“Export of services” has been defined under IGST Act 2017. As per section 2(6) of such act, it means the provisioning/supply of services which have following components:-
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange *{“or in Indian rupees wherever permitted by the Reserve Bank of India”}; 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;
*IGST Amendment Act 2018 applicable w.e.f. 01.02.2019
Where portion of Export of Services Outsourced to a person located outside India
There are certain representations have been received seeking clarification on certain issues relating to export of services under the GST laws. The same have been examined by CBIC and the clarifications on the same issued through CIR-78/52/2018-GST which are as below :-
Issue :-
In case an exporter of services outsource a portion of the services contract to another person located outside India, what would be the tax treatment of the said portion of the contract at the hands of the exporter?
There may be instances where the full consideration for the outsourced services is not received by the exporter in India.
Clarification :-
Where an exporter of services located in India is supplying certain services to a recipient located outside India, either wholly or partly through any other supplier of services located outside India, the following two supplies are taking place:-
(i) Supply of services from the exporter of services located in India to the recipient of services located outside India for the full contract value;
(ii) Import of services by the exporter of services located in India from the supplier of services located outside India with respect to the outsourced portion of the contract.
2. It is clarified that the supplier of services located in India would be liable to pay integrated tax on reverse charge basis on the import of services on that portion of services which has been provided by the supplier located outside India to the recipient of services located outside India. Furthermore, the said supplier of services located in India would be eligible for taking input tax credit of the integrated tax so paid.
Illustration: ABC Ltd. India has received an order for supply of services amounting to $ 5,00,000/- to a US based client. ABC Ltd. India is unable to supply the entire services from India and asks XYZ Ltd. Mexico (who is not merely an establishment of a distinct person viz. ABC Ltd. India, in accordance with the Explanation 1 in Section 8 of the IGST Act) to supply a part of the services (say 40% of the total contract value). ABC Ltd. India shall be the exporter of services for the entire value if the invoice for the entire amount is raised by ABC Ltd. India. The services provided by XYZ Ltd. Mexico to the US based client shall be import of services by ABC Ltd. India and it would be liable to pay integrated tax on the same under reverse charge and also be eligible to take input tax credit of the integrated tax so paid. Further, if the provisions contained in section 2(6) of the IGST Act are not fulfilled with respect to the realization of convertible foreign exchange, say only 60% of the consideration is received in India and the remaining amount is directly paid by the US based client to XYZ Ltd. Mexico, even in such a scenario, 100% of the total contract value shall be taken as consideration for the export of services by ABC Ltd. India provided integrated tax on import of services has been paid on the part of the services provided by XYZ Ltd Mexico directly to the US based client and RBI (by general instruction or by specific approval) has allowed that a part of the consideration for such exports can be retained outside India. In other words, in such cases, the export benefit will be available for the total realization of convertible foreign exchange by ABC Ltd. India and XYZ Ltd. Mexico.
Supply of service by a person in India to subsidiary/ sister concern/ group concern, etc. located outside India
As per clause (v) of definition of “Export of Services”, it is being provided that the supply of service shall not be considered as export of service where the supplier of service and the recipient of service are merely establishments of a distinct person in accordance with Explanation 1 in section 8.
As per Explanation 1 to Section 8 of IGST Act, 2017, it is being provided that following establishments shall be treated as distint persons where a person has :-
- an establishment in India and any other establishment outside India;
- an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
- an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory.
Further, as per Explanation 2, A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.
Recently, on 20/09/2021, CBIC has issued a circular 167/17/2021-GST to clarify the situation on supply of services to an establishment situated outside India.
As per said circular, establishments outside India are divided into two categories:-
- Establishments registered under the laws of another country; and
- Establishments registered under Indian laws carrying business through a branch or an agency or a representational office in another country.
or vice versa
Further, reference being taken from the definitions of company and foreign company which have been provided under section 2 of Companies Act 2013, as under:
(20) “company” means a company incorporated under this Act or under any previous company law;
(42) “foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
Thus, it is clarified that a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under CGST Act, and thus are separate legal entities.
Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.
Conclusion : –
Where supplier party is registered under laws of India and recipient is registered under laws of another country, then, service supplied by Indian supplier would be considered as Export of Services.
Where recipient party is registered under laws of another country and supplier Party is carrying business through a branch or an agency or a representational office in India. it would not be considered as Export of Service.
Where supplier party is registered under laws of India and recipient party is carrying business through a branch or an agency or a representational office in another country. it would not be considered as Export of Service.
It is pertinent to note that, in the given circular, it has focused on the Companies/Corporates Only to clarify the situation.
