FEBRUARY 22, 2018

By Priyanka Kalwani

IT is a general business practice for various organizations to provide intermediary services to their group / holding companies located in foreign countries. The company acts as a commission agent for sale of the products of the group entities located outside India to Indian customers. Based on the quantum of sale, the company receives commission in foreign currency for such services. Let us examine the taxability of this transaction under the Goods & Services Tax (GST) regime.

GST would be leviable on the said services provided by the company only if such services are provided in the taxable territory. In order to determine whether the services have been rendered in the taxable territory or not, reference has to be drawn to the Integrated Goods & Services Tax Act, 2017 (IGST Act, 2017).

Section 13 of the IGST Act, 2017 provides for determination of the place of supply of services where location of supplier or location of recipient is outside India. Section 13(2) provides that the place of provision of a service shall be the location of the recipient of service, except for the services specified in sub-sections (3) to (13).

It would be relevant to refer to sub-section (8) of section 13 of the IGST Act, 2017 which provides that the place of provision of the services mentioned therein would be the location of the service provider. The said provision inter alia includes "Intermediary services" under its purview.

In view of the above, the place of provision of the services provided by the company to their foreign affiliates would be in India, as per the provisions of Section 13(8)(b) of the IGST Act, 2017. Hence, GST would be payable by the company on the amounts received from the foreign entities .

Let us now examine whether the above supply amounts to an inter-state supply or intra-state supply.

Section 7 of the IGST Act, 2017 defines inter-state supply. Section 7(5)(c) which is relevant in the present case provides that supply of services in the taxable territory, not being an intra-state supply and not covered elsewhere in the section shall be an inter-state supply.

Section 8(2) of the IGST Act, 2017 which deals with intra-state supply of services, states that when the location of the supplier of service and place of supply is in the same State, it amounts to an intra-State supply.

In the present transaction of intermediary services being provided by a company to its foreign affiliates, the place of supply is the location of the supplier and hence, the location of the supplier and the place of supply would be in the same state or Union territory. One may argue that this transaction would be an intra-state supply as per the provisions of Section 8(2) of the IGST Act, 2017.

However, Section 8(2) is ‘subject to the provisions of Section 12'. Let us look into the legal implication of the words, ‘subject to the provisions of…' as interpreted by the Hon'ble Supreme Court in various decisions.

In the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue Trivandrum and Another reported in AIR 1996 Supreme Court 207, the Constitution Bench of the Supreme Court observed that the expression "subject to" conveys the idea of a provision yielding place to another provision to which it is made subject.

In the case of K.R.C.S. Balakrishna Chetty and Sons and Co. v. State of Madras reported in AIR 1961 Supreme Court 1152, the three Bench Judge of the Supreme Court observed that use of words ‘subject to' has reference to effectuating the intention of the law on which the correct meaning is conditional upon.

In State of Bihar v . Bal Mukund Sah reported at (2000) 4 SCC 640 the Apex Court reiterated that the words "subject to the provisions of this Constitution" used in Article 309, necessarily mean that if in the Constitution there is any other provision specifically dealing with the topics mentioned in the Article 309, then Article 309 will be subject to those provisions of the Constitution .

A similar proposition was laid down in the case of UOI v Brigadier P.S Gill 2012 (279) ELT 321 (S.C)

The above decisions were relied upon recently by the Hon'ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. v UOI - 2016-TIOL-2393-HC-AHM-CX wherein it was held that when the Legislature makes a provision subject to another provision, the former would yield to the latter and in other words, in case of a conflict, the provisions of the latter would prevail.

From a reading of the above legal position as laid down by the Hon'ble Supreme Court, a view may be taken that to fall under Section 8(2) of the IGST Act, 2017, it is necessary to qualify the parameters of Section 12 of the IGST Act, 2017. Section 12 deals with place of supply when location of supplier and recipient is in India. Hence, it can be argued that since Section 12 is not at all applicable to intermediary services provided by a supplier in India to foreign parties, Section 8(2) would also not be applicable to this supply. On this analogy, a view can be taken that the said transactions amount to an inter-state supply as per Section 7(5)(c) of the IGST Act, 2017 attracting IGST.

Contrary views are prevailing in the industry and the same may also be disputed by the Department. A clarification in this regard by the Government would help resolve the confusion.

(The author is Principal Associate, Lakshmikumaran & Sridharan, Ahmedabad and the views expressed are strictly personal.)