When Can Back Office Support Services Be Considered As Zero Rated Supply Under Section 16 Of Integrated Goods And Service Tax Act, 2017?

Find this article on Mondaq by clicking this link here.

The Maharasthra Authority for Advance Ruling in its recent order in the case of Vservglobal Private Limited, a company incorporated under the provisions of the Companies Act, 2013 and having its registered office at 502, Brahans Business Park, Near Peper Box MahalIndustrial Area, Aghadi Nagar, Andheri East Mumbai, Mumbai City- 400093 (hereinafter for the purpose of brevity be referred to as the “Applicant”) held that if activities undertaken by back office support services to overseas companies are to facilitate the supply of goods and services between the client and its customers, it shall not be rendered to qualify as “Zero Rated Supply”in terms of Section 16 of the Integrated Goods and Service Tax Act 2017(hereinafter for the purpose of brevity be referred to as “IGST Act”)

Background of the case

• The
  Applicant, having its corporate office in Mumbai was involved into the business
  of providing back-office support services
  to overseas companies (hereinafter for the purpose of brevity be referred to as
  “Clients”) which are normally engaged
  in Trading of Chemicals and other products in International Trade.

• The
  services were co-ordination with Client`s suppliers/customers
  for execution of purchase and sales contracts, creation and arrangement of
  documentation (purchase order, sales contract, proforma invoice etc.) to be
  exchanged between Clients and their suppliers/customers,
  maintaining client employee records, payroll processing, accounting of payments
  made by clients to suppliers etc. The Applicant compensation was either fixed
  monthly or as per the volume of transactions.

Issues raised

The issue raised before the Maharashtra Authority for Advance Ruling is:

• Whether
  the services provided by the Applicant render
  to qualify as “Zero Rated Supply” in terms of Section 16 of IGST Act 2017 or
  not?

What is Zero Rated Supply, Export of Services and Intermediary as per the IGST
Act?

• According to Section 16
  of the IGST Act 2017, Zero rated supply means export of goods or services or
  both; or supply of goods or services or both to a Special Economic Zone
  developer or a Special Economic Zone unit. A registered person making zero rated supply subject to such conditions,
  safeguards and procedure as may be prescribed shall be eligible supply such
  goods or services without payment of integrated tax or can claim a refund of such tax paid on goods or services or
  both supplied.

• According to Section
  2(6) of the IGST Act 2017, Export of services  means the supply of any service when the
  supplier of service is located in India; the recipient of service is located
  outside India; the place of supply of service is outside India; the payment for
  such service has been received by the supplier of service in convertible
  foreign exchange, and the supplier of
  service and the recipient of service are not mere establishments of a distinct
  person in accordance with Explanation 1 in section 8.

• According to Section
  2(13) of the IGST Act 2017, 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;

Contentions
of the Applicant –

The Applicant claimed that the nature of
services provided by them to their clients fulfills
all the required conditions and fall in the purview
of export of services and ultimately under zero
rated supply on the grounds that –

• The supplier of
  services i.e. The Applicant is located in India, recipients of service were
  also located overseas i.e. different from the place of business, also fixed
  establishment of such recipients of service is different from the place of
  business, payment for services was made in convertible foreign exchange and
  that supplier and recipient were not mere establishments of distinct person.

The applicant
on being posed with the question of how the services rendered by them are not
covered under the definition of ‘Intermediary Services” stated that –

• The applicant falls
  under the exemption of definition of Intermediary as per the act as it provides
  services on its own account and that it would come into picture only after
  finalization of Purchase / Sale deals by the clients, services would be
  provided on Principle to Principle basis. The applicant also claimed that such
  services are composite supply, the tax
  liability of which should be levied as per section 8 of the CGST Act.

The applicant also cited GoDaddy India Web Service Private Ltd[1]
claiming it to be identical to the present case wherein the authority
observed that the applicant proposed to provide support services in relation to
marketing, branding, offline marketing, oversight of the quality of third-party customer care Centre and
payment processing, on principal to principal basis. The Authority accepted
that the said services are bundled as a package in the natural course of business and are not intermediary service.

Contentions
of the Concerned Officer –

• The officer claimed
  that M/s Vikudha Overseas Corporation Limited i.e. the claimed recipient of
  service also has an Indian sister company M/s Vikudha India Trading Limited
  i.e. the actual recipient of service, having its registered office in Mumbai.
  And the COO of M/s Vikudha Overseas Corporation Limited Mr. Deap Balkishan
  Adukia is also the Director of M/s Vikudha India Trading Limited.

• The officer further
  claimed that said services were being provided to M/s Vikudha India Trading
  Limited and not to M/s Vikudha Overseas Corporation. Hence, technically the
  services were not being exported but were a series of intrastate transactions
  and only mere agreement by a foreign
  company with an Indian company is not
  sufficient to determine Export of services.

• The officer also
  claimed that on seeing the bank account of the M/s Vservglobal Pvt Ltd, payment for such services was not being
  received by the supplier of service in convertible foreign exchange which
  further establishes that services were not being exported.

• The officer also
  claimed that as per distinct person provision, M/s Vikudha Overseas Corporation
  Limited, and M/s Vikhudha India Limited, and M/s Vservglobal Pvt Ltd, are not a distinct person, for this provision,
  hence their transactions do not qualify as export of services, and ultimately
  as “Zero rated supply”, it is rather Intra-state
  supply of services.

Judgement

The authority observed
on the basis of information submitted by the officer that all the above firms
are related companies and applicant is providing services to M/s. Vikudha India
Trading Limited which happens to be a sister concern located in India. Hence,
there is no export of services contended by the applicant.

The authority observed
that decision relied upon by the applicant i.e. Godaddy India Web services Pvt
Ltd(supra) has very different facts from the present case as Godaddy was being
provided support services on principal to principal basis with sole intention
of promoting the brand Godaddy US in India whereas in the present case, the
activities undertaken by the applicant are to facilitate supply of goods and
services between the clients and their customers.

The authority held that
sum of all activities mentioned by the applicant indicates that it arranges or facilitates the supply of goods or services or both. Therefore,
it is covered and falls in the definition of an intermediary as per the IGST
Act. Hence the supply of services by the applicant cannot be considered as
“Zero Rated Supply”.

Analysis

The observation of
authority that services provided by the applicant do not render to qualify as
“Zero Rated Supply” on the ground that not all conditions of Export of Services
are being fulfilled seems to be valid and reasonable. However, it seems
unreasonable to hold that the back-office support services as listed by the
applicant are of the nature of intermediary services which facilitate the supply of goods or services or both. The stand
taken by the Maharashtra AAR is contrary to the position taken by the revenue
department in the previous service tax regime.

Conclusion

The approach taken by
the authority, considering back office support services as of an intermediary
can pose a serious threat to many entities engaging in providing back office
support services to various foreign and overseas entities. If the new tax regime
(GST Law) treats export of back office
support services as of an intermediary, an additional increase of 18% tax on
their cost can affect their competitiveness in comparison to such firms in
other countries to a large extent. It will also add to lower India’s ease of
doing business in the global context due to the lack
of transparent and clear tax laws.

[1] 2016 (46) S.T.R. 806 (A.A.R.)

Contributed by – Raghav Gaind & Pawan Khatri 

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com