Dated 14th July, 2020

The taxability dispute on ocean freight has been finally decided by the Gujarat High Court, which held that taxing ocean freight is ultra vires and leads to double-taxation

Maintenance and Repair Contract undertaken by an Indian branch of foreign company in India not to be considered as import of service and GST required to be discharged under forward charge mechanism by supplier 1

Fact of the case

The applicant is a local branch of a Russian business entity in the name of the foreign company. The applicant entered into a Maintenance and Repair Contract (hereinafter called ‘MARC’) with Bharat Coking Coal Ltd (hereinafter called ‘BCCL’) with respect to the machinery and equipment it had supplied.

In this regard, the applicant want to understand whether maintenance and repair contract makes supplier liable to pay GST or whether the recipient is liable to pay tax on reverse charge basis as per a notification2issued by CBIC.

Contention of the Applicant

The applicant contended that the above contract is a supply of service by the Foreign Company. Therefore service in terms of the maintenance and repair contract is import of service within the meaning of section 2 (11) of the Integrated Goods and Services Tax Act, 2017.

Section 2(11) of the IGST Act 2017, import of service means the supply of any service, where -

  • the supplier of service is located outside India;
  • the recipient of service is located in India; and
  • the place of supply of service is in India;

On the basis of above provisions, Appellant argued that the supplier is located outside India and the recipient is located in Dhanbad, India.and hence both the clauses (i) & (ii) of Section 2(11) of the IGST Act, 2017 are complied.

Moreover, as per Section 13(3)(a) of IGST Act 2017,the place of supply of the following services shall be the location where the services are actually performed, namely:—

Services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services.

Therefore, the place of supply of the service provided in terms of MARC is the location where the machinery and equipment are used in India. Accordingly, all the conditions specified in Section 2(11) of the IGST Act are, therefore, satisfied.

It was contended that the above said contract is an import of service, the recipient here is liable to discharge the tax liability through reverse charge basis. The Foreign entity is not liable to pay tax in this case.

Observation of the Hon’ble West Bengal AAR

The Advance Ruling Authority held thatthe applicant tried to prove the fact that they shall be considered as a foreign entity, since they are a branch offoreign companywho is responsible for receiving and making payments on behalf its principal. Hence, the applicant is not the supplier in the context of MARC.

In the given case the applicant claimed that they are not supplier, instead they tried to prove the point that the whole transaction occurred between foreign company having location in Russia and BCCL. The Authority is of the view that the applicant is indeed the supplier of services in terms of the MARC.

It was clarified that clause 9 of the MARC, deals with ‘Taxes & Duties’. But it is to be noted that, nowhere in the MARC, a foreign MARC Holder and a domestic MARC holder entities exist separately. The contract is only about the rights, duties, and obligations of MARC holder without any distinction between a foreign MARC holder and a domestic MARC  holder. Hence the distinction is relevant only in the context of any statutory provision requiring the MARC holder to be located in India.

The above said contract is a long-term contract spanning over seventeen years from the date of commissioning of the equipment. Here the MARC holder is responsible for supply of the spares, components and consumables over the entire period. MARC holder will also depute the officers, support staff, and system expert at the site for maintenance and repair of equipment and train the BCCL personnel. In this contract, BCCL and MARC Holder shall jointly sign the Equipment Logbook on daily basis recording the details of work done.

It is evident from the above discussion that MARC holder maintains suitable structure in terms of human and technical resources at the sites of BCCL. Hence, the MARC holder supplies the services at the sites from fixed establishments as per the provision of Section 2 (7) of the IGST Act. As per Section 2(7) of the IGST Act 2017, fixed establishment” means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services or to receive and use services for its own needs.Further, as per Section 2(15) of the IGST Act 2017, location of the supplier of services means,

  1. where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
  2.  where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
  3. where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
  4. in absence of such places, the location of the usual place of residence of the supplier.

Accordingly, in term of conjoint reading of provision of Section 2(7) and Section 2(15) of IGST Act, 2017, the location of the supplier should be in India.

Hence, supply of the MARC Holder to BCCL is not import of service within the meaning of section 2(11) of the IGST Act. The MARC Holder should be treated as a supplier located in India and made liable to pay GST. Though the applicant is a registered branch under a Foreign Company, then also the applicant is to be treated as a domestic MARC holder and therefore is liable to pay tax accordingly.

Hence in view of the above discussion supply of service in terms of maintenance and repair contract is not import of service. Hence the recipient is not liable to discharge tax liability through reverse charge basis as per a notification issued by CBIC. It is the maintenance and repair contract holder who will be taxable on the basis of contract entered by him.

1 M/s IZ-KARTEX , 2020-TIOL-147-AAR-GST 10/2017-Integrated Tax (Rate)

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