R&D services to overseas entities not zero-rated when goods physically present in India under Section 13(3)(a)

The AAR-Gujarat ruled that R&D services provided by the applicant to entities outside India are not zero-rated supplies under Section 13(2) of IGST Act, 2017. Since the recipient sent goods to the applicant in Gujarat for testing and R&D activities, the services fall under Section 13(3)(a) where place of supply is where services are actually performed. As the services required physical availability of goods at the applicant's Gujarat location, the place of supply is Gujarat, making the services liable to CGST and SGST rather than IGST.

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Issues Involved:
1. Whether the services provided by the applicant to entities located outside India are covered under Section 13(2) of the Integrated Goods and Services Tax Act, 2017.
2. Whether the services provided by the applicant are liable to CGST and SGST or IGST or eligible to be treated as a 'zero-rated supply' under Section 16 of the IGST Act, 2017.

Issue-wise Analysis:

1. Applicability of Section 13(2) of the IGST Act, 2017:

The applicant, M/s. Hilti Manufacturing India Pvt. Ltd., engaged in manufacturing and supplying diamond cutting tools, has been providing R&D services to Hilti Aktiengesellschaft, a foreign entity. The services include testing various products and providing detailed reports. The applicant contended that these services should be considered as 'export of service' under Section 2(6) of the IGST Act, 2017, and thus fall under Section 13(2) of the IGST Act, which generally states that the place of supply of services shall be the location of the recipient of services.

However, upon reviewing the service contract and the nature of services provided, it was found that the goods were physically made available by the recipient to the applicant in India for conducting R&D activities. According to Section 13(3)(a) of the IGST Act, the place of supply for services requiring the physical availability of goods is the location where the services are actually performed, i.e., India. Therefore, the services provided by the applicant do not merit coverage under Section 13(2) but fall under Section 13(3)(a), making the place of supply Gujarat, India.

2. Tax Liability and Zero-rated Supply:

The applicant argued that their services qualify as 'zero-rated supply' under Section 16 of the IGST Act, 2017, as they fulfill the conditions of 'export of services' under Section 2(6) of the IGST Act. They emphasized that the services are provided to a foreign entity, and payment is received in convertible foreign exchange.

However, for a supply of service to qualify as an 'export of service,' one of the conditions is that the place of supply must be outside India. Since the place of supply in this case is Gujarat, India, this condition is not satisfied. Consequently, the services do not qualify as 'zero-rated supply' and are subject to CGST and SGST as per Section 8(2) of the IGST Act, which states that if the location of the supplier and the place of supply are in the same state, it shall be treated as intra-state supply.

The applicant's reliance on case laws from the Service Tax era and Advance Rulings under different factual circumstances was deemed misplaced. The GST provisions, particularly Section 13 of the IGST Act, govern the determination of the place of supply in this context, rendering the cited precedents inapplicable.

Ruling:

1. The services provided do not merit coverage under Section 13(2) of the IGST Act.
2. The services are liable to CGST and SGST.

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