India boasts of more than USD 50 Billion worth of annual Outsourcing Industry, growing at a pace. Business Process Outsourcing (“BPO”) and Knowledge Process Outsourcing (“KPO”) companies are engaged in providing back Office Support, Accounting and Legal Support to Complete Technology Support.
The services provided by the Indian offices, mostly under a Service Agreement, are sometimes on a Principal to Principal agreement, where the Indian Company provides services to its foreign counterparts and there are also instances when the services are provided directly to the customers of foreign counterpart, at times backed by tri-party or multi-party agreements.
It may be noted that several of these firms are treated as exporters of services in India and thus, GST is paid at ‘Zero Rate’ and thereby helping the Indian exporters being cost effective or more profitable. Currently, taxes are not applied on exports in most situations.
In a recent ruling, the Authority of Advance Ruling (AAR) said that back office support services qualify as “intermediary” services, wherein, the place of provision of service shall be deemed to be the place of service provider (India in this case) and hence, and not ‘Zero Rated’ exports which has sent shockwaves through the information technology and business process outsourcing industry which would encompass accounting and legal offshore services provider too.
Understanding the meaning of ‘Exports’, ‘Place of Supply of service’ and ‘Intermediary’ under the GST Law
1.As per section 16 of the IGST Act, ‘Zero Rated Supply’ includes ‘Export of Goods or Services or both’. Which means that if a supply is considered as an export of goods/services, the same shall be taxable at ‘Zero Rate’ or in other words will not attract GST liability.
2.As per section 2 (6) of the IGST Act, a supply of service shall be considered as ‘Export of services’ when all the following 5 conditions are satisfied:
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; 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;
3. As per section 13 (2) of the IGST Act, in general, whenever either the supplier of service or recipient of service is located outside India, the location of the recipient of service shall be considered as the place of supply of service. For instance, if an Indian Company is providing software development service to an US based Company, the place of provision of service shall be considered to be outside India, as the service provider is in India, but the service receiver is outside India. Hence, in general, the clause (c) of the export rules gets satisfied in such cases of supply of service and the supply of service is treated as export of service (Subject to other conditions of export being met)
4. However, section 13 (8) states the scenario’s where the location of the ‘Service Provider’ shall be considered as the ‘Place of Supply of Service’. One of such service is ‘Intermediary Services’
5. As per section 2 (13) of the IGST Act, ‘Intermediary’ means a broker, an agent, or any other person, by whatever name called, who 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.
Relevant Case Law and Argument – Instant case of Vserv Global
1.Recently, the Maharashtra bench of AAR – in the case of Vserv Global – had upheld that as per the facts of the given case, the back-office support services provided by the Company does qualify as ‘intermediary’ services, and hence, the ‘Place of Supply of service’ shall be India, which is the location of the service provider, which means that one of the conditions for ‘Export of services’ being ‘Place of supply of service should be outside India’ is not getting satisfied and in turn the transaction was thus, liable to 18 per cent Goods and Services Tax (GST).
- The AAR held that to qualify a transaction as export of services, it had to satisfy all five elements of the definition of services export simultaneously. The services, proposed to be rendered by the applicant, do not qualify as ‘export of services’ and thus, not a ‘zero rated supply’ as per section 16(1) of the IGST Act, 2017, it had ruled.
- Here, it must be noted that as per the facts of the case, agreed to by the litigant Company, the Indian Company was providing the following services:
i) Vserv will come into picture after finalization of sale/purchase order of the client
ii)It will generate purchase/sale detail form
iii)Generate order number
v)Liaise at different levels and with different authorities and parties
vii)It would also maintain accounts, payroll and provide other ancillary and support services
4.Based on the agreement signed between by the two parties and upon analysing the aforesaid services provided by the Indian Service Provider to its overseas customer, The Authority for Advance Ruling concluded that the nature of services provided were in nature of facilitating supply of goods or services or both between the overseas client and customers of the overseas client, and hence, the applicant is clearly covered and falls under the definition of ‘Intermediary’ as defined under the IGST Act. As the service provider is covered under the definition of ‘Intermediary’ the place of supply of service shall be the location of Service Provider, which is Mumbai, India and hence, the supply of service is not a ‘Export of Service’ as per the IGST Act and hence the supply is not ‘Zero Rates Supply’ but a normal taxable supply attracting GST.
Counter view in the Case of GoDaddy
A similar case was also heard by Advance Ruling Authority, New Delhi, in the case of GoDaddy India Web Services Private Limited, reported as 2016 (46) STR 806 (AAR) dated 04.03.2016 (In short GoDaddy). The judgement in the case of GoDaddy was in the favour of the application and the AAR did not consider the services of the Indian Service Provider Company as ‘Intermediary Services’ and allowed the supply of service to be treated as ‘Zero Rated Export of Services’.
The basic difference between the two cases was the nature of service provided and also the Service Agreement entered into between the two parties. In the case of GoDaddy the AAR concluded that the agreement and services between the Indian Service Provider and the overseas service receiver customer were on Principal to Principal basis, as the Indian service provider provided the services on its own.
Impact Analysis and Conclusion
The actual nature of service provided by the Indian service provider and nature of service agreement between the Indian Service Provider and its overseas customer becomes utmost important. Its for sure the all outsourcing services provided from India cannot be blindly categorized under this segment. Every, case will have to be analysed based on the facts of the case and the nature of service agreement. The overall outsourcing industry shall not be impacted by this but a considerable chunk, who were not treating themselves as ‘intermediary’ but the nature of service in actual is covered under the definition of ‘Intermediary’ needs to worry. If as per the agreement the services are provided to the overseas client on P2P basis, this scenario shall not be triggered, and the services can be normal ‘Zero Rated Export of Services’ as in the case of GoDaddy.
However, the tax officials with their own interpretation of definition of ‘Intermediary’ can open the Pandora’s box for various India setups that are assisting foreign companies with different kind of back office support functions which may lead to “unwarranted disputes”, potential loss of revenue, jobs and customers and may dent India’s image as a global service provider. This may have direct or indirect impact on the over 500 Global Innovation Centres (GICs), with over 3.5 lakh employees operating out of India.
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