GST UPDATE NO. 70TH ON EXPORT OF SERVICES BY DISTINCT PERSONS

Recently GST council meeting was held wherein many decisions were taken and consequently circulars have been issued, one of them being clarification regarding condition (v) of section 2(6) of the IGST Act 2017 pertaining to export of services. The content of the Circular no. 161/17/2021-GST dated 20th September, 2021 is the subject matter of discussion of our present update. The interpretation of the Explanation 1 under section 8 of the IGST Act 2017 in relation to condition (v) of export of services as mentioned in sub-section (6) of the section 2 of the IGST Act 2017 has been a subject matter of dispute as regards treating the services provided by one establishment situated in India to another establishment of the same company situated outside India as export of services. In order to have better understanding of the confusion, it is pertinent to mention the relevant provisions as follows:- The export of services has been defined in sub-section (6) of the section 2 of the IGST Act, 2017 as under: (6) “export of services” means the supply of any service when, –– (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; Explanation 1 of the Section 8 of the IGST Act provides for the conditions wherein establishments of a person would be treated as establishments of distinct persons, which is reproduced as under: Explanation 1.––For the purposes of this Act, where a person has,–– (i) an establishment in India and any other establishment outside India; (ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or (iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory,hen such establishments shall be treated as establishments of distinct persons. As per the above Explanation, an establishment of a person in India and another establishment of the said person outside India are considered as establishments of distinct persons. Relevant portion of various other explanations and sections are given below: Explanation 2 of Section 8 of IGST Act, which is reproduced below: “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.” Extract of definition of person as per section 2(84) “person” includes— (c) a company; (h) any body corporate incorporated by or under the laws of a country outside India; And lastly : (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 Clause (v) of sub-section (6) of section 2 of IGST Act, which defines “export of services”, places a condition that the services provided by one establishment of a person to another establishment of the same person are considered as establishments of distinct persons as per Explanation 1 of section 8 of IGST Act, and so cannot be treated as export of services. In other words, any supply of services by an establishment of a foreign company in India to any other establishment of the said foreign company outside India will not be covered under definition of export of services. In view of the above, it can be stated that supply of services made by a branch or an agency or representational office of a foreign company, not incorporated in India, to any establishment of the said foreign company outside India, shall be treated as supply between establishments of distinct persons and shall not be considered as “export of services” in view of condition (v) of subsection (6) of section 2 of IGST Act. From the perusal of the definition of “person” under sub-section (84) of section 2 of the CGST Act, 2017 and the definitions of “company” and “foreign company” under Section 2 of the Companies Act, 2013, it is observed that a company incorporated in India and a foreign company incorporated outside India, are separate “person” under the provisions of CGST Act and accordingly, are separate legal entities. Thus, a subsidiary/ sister concern/ group concern of any foreign company which is incorporated in India, then the said company incorporated in India will be considered as a separate “person” under the provisions of CGST Act and accordingly, would be considered as a separate legal entity than the foreign company. It is hereby 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”. Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 (and thus qualifies as a ‘company’ in India as per Companies Act), to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the subsection (6) of the section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017. This clarification is a sigh of relief for all the assessee that have foreign establishments which are registered outside India.

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GST UPDATE NO. 70TH ON EXPORT OF SERVICES BY DISTINCT PERSONS

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