This Tax Alert summarizes a recent ruling [1] of Karnataka High Court staying proceedings in respect of show cause notice alleging that overseas branches have rendered services to Indian head office and the same is liable to be taxed under reverse charge mechanism in GST regime.
Petitioner argued that the services are received outside India, the location of service provider is outside India, and the location of service recipient is also outside India. Thus, there is no jurisdiction under GST law to tax the transaction.
Further, place of supply is an issue that can decided only by an officer competent to do so, but not the officer who issued the show cause notice.
The Court stayed the proceedings till next hearing.
Comments
- This Branch model is fairly common across sectors and particularly popular in the IT services space.
- Since service tax times, an Indian head office and its overseas branch(es) have been treated as distinct or different establishments or persons.
- Interpreting the service tax law, Tribunals across the country have consistently held that no supply can be inferred between a HO in India and its overseas branch – the interpretation being, the deeming fiction is not to levy tax, but prevent tax being levied in India with respect to supplies made and received outside India. Further, most of these rulings were rendered in the context of funds being transferred from India to meet set-up and operating expenses of overseas branches.
- This principle would need to be tested in the context of the GST law which deems a supply of services between an overseas branch and Indian head office (by way of an import), even when rendered without a consideration. At the same time, the Revenue has clarified that, nil value is acceptable where the receiving office is entitled to full input tax credit.
- Whether an overseas branch can be said to be rendering services to its head office in India is a matter of fact that needs to be determined basis the following:
- Underlying contracting and billing model
- Activities undertaken by the branch, including whether the same is for or on behalf of the head office
- Whether there is a remittance (and if yes, purpose of the remittance from India), including its linkage if any to the activities of the branch
- Position adopted with respect to transfer pricing and income tax purposes
- Underlying contracting and billing model
- Apart from head office-branch office, any representational office is also treated as establishment. A similar determination would need to be made with respect to other types of establishments such as project offices and liaison offices.
- Further, while the ongoing controversy appears to be with respect to transfer of monies from India to overseas, the characterization of monies received by an Indian office from its overseas establishment equally merits consideration from GST applicability/ export status non availability standpoint.
- With multiple models in play, coupled with the interpretative nature of the issue, it would be important to monitor judicial developments around this issue.
