JUNE 01,2020

By Ravi Raghavan, Executive Partner and Laksh Manocha, Associate, Lakshmikumaran & Sridharan, Bangalore

THE concept and mechanism of an Authority for Advance Ruling is not new and is not exclusive to the Goods and Services Tax ('GST'). Under the previous tax regime, similar provisions and mechanism were present to provide for a forum which could adjudicate on matters of tax liability for a proposed business activity or to provide clarity to certain issues. The AAR mechanism under the GST law, has a wider and well-defined scope with respect to what questions can be answered by it and it is no more restricted to a proposed activity but is also extended to ongoing activities that a business undertakes.

Despite the well-defined scope and wider coverage the AAR has not been answering questions relating to place of supply, which are extremely critical in situations where supplier needs to understand whether the transaction is an export or import arises. To understand this better, we can take the situation of an export transaction. In terms of Section 2(6) of the Integrated Goods and Services Tax Act, 2017 ('IGST Act') a transaction qualifies to be an export of service if the following five essentials are satisfied:

i. The supplier of service should be located in India;

ii. The recipient of service should be located outside India;

iii. The place of supply of service is outside India;

iv. The payment for such supply of service has been received by the supplier of service in convertible foreign exchange; and

v. 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.

It can be understood from the above that one of the conditions for a transaction to be export of service is that the 'place of supply of service' should be outside India, hence it becomes pertinent to analyse and determine the place of supply in such transactions.

Which brings us to the issue at hand, Whether AAR has the jurisdiction to answer questions regarding determination of 'place of supply'?

Very recently, the High Court of Kerala was faced with the question regarding the scope of an AAR with respect to its jurisdiction when faced with issues regarding place of supply. In the case of Sutherland Mortgage Services Inc. v. The Principal Commissioner¹, the Kerala High Court had to decide whether the scope of an AAR includes the question regarding 'place of supply'. Briefly, the facts of the case were as follows, Sutherland Mortgage Services Inc. functioning in the Cochin SEZ ('Indian Company'), is a branch office of its US based company M/s. Sutherland Mortgage Service Inc. USA ('US entity'). The US entity being prohibited under the laws of USA to outsource it's work to a third party, had entered into an intra company agreement with the Indian Company for providing services to customers outside India. The US entity had also entered into various agreements with the customers outside India for providing services from the USA and India branch. The Indian Company used to provide services directly to the customers outside India and the same was not reviewed by the US entity before being delivered to the customers. Further, as per the arrangement, the customers used to make payment to the US entity, which in turn was being reimbursed to the Indian company in foreign exchange based on the value of commercial invoices raised by the Indian Company for the services provided. As the flow of revenue was not directly from the customers outside India to the Indian Company but was routed through the US entity as per the agreement, the Indian Company was faced with the dilemma as to whether the transaction would amount to 'export of services' and whether GST would be payable.

The Indian Company then approached the AAR seeking clarification on the issue, whether they are liable to pay GST on the supply of services by the Indian Company to the customers outside India in light of the intra company agreement between the US entity and the Indian Company. The AAR while ascertaining whether the transaction would qualify as "export of services" said, that an important aspect while understanding whether a transaction is an export of service is to examine the place of supply as discussed earlier. The AAR held that as Section 97(2) does not envisage place of supply within its list and the fact that AAR has been created under a statute and has to function under the legal boundary created by the statute, the question regarding place of supply does not fall within its jurisdiction and rejected the application at the admission stage by passing an order under Section 98(2).

As the order was passed under Section 98(2), therefore, an appeal could not be preferred before the Appellate Advance Ruling Authority. A writ was then filed in the High Court of Kerala seeking an order/direction, and the High Court admitted the matter on the ground that no alternate remedy was available to the assessee in the present case. The High Court after considering the relevant provisions of the CGST Act noted that the following questions can be referred to the AAR as per Section 97(2):

a) Classification of any goods or services or both;

b) Applicability of a notification issued under the provisions of the act;

c) Determination of time and value of supply of goods or services or both;

d) Admissibility of input tax credit of tax paid or deemed to have been paid;

e) Determination of the liability to pay tax on any goods or services or both;

f) Whether applicant is required to be registered?

g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term?

In its analysis, the Court observed the following points:

1. Section 97(2) lists down under clauses (a) to (g) various questions that can be answered by the AAR. It further observed that, clauses (a) to (d) and (f) to (g) are very specific in nature to the extent that they provide for specific issues that are to be answered by the AAR. In a stark difference to this, clause (e) has a much wider scope and is not limited to a specific question. Clause (e) to Section 97(2) provides for the issue of "determination of the liability to pay tax on any goods or services or both". The Court said that this is a wider question which envisages various other situations/issues which could not be envisioned at the time the statute was brought into effect.

2. The Court, while highlighting the fact that India is a growing economy and investments are no more limited to domestic investors said, that with a growth in foreign investments in India, the foreign investors would want to ascertain their tax liability before making any transaction. It went on to say further, that the Parliament has time and again emphasised on the fact that the assessees would require clarity and certainty about their tax liability and, therefore, the provision under Clause (e) has been kept wider and more general in nature so that larger tax issues can be covered under the same.

3. The Court finally held, that to say, that the question regarding determination of place of supply does not fall under the ambit of Section 97(2) would be legally wrong and incorrect and that such questions would be squarely covered under Clause (e) of Section 97(2) of the CGST Act. They said that the AAR has taken a 'hyper technical view' and the same defeats the intention of the legislature and the purpose for which an AAR was formed.

With this judgement of the Kerala High Court, the scope of the AAR has been widened to include questions regarding determination of place of supply within its jurisdiction. This comes as a huge relief to the assessees as now various export and import transactions where assessees were faced with questions regarding the tax liability can be answered by the AAR. The Court while reaching the decision in this case has gone by the primary intention and purpose with which an AAR has been established. The decision of the Kerala High Court will have binding effect over the Kerala Advance Ruling Authority and will have persuasive value in other States. Whether assessees nationwide will get the same relief is a question that only time and the Courts can answer.

[The views expressed are strictly personal.]

¹ WP (C) No. 32634 of 2019 (D) - 2020-TIOL-486-HC-KERALA-GST