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 including procurement of services from outside India.

Service sector plays an important role in technology diffusion especially in areas such as financial services, software, information technology, computing and information process or management consultancy. In GST regime read with article 269A of Indian constitution, 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. In simple words, import of services would be treated as inter-State supply for taxation purpose.

Import of service

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 [Section 7]

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 [ Schedule I to CGST Act].

Applicability of RCM in case of Import of Service

In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable under RCM 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 liability under RCM in case of Import of service has to be paid in cash/bank. GST ITC  to the extent of IGST paid can be availed and utilized in the same month subject to ITC eligibility. 

Place of Supply in case of Import of Service

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 when recipient is in India.

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).

No liability under RCM on import based on place of supply concept : Few scenarios

1) Intermediary Services: M/s. XYZ receives service from M/s. ABC (US based company) towards procurement of customer orders for 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. Service would fall 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/ contracts entered between the service provider and recipient holds the key to understanding the taxation of such transactions. Few case studies also discussed for better understanding of RCM concept.

Case study #1:

Facts of the case:

  • ABC Pvt. Ltd is a subsidiary of XYZ Inc. (USA) being the parent company.
  • XYZ Inc. has sent goods India for ABC to carry out certain activity.
  • XYZ Inc. creates a cost center for cost allocation, although this is only for reporting purposes and no actual expenses are incurred by ABC Pvt Ltd.
  • No accounting entry in the books of ABC Pvt Ltd.

Queries

1. Whether the above is an import of service under GST?

2. If yes, what would be the time of supply for such transaction?

GST Provisions:

  • Section 5(3) IGST Act – Levy under IGST Act on services which will be liable under reverse charge – listed in notification 10/2017.
  • Notification 10/2017-Integrated tax(rate) – Includes import of services liable under reverse charge.
  • Section 15(5) CGST Act – Explanation – Related person includes – one of them directly or indirectly controls the other.
  • Schedule I clause 2 – Activities to be treated as supply even if made without consideration – includes transactions with related parties.
  • Section 15 r/w Rule 28 CGST law – Valuation for transaction between related party. (open market value if available to be considered)
  • Section 13(3) of CGST Act –
    • Time of supply for reverse charge would be the date of payment (to supplier), or 61st day from the date of invoice when payment is not made.
    • Where not covered above, the date of entry in the books of the recipient.
    • For associated enterprises where supplier is outside India, the time of supply will be based on the date of entry in the books of the recipient.
  • Section 13(5) of CGST Act – Where the time of supply cannot be ascertained under other sub-sections, it would be – in a case where a periodical return has to be filed, be the date on which such return is to be filed;
  • Section 13(2) of IGST Act – As such services are not specifically covered in this section residual entry is applicable, i.e. place of supply would be location of recipient of service.
  • Section 13 (3)(a) of IGST Act – Place of supply is location of actual performance in case of 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

Conclusion:

1. Levy – Liable which is established based on Schedule I as services are from related person.

2. Valuation – Open market value would generally not be available, actual cost center allocations could be used.

3. Place of supply – In India in terms of Section 13(3) (a), therefore, satisfying Import of Service definition

4. Time of Supply

a. Although they are related parties/associated enterprises, there is no entry in the books of ABC Pvt Ltd, thus Section 13(3) for time of supply would not be applicable.

b. Although, Section 13(5) would be applicable, and the liability would be 20th of every month, i.e. GSTR 3B due dates. (subject to extensions).

Therefore, here is a case where no payment is made, no accounting entry is recorded although the activity is liable as an import of service under GST.

Case study #2:

ABC Pte Ltd (Singapore) has entered into an agreement with XYZ Ltd. (India) for provision of administration/management services. This has been outsourced to PQR Associates. ABC Pte Ltd considers this transaction as an intermediary service under GST. (Although, services provided are on principal to principal basis).

The supplier PQR & Associates provides services to XYZ Ltd., invoices ABC Pte Ltd. as an export of service (without payment of GST).

For XYZ Ltd. as the transaction is an intermediary service, and place of supply is outside India, it is not an import of service and GST under reverse charge is not payable.

GST would be payable on such services, as the concept of ‘intermediary services’ may not hold good in this scenario. Intermediary under GST – arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;

Therefore, PQR & Asst. would raise an export invoice to ABC Pte Ltd, although for XYZ Ltd., as it is not an intermediary service, i.e. services provided on principal to principal basis, GST is to be paid under reverse charge considering it to be an import of service. The structure in place may lead to tax evasion. 

Taxability of Intellectual Property Rights

There is a practice to charge for intellectual property rights by a holding company outside India wherein it agrees to provide right to intellectual property in terms of goods and/or IT software and other related services.

Under erstwhile VAT laws, it was understood that where the transaction involves granting the right to use trademarks, patents, technical know-how or technology right etc., then it would be construed as transaction in goods. Transfer of technical know-how was accepted as ‘goods’ and constituted as sale under VAT as provided in case Mechanical Assembly System Vs State of Kerala [2006, 144 STC 536]. As per Supreme Court decision in TATA Consultancy Services vs. State of Andhra Pradesh, the canned software is ‘goods’ for the purpose of levy of VAT.

Under GST regime, temporary transfer or permitting the use or enjoyment of intellectual property right constitutes 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 to ascertain if such right is in respect of goods or information technology software.  The GST rate varies in 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. When procured from associated enterprises and from others, the time of supply varies as discussed in earlier paragraphs. 

Illustration for easy understanding of time of supply:

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

GST to be 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

GST to be paid in May 2018 GSTR 3B

GST to be discharged

=12%*2,50,000

=Rs. 30,000

Invoice received on 23.06.2018

(Amounting to Rs.6 lakh)

25.06.2018 23.06.2018

GST to be paid in June 2018 GSTR 3B

GST to be discharged

=12%*1,50,000 (6 lakh – 2 lakh – 2.5 lakh)

=Rs. 18,000

Note:

♦ 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 change in Section 13(13) of IGST Act (w.e.f 1st October 2019):

In terms of Section 13(3) of IGST Act 2017, the place of supply for services where goods have to be made physically available by the recipient to the supplier of service would be the location where services are performed.

Based on industry representation, to enable such transaction to be considered as an export of service, the place of supply had to be shifted to the location to recipient of service.

To enable the same, notification 04/2019-Integrated Tax(rate) was issued. Summary of the changes made provided below:

Certain services have been listed where the place of supply would be the location of the recipient of services irrespective of goods being made available to the supplier. Various Research & Development services (for Pharma sector only):

1. Integrated discovery and development

2. Evaluation of the efficacy of new chemical/ biological entities in animal models of disease

3. Evaluation of biological activity of novel chemical/ biological entities in in-vitro assays

4. Drug metabolism and pharmacokinetics of new chemical entities

5. Safety Assessment/ Toxicology

6. Stability Studies

7. Bio Equivalence and Bio Availability Studies

8. Clinical trials

9. Bioanalytical studies

In such cases, where the suppliers are located outside India, and the recipients are within India, such services would now be liable under reverse charge as an import of service. 

(This article has been prepared by Varsha Vasante Gowda (Audit Executive) and CA Akshay Hiregange vetted by CA Mahadev R. The author could be reached at varshav@hiregange.com and akshay@hiregange.com .)

(Republished after updation with Amendment since last Publication)

Author Bio

Qualification: Student - CA/CS/CMA
Company: Hiregange&associates
Location: Banglore, Karnataka, IN
Member Since: 08 Feb 2019 | Total Posts: 1

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16 Comments

  1. Purushothaman gopalan says:

    Is GST payable for Letter of comfort issued by a parent company outside India to Banks located in india for their subsidairies located in india for working capital enhancement ?

    1. Varsha VG says:

      Dear Sir,

      Letter of comfort issued by a parent company outside India to Banks located in India for their subsidiaries located in India for working capital enhancement – GST would be discharged under RCM as it would be import of service.
      Residual provision of Place of supply i.e section 13(2) of IGST Act would be applicable. Hence place of supply shall be the location of the recipient of service.
      It would amount to import of service and RCM has to be discharged on the same.
      Valuation as per Rule 28 of CGST Rule to be taken care.

  2. Jatin Nandha says:

    Wether RCM applicable on Services provided out of india for Shooting a film or ad-film? (Shoot at out of India Location – Services provided by foreigners at foreign location).

    Also Editing and VFX, Grafix work done out of India by a non resident person, will RCM be applicable?

    1. AkshayH says:

      Dear Jathin

      The situation could be covered under Section 13(3)(b) of IGST Act, which provides that the place of supply would be where services are performed. Therefore, this may not attract reverse charge liability under GST.
      Although, for editing, VFX, etc. this may not require the physical presence of the recipient, the place of supply would generally be the location of the recipient and the transaction would be an import of service. The transaction may attract RCM liability.
      For a written/legal opinion please write to me at akshay@hiregange.com

  3. Ankush says:

    I would like to understand whether GST needs to be discharged on royalty for usage of brand name by an Indian company to its foreign parent company. Nature of business for Indian company is to provide IT services to all the group companies including its parent company on cost plus business model. Hence, if parent will charge it for royalty, it will be the cost for Indian company and it will again charge back to the parent along with Mark up. Therefore I believe that royalty shouldn’t be charged by the parent and no GST needs to be paid accordingly.

    1. AkshayH says:

      Dear Ankush,

      GST would be applicable on the royalty. It would be an import of service, and the time of supply would be based on the entry in the books of accounts and not the payment.
      To advise we may need to perform an in-depth examination – please write to akshay@hiregange.com.
      Sorry for the delay in response.

      1. Venkat says:

        Dear Akshay, thank you for this informational article.

        I wanted to know on the customs duty liability on payment of royalty/license fee.

        In case of royalty payment by subsidiary to holding company, IGST is payable on reverse charge basis. What about, customs duty, is Basic Customs Duty is payable on payment of royalty?

    1. Varsha VG says:

      Dear sir,

      For publishing service – Residual provision of Place of supply i.e section 13(2) of IGST Act would be applicable.Hence place of supply shall be location of recipient of service.
      It would amount to import of service and RCM has to be discharged on the same.

    1. Varsha VG says:

      Dear Ma’am,

      In case of supply of service by a music composer by way of transfer or permitting the use or enjoyment of a copyright relating to original music work to music company or the like,service recipient being music company or like is required to discharge GST under reverse charge mechanism.( Notification no.13/2017- central tax(rate) entry no.9)
      Hence in your case, the person to whom you have sold audio rights is required to discharge GST. ( Rate- 12% ( CGST+SGST) ,SAC – 99733 )

  4. Siddhesh Khandalkar says:

    The matter of taxation of import of service is far more complicated. This article has not even considered the provisions of section 13(12) – Place of supply in case of OIDAR services.

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