MAY 27, 2020

By Ravi Raghavan, Executive Partner, Lakshmi Ratna, Joint Partner & Sudeshna, Principal Associate, Lakshmikumaran & Sridharan 

IN this article the authors seek to bring to fore the ambiguity in "place of supply" of certain specific services when provided online/through electronic platform.

With the social distancing norms in force during these critical times of COVID-19, various sectors have switched their operations from the offline mode to the online mode and are slowly gaining momentum. Particularly, sectors providing health service, fitness and training have started offering app based-online sessions to their customers across India. The customers/users of such services are encouraged to download the respective applications (apps) on their mobile phones or tablets where the services can be live streamed for the users to enjoy the benefit of un-interrupted services.

To illustrate, the array of offerings provided by companies/establishment online to their consumers for some specific sectors are identified below -

While, the new modus operandi of these businesses is a welcome change for the end customers, it is imperative to understand the difference in tax implication for such businesses due to the switch from the offline mode to the online mode. That takes us to the question of determining the nature of tax payable and place of supply vis-à-vis the specific services provided to an end customer.

Relevant Provisions & Our Analysis

Undisputedly, providing sessions on fitness or training, online counselling etc. through live streaming on different apps are taxable supplies of services (subject to the threshold of the supplier of service). Such services provided through live streaming on an electronic platform even though provided through electronic media are not automated and are rather controlled by human intervention. Accordingly, such supplies are not covered under the ambit of Online Information and Database Access Retrieval Service (OIDAR) as defined under Section 2(17) of the IGST Act, 2017.

Section 12 (4) & Section 12(5) of the IGST Act, 2017 lays down that the place of supply of health service(s), fitness service, performance appraisal and training services (to unregistered persons) shall be the place where they are actually performed. In other words, the place of supply of such online services will be based on the reading of Section 12(4) and 12(5) depending upon the nature of supply only and determination of what qualifies as "actually performed".

Scope of "actually performed" - Let us explore?

As reiterated from time to time, GST is a destination-based consumption tax. Accordingly, the provisions pertaining to place of supply under GST have also been framed keeping in mind the destination/consumption principle. However, unlike goods, services are intangible in nature and, therefore, the challenge has always been determining the exact place where services are acquired, enjoyed and consumed and, therefore, in respect of certain categories of services, the place of supply is determined with reference to a proxy. ¹In the said services, the supply of such services deems it necessary that the performance of the service and the consumption both are at the same place. However, where the services are mediated through the internet, the said proxy does not lend assistance in ascertaining the place where the services are "actually performed".

The phrase "actually performed" has not been defined under the GST Law. The phrases "actual" and "performance" as defined in the Black's Law Dictionary 2004, 8th Edn. reads as:

Actual, adj. Existing in fact ² ; Performance : The successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability ³

The combined reading of the meaning of both the words seem to suggest that material performance is required in a location to determine 'actual performance’. This view is fortified from the reading of the Taxation of Services - An Education Guide dated 20.06.2012 ("Education Guide") relevant in the context of Place of Provision of Services Rules, 2012 as applicable in the erstwhile regime. The Education Guide had categorically clarified that certain services such as cosmetic surgery, health and fitness services, class room teaching etc., require the physical presence of the individual for the provision of service and the services are provided at the service provider premises/ at the customer’s premises if the customer is on the move.⁴

As contemplated under health services/fitness services ⁵ /training services⁶ and drawing cue from the Education Guide supra, these specific services are of such typical nature that the performance of such services has to be where both the supplier and recipient are located together and it would be impossible for the supplier to supply such services without the physical presence of the receiver.

Under the erstwhile regime, the Hon'ble Courts have addressed the question of 'performance of service' with respect to 'consumption of service' specifically in the context of export of services. In the case of Dewan Travels Pvt. Ltd [ Final Order No. 53095/2017 in Service Tax Appeal No.ST/59531/2013-ST [DB]] in the context of provision of outbound tours, the Hon'ble Tribunal had held that such services though performed in India, the same having been consumed outside India is to be considered as export of service and not liable to Service Tax. For services provided by outbound tour operators, the tour operator may be located in India (taxable territory) but the service has to be necessarily provided outside India and , therefore , consumption is outside India. In other words, such services are consumed where they are performed.

Incidentally, reference may be made to the decision of European Court of Justice (ECJ) in the case of Staatssecretaris van Financien v Geelen (EU: Case C-568/17), among others, the question for determination was what would be the place of supply of interactive sessions filmed and broadcasted live on the Internet by the Applicant Geelan i.e., whether it would be classified as an electronically supplied service or an entertainment event. The ECJ ruled that, a complex service, which consists of offering live interactive webcam sessions, is an 'entertainment activity' or 'amusement activity', which must be considered to be 'materially' or 'actually' taken place where the service provider has established his seat of business or a permanent establishment from which he provides the service or, failing that, his place of residence or his usual place of residence.

Therefore, the apparent dichotomy between the existing jurisprudence in India and that in Europe is that the Indian courts have understood the place of supply of such services as the place where the services are consumed, i.e. the location of the receiver. Whereas, the ECJ Ruling indicates that the place of supply would be the location of the supplier (permanent establishment) in case of entertainment event provided via the internet.

Conclusion:

For supply of above services through electronic media, even though the services are consumed immediately on receipt by the recipient, the ambiguity still remains on understanding the place of actual performance of the service. For instance, it could be said that the location of physical trainer from where he is live streaming the training is where the service is actually being performed. On the other hand, there could be another possible view that the location of the recipient who is following the instructions of the trainer is where the service is actually performed (i.e. consumed).

Even though, the place of supply for such services is not location of either supplier or recipient as per Section 12(4) and 12(5)(ii) of the IGST Act, 2017, the determination of actual performance of service could require reference to the location of the supplier or recipient when the medium of performance of such service is electronic media, app, platform etc. The moot question, therefore, is whether the understanding of the phrase 'actually performed' under Section 12(4) and 12(5)(ii) of the IGST Act, 2017 for the said specific services supplied through online mode be understood as the place where the service is consumed as contemplated for the said services when supplied in an offline model.

Unlike the erstwhile Place of Provision of Services Rules, 2012, the provisions under the GST Law does not specify any order of application of Rules and neither is there any enabling provision to notify the place of effective use and enjoyment of a specific category of service in case of supplies mediated via internet within India.

We may have to possibly wait for the CBIC to issue a suitable clarification to outline the scope of the phrase "actually performed" to iron out this ambiguity which has particularly come into the fore during COVID pandemic.

[The views expressed are strictly personal.]

¹ CBEC GST Flyer No.21 dated 01.01.2018, on Integrated Goods and Services Tax Act.

²Pg. 104 of Black's Law Dictionary 2004, 8th Edn, 2004.

³Pg.3603, Black's Law Dictionary 2004, 8th Edn, 2004

⁴Paragraph 5.4.3., Education Guide.

⁵ Section 12(4) of the IGST Act.

⁶Section 12(5) of the IGST Act.