WHETHER THE DETERMINATION OF THE ISSUE OF ‘PLACE OF SUPPLY’ CAN BE THE SUBJECT MATTER OF ADVANCE RULING?

[Mr. M. GOVINDARAJAN]

Questions on which advance ruling can be sought

Section 97(2) of the Central Goods and Services Tax Act, 2017 provides that the question on which the advance ruling is sought under this Act, shall be in respect of-

1. classification of any goods or services or both;
2. applicability of a notification issued under the provisions of this Act;
3. determination of time and value of supply of goods or services or both;
4. admissibility of input tax credit of tax paid or deemed to have been paid;
5. determination of liability to pay tax on any goods or services or both;
6. whether applicant is required to be registered;
7. whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results to any goods or services or both, within the meaning of that term.

Determination of place of service

In many cases the Authority for Advance Ruling rejected the applications for Advance ruling in case of export of services on the ground that the Authority is not having jurisdiction to decide the ‘place of supply of service’.

In re ‘Sabre Travel Network India Private Limited’ – 2019 (7) TMI 1475 – AAAR, MAHARASHTRA the Appellate Authority held that as per section 2(6) of the Integrated Goods and Services Tax Act,  2017 which prescribes conditions for qualification of any service to be an export of service, place of supply of service has to be determined.  Determination o place of service is not within the scope of the Advance Ruling.  The Authority for Advance Ruling had transcended its jurisdiction by commenting on place of supply of service.

In re ‘Asiatic Clinical Research Private Limited’ – 2020 (1) TMI 571- AAR, Karnataka, the Applicant is providing service to AKAP, USA in the instant case. The location of the recipient of the service is outside India. The Applicant is supplying service in respect of the goods i.e. new drugs, which are physically made available to the investigator / institution who conducts the clinical trials on behalf of the applicant, in order to provide the service.  In order to decide whether the said services amount to export or not, place of supply of service need to be determined. Section 97 (2) of the CGST Act, 2017 empowers the Authority to give a Ruling on time and value of Supply. However it does not empower the Authority to examine the place of supply. In the absence of this provision the Authority is constrained to answer whether the activity undertaken by the applicant amounts to export or not.

In ‘Sutherland Mortgage Services Inc. v. The Principal Commissioner, )/o Principal Commissioner of Customs, Central GST and Central Excise, Kochi, the Commissioner of State Tax, Assistant Commissioner, Kakkanad Range – 4’ – 2020 (3) TMI 186 – Kerala High Court,  the petitioner, functioning in the Cochin Special Economic Zone, is a branch office of its principal, Sutherland Mortgage Service Inc. USA. The petitioner is engaged in the business of providing information technology enabled services such as mortgage orientation, primary servicing, special servicing, cash management and analytics & reporting. The principal company, Sutherland Mortgage Service Inc. is in USA which is engaged in such mortgage business and is prevented from outsourcing its work to any other third party. Therefore, by the compulsion of the US laws, the principal company has made an intra company agreement with the petitioner in order to provide services to customers outside India. The above intra company agreement has been entered into only for the purpose of transfer pricing regulations and the petitioner, which is only a branch of the principal company, having no separate legal existence apart from the principal company. The principal company in USA is reimbursing the branch at India for the costs incurred to perform the services. The petitioner issues commercial invoice to the corporate head office at USA. The services are provided by the petitioner branch directly to the customers located outside India. The petitioner branch is not providing those services to the head office in USA. Therefore, those services would eminently qualify as 'Exporter services’ which is considered zero rated supply as envisaged in Sec. 16 of the Integrated Goods & Services Tax Act, 2017.  

The petitioner has filed an application for advanced ruling before the Authority for Advance Ruling on the point as to whether supply of services by India Branch of Sutherland Mortgage Services Inc. USA to the customers located outside India shall be liable to GST in the light of the intra company agreement entered into by the said branch with the principal company incorporated in USA.

The Advance Ruling authority as per the impugned order has held that the advance ruling as sought for in application cannot be granted as the issue of ‘determination of place of supply’, does not come within the permissible issues to be determined by the Advance Ruling Authority in terms of Sec. 97(2) of the CGST Act, 2017.  Therefore the Advance Ruling Authority lacks jurisdiction to entertain application.

The Advance Ruling Authority held that as per the submissions of the petitioner, it is evident that the question raised is whether the supply made by the petitioner would qualify as “export of service” as defined in Sec. 2(6) of the IGST, 2017 and that therefore, the question would essentially and substantially involve the determination of place of supply, etc. The issue to be determined is one relating to the place of supply of service and then such an aspect may not be subject matter of an Advance Ruling as envisaged in Sec. 97.  The Advance Ruling Authority further held that in this case the supply of service is located in India and the recipient of service is located outside India, the “place of supply of service” cannot be the subject matter of advance ruling in terms of Sec. 97 of the CGST Act, etc. for the reason that the determination of the issue of place of supply, is not enumerated in Sec. 97(2) and on this premise, the Advance Ruling Authority has chosen to reject application  for advance ruling at the threshold stage in terms of Sec. 98(2) of the CGST Act.  The Authority for Advance Ruling further held that as the Advance Ruling Authority is creator of the statute, it has to function strictly within the legal bounds mandated by said Act and that as the place of supply is covered by Sec. 97(2) of the Act, the said Authority is helpless to answer the question raised in the application as it is lacking jurisdiction to decide the said issue and the jurisdiction of the said Authority does not extend to the questions on determination of ‘place of supply’.

If an order is passed under Sec. 97(2) of the CGST Act, then the same is not appealable in terms of Sec. 100 of the Act as sub section (1) of Sec. 100 clearly provides that only if the applicant concerned is aggrieved by any advance ruling pronounced under Sec. 98(4) of the Act that the appeal would lie. Since there cannot be any dispute that since the petitioner does not have any alternative statutory remedy, the applicant challenged the same mainly by way of judicial review in writ proceedings under Art. 226 of the Constitution of India.

The petitioner submitted the following before the High Court-

• The ‘recipient of service’ is a customer located outside India and that the petitioner India branch renders services to those customers outside India under the intra company agreement entered into by the India branch with the principal company in USA and that therefore, the services are rendered by the petitioner India branch directly to the overseas customers and not to the principal company incorporated in USA. 
• The services in question are rendered by the petitioner India branch directly to the customers located outside India and such services are thus consumed by such customers located outside India.
•  India branch is thus not directly rendering service to the principal company in USA (but directly to the customers located outside India) the restriction in clause (v) of Sec. 2(6) of the IGST Act read with Explanation 1 of Sec. 8 of the IGST Act cannot be pressed into service against the petitioner and that therefore the service in question would eminently and fully fulfill the definition of “export of services” as defined in Sec. 2(6) of the IGST Act.
• If the petitioner India branch had directly rendered the service to its principal company incorporated in USA and thereafter, the latter had in turn made available those services to the customers located outside India, then the scenario would have been different, etc.
•  The Advance Ruling Authority has jurisdiction to entertain the application on merits and then to determine all the issues including the issue relating to the determination of the place of supply.

The Revenue submitted the following before the High Court-

• The ruling given by the Advance Ruling Authority is legally correct and does not require any interdiction in this judicial review proceeding. 
•  The Advance Ruling Authority has considered all the relevant aspects of the matter in the correct legal perspective, after taking into account all the relevant facts and they would argue that the crucial issue to be determined in this case, which is in relation to the determination of the issue of place of supply, cannot be the subject matter of advance ruling, as the said issue relating to determination of place of supply, is not covered within the ambit of Sec. 97(2) of the CGST Act and hence the Advance Ruling Authority lacks jurisdiction to decide on the said issue and that the Advance Ruling Authority has rightly refused to answer the query.
• The impugned view taken by the Advance Ruling Authority is fully correct and that the Writ Petition is liable to be dismissed.

The High Court heard the submissions of both the parties.  The High Court analyzed the provisions of section 97. It would make it clear that 7 items are enumerated as per clauses (a) to (g) of sub section (2) of Sec. 97 and all those clauses other than clause (e) thereof, are in specific terms. Whereas clause (e) of sub section (2) of Sec. 97 of the CGST Act clearly mandates that the larger issue of “determination of liability to pay tax on any goods or services or both” would also come within the ambit of the questions to be raised and decided by the Advance Ruling Authority on which advance ruling could be sought and rendered under the said provisions.  Clause (e) of sub section (2) of Sec. 97 is in wide terms and the Parliament has clearly mandated that the latter issue of determination of liability to pay tax on any goods or services or both, should also be matters on which the applicant concerned could seek advance ruling from the Advance Ruling Authority on which the said authority is obliged to render answers thereto.

The High Court further observed that the Parliament has made the said provision envisaging that in transactions in nature, where India is now a growing economy and has to make its substantial performance in economic growth and development not only domestic investments, but even foreign investments would also be heavily required and that host of tax laws has been subsumed into the overarching umbrella of the goods and sales tax regime introduced by the Parliament and the Parliament would have certainly taken cognizance of the fact and has intended that very often applicants would require clarity and precision about various aspects of taxation in the transactions and that there should be certainty and precision in those matters, so that the applicant concerned is given the right to seek advance ruling even in such a larger issue as the one as per clause (e) of Sec. 97(2) of the CGST Act, which deals with issue of determination of liability to pay tax on any goods or services or both.

In cases of this nature, entities which come with foreign investment in India would also require certainty and precision about the tax liability so that they can plan an decide in advance about their functioning as business entities in India so that its efficacy is maximized so as to bring in a “win win situation” not only for such foreign entities, who are permitted to make such investments in India, but also for the economy of India. It is in the light of these dynamic scenario in the fast changing global economy that the Parliament has taken a very proactive role with a very wide vision, the Parliament in its wisdom has decided to mandate such a provision as in clause (e) of Sec. 97(2), whereby the applicant is empowered to seek advance ruling even on the said larger issue of determination of liability to pay tax on goods or services or both and in view of such a scenario, the Advance Ruling Authority is obliged to entertain such plea and consider it on merits and then render its opinion/answer to such a plea that may be raised and to render its advance ruling on those aspects in accordance with the provisions contained in the above said Acts.  The Advance Ruling Authority has proceeded on a tangent and has missed the said crucial aspect of the matter and has taken a very hyper technical view that it does not have jurisdiction for the simple reason that the said issue is not expressly enumerated in Sec. 97(2) of the Act.

The High Court held that the above said view taken by the Advance Ruling Authority is legally wrong and faulty and is liable to be quashed and accordingly declared and ordered.  Consequently, it is ordered that the said rejection order will stand quashed and the application for Advance Ruling will stand remitted to the Advance Ruling Authority concerned for fresh consideration and decision in accordance with law. 

Conclusion

This judgment is a landmark judgment in respect of Advance Ruling.  So many cases have been rejected by the Authority of Advance Ruling in all States for the reason that the Authority has no jurisdiction to decide the ‘place of supply’.  Even if the Authority for Advance Ruling considered it, the Revenue got it set aside by the Appellate Authority for Advance Ruling by filing appeal.  There will be a relief to the business entities having business with other countries.  This judgment shall be followed by the Authorities for Advance Ruling.  The Government may make an amendment to section 97 in this regard so as to fulfill the purposes of Advance Ruling.