Import of service - Payment not made/written off, Goods and Services Tax - GST

[Naresh G]

I have seen a case where a company in India has availed services from foreign country every month in a particular year and has not made any payments to the foreign entity. At the end of the financial year, they have passed an entry (writing off because of bad service). The amount is around INR 50 lakhs.

Whether GST has to be paid on import of service under RCM? In this case he has availed the service but has not made payments to the foreign entity. Please help

Posts / Replies

[Amit Agrawal]

What was the reason for not-paying GST under RCM as per said Company?

Whether amount booked as expenses were provisional in nature or same was against bills issued by supplier and agreed to by the recipient?

[Naresh G]

Good evening Sir!

The reason mentioned in their books is " Service is not satisfactory". And it was mentioned at the end of the financial year and they had written off the expenses. It was not a provision, there are actual bills.

It is clear that it is an import of service but my doubt is since amount is not paid by the recipient, whether he has to pay GST under RCM?

[Shilpi Jain]

It would be required to see the terms of payment in the contract.

Whether it is a continuous supply of service?

Also, Section 34 allows issuing a credit note for deficiency of service. Though that has to be issued by the supplier who in the present case is not registered under GST.

If the agreement has terms and conditions as per which it can be clearly shown that the quality of service provided is as good as no service provided then a view can be taken that no services provided and hence no GST liability under RCM.

[Shilpi Jain]

Though, if the services are actually provided satisfactorily but payment not made due to any other disputes, escaping RCM liability would be difficult since time of liability for services under RCM triggers within 61 days from issue of invoice by supplier.

Further facts and analysis would be required.

[Naresh G]

Here it is a continuous service and the end of the FY, the taxpayer has written off liability because of bad service.

Since the service has been availed and no payment made to the foreign entity, whether GST under RCM can be demanded? Pls clarify

[KASTURI SETHI]

Dear Sh. Naresh G. Ji,

There is no escape route except to pay tax under RCM in this scenario. Service has been imported. Importer has not paid Rs.50 lacs to the supplier. These facts cannot be denied.

Regarding good or bad service, there is no such nomenclature in CGST Act/IGST Act. The terms, 'good service', 'bad service' have not been defined in GST Acts. Only 'service' has been defined. In order to avoid litigation, the burden of proof is cast upon the importer and not on the department, especially, in import-export cases/Customs cases.

[Padmanathan Kollengode]

Respected Kasthuri Sir,

I agree GST law doesnot distinguish good service/ bad service. But when the service is found to be deficient/bad can it be said to be "service" at all. Isnt the underlying agreement between the parties to the service contract violated once the service is found to be deficient. Isnt that why the payment is not made. OR seen from a different perspective isnt "service" complete only when the recipient is satisfied/beneficted out of it?

Humbly request to throw some light on this issue from a commercial aspect as well sir.

[KASTURI SETHI]

Dear Shri Padmanathan Kollengode Ji,

Logically I agree with you on the grounds that service may be deficient, may not be complete, service recipient is not satisfied etc. All these points are matter of dispute between the supplier and recipient of service. It is their internal dispute. RCM is applicable and an amount of Rs.50 lakhs is with the importer of service. Both facts are not disputed. It is a hard nut to crack. In this case, if tax is not paid, SCN is certain. The party may get relief from Appellate Authorities after proving the deficiency of service. It is a cake walk to blame the supplier rather than proving the above deficiencies as pointed out by you. The possibility of some other reasons for dispute cannot be ruled out.

To cap it all, non-payment of tax under RCM, is not doubt-free and litigation free.In case the importer has solid proof of deficient service, he must fight to get natural justice. He must inform the department about his bona fides at every stage in order to avoid rigours of litigation. Genuineness will be the yardstick in the eyes of the department.

[Amit Agrawal]

Just to add to the ongoing discussion:

Bad service / deficiency etc. is different that saying that no services were provided.

Bad service / deficiency may involve reduction of consideration payable (depending upon nature of service, terms of contract etc.) and need not necessarily be non-payment of consideration.

Furthermore, mere self-serving claim of importer will not suffice in given set of facts, more so if actual supplier has different version on the transaction (i.e. supply so made).

Entire transaction, deliverables as per contract, factual position surrounding nature / cause of disputes between two parties & so on .... needs to be looked into, before deciding on the issue raised in subject query.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Sir,

Your arguments are full of substance.

[Shilpi Jain]

If the foreign supplier has issued a financial credit note to you, thereby agreeing to the fact that no service was provided or there was a deficiency of service, you can take a stand no liability under RCM exists to the extent of the credit note. Have proper communication in place between you and the foreign supplier.

[Vineet Agrawal]

As per section 7(1)(b) of CGST Act, importation of service, for a consideration whether or not in the course or furtherance of business, is 'supply' and subject to GST.

Assuming that both entities are not related, since no consideration has been been there has been no supply.

[Padmanathan Kollengode]

Vineet sir,

Non-payment of consideration will not tantamount to lack of consideration. When the service was agreed to be provided, there was consideration. Here the consideration which was agreed upon is not paid.