TMI Blog2023 (7) TMI 868X X X X Extracts X X X X X X X X Extracts X X X X ..... to be decided in the backdrop of the judgement of the Hon'ble High Court of Kerala in the case of M/s. Sutherland Mortgage Services Inc. [WP(C) No. 32634/2019(D) dated 3.2.2020. [ 2020 (3) TMI 186 - KERALA HIGH COURT] . The applicant develops a prototype. Some of the materials/goods that go into the making of the prototype are supplied by HAG [the recipient]. The prototype is not supplied to the recipient as it gets consumed in the process. After conducting the R D, testing and engineering activities for developing new products process, the applicant communicates the result to HAG. It is on this activity that the applicant seeks a ruling from the GAAR . The supply of services would therefore fall under section 13(2), it is already concluded that it would not fall within sub-clauses 4 to 13. However the testing activities related to HAG items, meaning thereby that the R D service is performed on the goods provided by HAG and hence as far as this portion of the service is concerned, it would fall within the ambit of sub-clause 3 of section 13 of IGST Act. The applicant is on record stating that they are a part of HAG group. Supply of services by a subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decide the case afresh following the principles of natural justice. 12. In view of the foregoing, the Advance Ruling in question is set aside and the case is remanded back to the Gujarat Authority for Advance Ruling (GAAR) to issue necessary ruling after hearing the appellant afresh. 2. Briefly, the facts are that the applicant, M/s. Hilti Manufacturing India (P) Ltd., is engaged in the manufacture and supply of diamond cutting tools, other innovative tools required by the construction industry and providing in-house research development service on diamond inserts. 3. The applicant is located at Plot No. 423, G1DC Estate, PO Kabiilpore Navsari, Gujarat-396424. Their additional manufacturing facilities are Iocated at Plot No. 244 to 251, 48 29(Unit-I) and Plot No. C-IB, 53/54-1 2, GIDC Industrial Estate, Sisodra, Navsari (Unit-3). The applicant has a separate Research and Development [for short - 'R D'] unit wherein activities are carried out for their own purposes as well as for other customers; that they carry out R D activities on behalf of entities situated outside India i.e. on the product samples/goods sent by the foreign entities for R D purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of R D ; prototypes on which testing activity is done gets exhausted in the process and is not supplied by the applicant to M/s. HAG; that it is not mentioned in the agreement dated 18.3.2014 that the goods on which the applicant needs to carry out the R D activities are supposed to be supplied by HAG; that the applicant raises periodic invoices the consideration is received by the applicant in convertible foreign currency. 8. On the merits, the applicant has stated as follows viz:- a conjoint reading of sections 2(52), 2(102), 9(1), 7(1)(a), of CGST Act, 2017, section 5(1) of the IGST Act, 2017, clearly show that scientific R D carried out by the applicant is not movable property hence would qualify as service; that it would fall within the ambit of section 13(2) of the IGST Act. 2017 as service under GST; 'location of supplier' 'place of supply' will determine whether the transaction is an intra-state supply or inter-state supply; R D services provided to HAG by the applicant does not fall under any of the subsections from 3 to 13 of section 13 of IGST; that the place of supply of the applicant's R D ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be supplied without payment of IGST; that R D services provided by the applicant would qualify as zero-rated supply in terms of section 16 of the IGST Act. 2017; as per section 13 of the IGST Act, place of supply of services shall be the location of the recipient in terms of Section 13(2), except for services specified under section (13)(3) of the IGST Act; that section (13)(3) of the IGST Act does not apply in this case; that as per section 13(3)(a) of the IGST Act, place of supply of service shall be the location where services are performed in case it is 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. 9. The following questions were raised before the Authority of Advance Ruling viz (i) Whether the services provided by the applicant to the entities located outside India is covered under Section 13(2) of the Integrated Goods and Services Tax Act, 2017? (ii) Whether the services provided by the applicant is liable to Central Goods and Service Tax and State Goods and Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAR and now made before the appellate authority; The appellant having presented new facts, which were not been placed before the GAAR; that the ruling given by the GAAR was based on different facts; that as the appellant have got the subject advance ruling based on different set of facts, the advance ruling given is not valid in view of the provisions of Section 103 (2) and 104 (1) of the CGST Act, 2017. On the aforementioned findings, the matter was remanded back to the GAAR with the directions as mentioned in para (1) supra. 13. The applicant vide his submission dated 28.2.2023, has now stated as follows viz:- that he is required to conduct R D, testing and engineering activities for developing new products process; the result are then communicated to HAG; the prototypes required for performance testing are manufactured by the applicant; a substantial portion of the raw material involved in making the prototype is sourced by applicant; that certain material are provided by HAG; that these are made available by HAG. as a matter of convenience; that no services are performed on such small portion of consumables, tool, reference material etc; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Available locally.) ~50 mins of cutting Setplate Part of cold press equipment; used in developing prototypes with differing properties. ~one set of blade prototypes Above listed materials are imported from HAG to support faster execution (immediate availability) for the development project. Listed products (except for set plate) can be purchased in India. that in addition to the above consumables/goods supplied by HAG for the said VORTEX 2.0 project, a substantial amount of consumable/goods are procured directly by the applicant from third parties, which are consumed in the process for providing R D activity; that during the span of such project which was for approximately 2 years, more than 900 items were procured during the year 2019 - 2021 for multiple projects (including VORTEX 2.0) whereas only 6 items were sourced from HAG. Moreover all these items (both directly procured and sourced from HAG) have been consumed in the R D process. Discussion and findings 15. At the outset, we would like to state that the provisions of both the CGST Act and the GGST Act are the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (e) determination of the liability to pay tax on any goods or services or both; (f) whether applicant is required to be registered; (g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term. [emphasis added] INTEGRATED GOODS AND SERVICE TAX ACT, 2017 2 (6) export of services means the supply of any service when,- (i) the supplier of service is located in India; (ii) the recipient of service is located outside India; (iii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange for in Indian rupees wherever permitted by the Reserve Bank of India]: and (v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation I in section 8; Explanation 1 of the Section 8 of the IGST Act Explanation 1.- For the purposes of this Act, where a person has,- (i) an establishment in India and any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the place of supply shall be the location of the supplier of services. (3) The place of supply of the following services shall be the location where the services are actually performed, namely:- (a) 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: Provided that when such services are provided from a remote location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services: [Provided further that nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or process and are exported after such repairs or treatment or process without being put to any use in India, other than that which is required for such repairs or treatment or process:] (b) services supplied to an individual represented either as the recipient of services or a person acting on behalf of the recipient, which require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes a non-resident external account and a non-resident ordinary account; (b) banking company shall have the same meaning as assigned to it under clause (a) of section 45A of the Reserve Bank of India Act, 1934; (c) financial institution shall have the same meaning as assigned to it in clause (c) of section 45-1 of the Reserve Bank of India Act, 1934; (d) non-banking financial company means, - (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; or (iii) such other non-banking institution or class of such institutions, as the Reserve Bank of India may. with the previous approval of the Central Government and by notification in the Official Gazette, specify. (9) The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods. (10) The place of supply in respect of passenger transportation services shall be the place where the passenger embarks on the conveyance for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , AAR cannot admit an application seeking a ruling on a question pertaining to place of supply, more so since it does not find a mention under section 97(2) of the CGST Act, 2017. We are of the considered view that being a creature of the Act, we cannot go beyond the diktats of what is spelt out in the Act. However, having said so we are also mindful of the fact that in the first round when the application was made before the Authority, the same was entertained and a ruling was given. In-fact we are also aware of the fact that no appeal was preferred against the ruling dated 9.7.2021 challenging the jurisdiction of the AAR to rule on the question of place of supply. This being the factual position, we proceed to decide on the merits of the matter in the backdrop of the judgement of the Hon'ble High Court of Kerala in the case of M/s. Sutherland Mortgage Services Inc. [WP(C) No. 32634/2019(D) dated 3.2.2020. 20. Now the applicant is before us arguing that the correct facts were not presented before the GAAR in the earlier round, the applicant we observe has taken a complete U-turn and stated that he is required to conduct R D, testing and engineering activities for develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. 24. On the other hand, section 13(2) of the IGST Act, 2017, states that the place of supply of services shall be the location of the recipient of services, except for the services specified in sub-sections (3) to (13). The only proviso in this sub-clause goes on to state that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services. 25. In this regard, we find that vide circular No. 103/22/2019-GST dated 28.6.2019, following clarification has been issued viz 2 Doubts have been raised about the place of supply in case of supply of various services on unpolished diamonds such as cutting and polishing activity which have been temporarily imported into India and are not put to any use in India? Place of supply in case of performance based services is to be determined as per the provisions contained in clause (a) of sub-section (3) of Section 13 of the IGST Act and generally the place of services is where the services are actually performed. But an exception has been carved out in case of services supplied in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the relating intellectual property rights, both first filings and or foreign filings in its own name and at its own cost and expense. HMI shall notify Hilti in writing of any and all Results that may be eligible for intellectual property right protection immediately in writing. Upon Hilti request HMI shall transfer to Hilti any such Result that was generated by HMIs employees free of charge. HMI shall ensure that is has the power to dispose or transfer such result to Hilti. HMI will do such acts and deeds necessary including making any filings with any governmental authority and executing any instruments or agreements that may be required or as may be requested by Hilti, to transfer such Result to Hilti. 4.6 If Results are subject to a copyright or similar right, HMI hereby grants to Hilti the sole and exclusive, worldwide, perpetual and unlimited right of use in these copyrights for any and all types of use, whether with or without copyright reference/author's note This shall include, without limitation, copyrighted software programs which HMI shall be obliged to hand over to Hiiti in both, source and object code, saved to a data carrier in a machine readable format, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirect costs of all HMI departments involved in the provision of the Services,- Employee compensation costs (salaries, wages, social security charges and similar payroll cost) Training expenses for internal or in housing training. Overhead and administrative expenses Rents for office space Travel expenses (airfares, transportation, lodging, food, etc.) External consulting costs External training costs Telecommunication and other communication expenses Costs for material, testing equipment, office equipment and office supplies Charges / cost reimbursements from other related parties Other relevant expenses A specific cost allocation concept will be developed in order to split the aforementioned costs into,- costs incurred by HMI in the provision of the Services for Hilti, and costs incurred for its own benefit/benefit of other service recipients. Mark-up On the sum of the costs incurred by HMl in the provision of the Services for Hilti a mark up of 10% shall be added. 28. On going through Appendix 1, [which depicts an overview specification of the service rendered by the applicant to HA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s developed by the applicant and is not supplied by HAG [recipient]. We find that it would not make much of a difference since what is supplied by the applicant is only some materials which go into making of the prototype and not the entire prototype. The question therefore that pops us is whether it would make a mark-able difference if the entire materials is supplied by the recipient (HAG in this case). Would it then put this supply under sub-clause 3 of the Section 13, ibid ? We have no hesitation in answering that even in such a situation, since the prototype on which R D is conducted and whose report is supplied to HAG is not being supplied by HAG, this service would not fall within the ambit of sub-clause 3 of section 13 of IGST Act, 2017. 31. On the basis of the foregoing, we hold that the supply of services would therefore fall under section 13(2), as in paras 23 24, we have already concluded that it would not fall within sub-clauses 4 to 13. However, this would apply only in case of the services specified in (B) and (C) of Appendix I, as mentioned in para 28 supra. A bare reading of (A) of Appendix I, in para 28 prima facie depict that the testing activities related t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as merely establishments of a distinct person in accordance with Explanation 1 in section 8 . 5.2 Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 (and thus qualifies as a company in India as per Companies Act), to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the sub-section (6) of the section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017. Similarly, the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would not be treated as supply to merely establishments of distinct person under Explanation 1 of section 8 of IGST Act 2017. Such supplies, therefore, would qualify as export of services , subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of IGST Act. 35. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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