b) Import of service without consideration by a taxable person from related person or from any of his establishment outside India, in the course or furtherance of business.
As per Notification no.10/2017 IT(R) dtd 28.06.2017, one of the notified service for which RCM is applicable is “any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient”.
IGST payable under RCM in case of Import of service were the payment is made in cash, credit to the extent of IGST paid in cash to be utilized in the same month.
In case of Import of service, if the nature of service does not fall under the one specified under Section 13(3) to 13(13) of IGST Act, then Place of supply shall be the location of the recipient of service. Hence IGST is to be discharged under RCM.
RCM would generally be applicable on the cases wherein the place of supply would be that of the recipient of service (generally located in India).
Following are few scenarios where IGST is not required to be discharged under RCM in case of Import of service due to place of supply concept :-
1) Commission Services:M/s. XYZ receives service from M/s. ABC (US based company) towards procurement of customer for its business. M/s. ABC charges commission of 10% on all payments received from the prospect for services provided by M/s. XYZ to such customer.
In the above case, M/s. ABC is acting as an agent between M/s. XYZ and the customer which falls within the meaning of ‘Intermediary services’. Hence the Place of supply shall be location of the supplier of service i.e. M/s. ABC as per section 13(8)(b) of IGST Act. Service provider (M/s. ABC) and the place of supply (US) is located in non-taxable territory, IGST is not required to be discharged under RCM.
2) Event based Services:M/s. A & Co. an architecture consultancy firm makes a payment to M/s. XYZ (foreign party) who is an organizer of exhibition. Few of the employees of M/s. A & Co. were sent to attend the exhibition which is held in Europe.
In the above case, as per section 13(5) of the IGST Act, the place of supply shall be the location where the event is held i.e. USA.
Service provider (M/s. XYZ) and the place of supply (Europe) is outside the territory of India. Hence IGST is not required to be discharged under RCM.
3) Services relating to Immovable Property: A goes for a business trip to Dubai and incurs accommodation expense towards stay in JW Marriott located in Dubai.
In the above case, the place of supply shall be the location of immovable property i.e. Dubai as per section 13(4) of IGST Act. Here the service provider and the place of supply is Dubai which is outside the territory of India. Hence IGST is not required to be discharged under RCM.
A comprehensive examination of Form 15CA/CB (foreign remittances), various agreements entered between the service provider and recipient holds the key to understanding the taxation of such transactions.
Such a scenario is generally applicable when a holding company outside India agrees the right to use for it’s IP in terms of goods and/or IT Software and other related services.
Under erstwhile VAT laws, it is understood that where the transaction involves granting the right to use trademarks, patents, technical know-how or technology right etc. is constructed as transaction in goods.
Related Case Laws
Transfer of technical know-how has been accepted as ‘goods’ and constitute sale under VAT as provided in in case Mechanical Assembly System Vs State of Kerala [2006, 144 STC 536]
As per Supreme Court decision in TATA consultancy service vs. State of Andhra Pradesh has held that canned software are ‘goods’ for the purpose of levy of VAT.
Under GST regime, temporary transfer or permitting the use or enjoyment of intellectual property right constitute supply of service as per Schedule II r/w Section 7(1A) of CGST Act.
Following are the rates applicable for Intellectual Property Right based on HSN:-
|HSN||Rate of tax||Description of Service|
|99733||12%||Temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP) right in respect of goods other than information technology software.|
|997331||18%||Temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP) right in respect of information technology software.|
|998599||18%||Other support services– management services for rights to industrial property (i.e. trademarks, franchises, etc.).|
Based on agreement entered between service provider and recipient, analysis can be done with respect to treatment of usage of Intellectual property right i.e. either it is in respect of goods or information technology software since rate of tax is different for each of the categories.
Also, it is important to note, the Time of Supply applicable [Proviso to section 13(3) of CGST Act] to such scenarios i.e. in case of associated enterprises which is different from the generally applicable TOS for RCM services.
Illustration given below for easy understanding:
M/s. ABB& Co.(Indian Company) has a holding company M/s. SS & Co. which is Germany based company.
M/s. ABB & Co. makes royalty payment towards use of intellectual property right in respect of ‘’brand name” of holding Company. Let us assume payment is made on quarterly basis amounting to Rs. 6,00,000/- (April-June).
|Date of entry in the books of the recipient (a)||Date of payment (b)||Time of Supply (a)/(b) which is earlier||GST to be discharged under RCM|
|30.04.2018 (Provision entry passed amounting to Rs.2 lakh)||25.06.2018||30.04.2018 Paid in April 2018 GSTR 3B||GST to be discharged =12%*2,00,000 =Rs. 24,000|
|31.05.2018 (Provision entry passed amounting to Rs.2.5 lakh)||25.06.2018||31.05.2018 Paid in May 2018 GSTR 3B||GST to be discharged =12%*2,50,000 =Rs. 30,000|
|Invoice May – Jul 18 received on 23.06.2018 (Amounting to Rs.6 lakh)||25.06.2018||23.06.2018 Paid in June 2018 GSTR 3B||GST to be discharged =12%*1,50,000 (6 lakh – 2 lakh – 2.5 lakh) =Rs. 18,000|
♦ The TOS provision of 60 days for payment to vendor/61st day if unpaid would not be applicable here.
♦ ITC on the GST paid under reverse charge would be eligible in the same month.
♦ In the instance that, the Invoice value for the quarter is lesser than RCM paid based on 2 months provisions, there would be no requirement to reverse RCM paid or ITC claimed, as it has a NIL revenue impact.
Recent update in Section 13 of IGST Act 2018 (Amendment Act w.e.f. 1st February 2019):
Place of supply in case of job work of any treatment or process done on goods temporarily imported into India and then exported without putting them to any other use in India, to be outside India.
Earlier, the above benefit was extended only to repairs and not job work activity.
This article has been prepared by Varsha Vasante Gowda (Audit Executive) and vetted by CA Akshay Hiregange. The author could be reached at email@example.com.