2023 (7) TMI 868 - AAR - GST

Applicant's R&D testing services to overseas entities liable for CGST/SGST under Section 13(2), other services qualify as zero-rated exports under Section 16

AAR Gujarat ruled on applicant's services to overseas entities. Services involving R&D testing on goods provided by foreign recipient fall under IGST ... Place of supply under Section 13(2) of the IGST Act, 2017 - services supplied in respect of goods requiring physical availability under Section 13(3)(a) of the IGST Act, 2017 - export of services under section 2(6) of the IGST Act, 2017 - zero-rated supply under Section 16 of the IGST Act, 2017 - jurisdiction of Authority for Advance Ruling to decide place of supply in admitted proceedingsPlace of supply under Section 13(2) of the IGST Act, 2017 - services supplied in respect of goods requiring physical availability under Section 13(3)(a) of the IGST Act, 2017 - Classification of the applicant's R&D/testing/engineering activities as falling under Section 13(2) or Section 13(3)(a) of the IGST Act, 2017 - HELD THAT: - The Authority examined the nature of services in Appendix I to the contract and the factual position that the applicant develops prototypes and consumes materials in the R&D process. Section 13(3)(a) applies where services are supplied in respect of goods which are required to be made physically available by the recipient to the supplier so that the service can be rendered, i.e., where the goods come into the supplier's physical possession and the service is performed on those goods. The Authority found that while some consumables/parts were supplied by the recipient, the prototype is developed by the applicant, consumed in testing and not supplied back to the recipient; moreover a substantial portion of inputs are procured by the applicant itself. Consequently the conditions of Section 13(3)(a) are not satisfied for the product development and OEM-related services listed at (B) and (C) of Appendix I. However, the testing activities expressly described in (A) of Appendix I - where the R&D service is performed on items specified by and provided by the recipient - prima facie fall within Section 13(3)(a). On this basis the Authority differentiated the services: (B) and (C) attract Section 13(2); (A) attracts Section 13(3)(a). [Paras 30, 31]Services in Appendix I items (B) and (C) are to be treated under Section 13(2); the testing activities in Appendix I item (A) fall under Section 13(3)(a).Export of services under section 2(6) of the IGST Act, 2017 - zero-rated supply under Section 16 of the IGST Act, 2017 - Whether the services qualify as 'export of services' and as a zero-rated supply under Section 16 of the IGST Act, 2017 - HELD THAT: - The Authority applied the five conditions in Section 2(6) of the IGST Act. For the services classified under Section 13(2) (Appendix I items (B) and (C)) the facts on record satisfy all conditions: the supplier is located in India, the recipient (HAG) is located outside India, the place of supply is the location of the recipient, payment is received in convertible foreign exchange, and the parties are not merely establishments of a distinct person. The Authority relied on statutory explanation and relevant circular clarifications that an Indian company and its foreign group company are separate persons for these purposes. Accordingly, services under (B) and (C) qualify as 'export of services' and therefore as zero-rated supplies under Section 16, subject to the conditions of Section 2(6). In contrast, services falling under (A) (testing on goods supplied by the recipient) have the place of supply within India under Section 13(3)(a) and thus do not qualify as export of services; they are liable to CGST and SGST. [Paras 35, 36]Services under Appendix I items (B) and (C) qualify as 'export of services' and are eligible to be treated as zero-rated supplies under Section 16; services under item (A) are taxable under CGST and SGST.Final Conclusion: The Authority set aside the earlier GAAR conclusion to the extent necessary and ruled that product development and OEM-related R&D/testing services described in Appendix I items (B) and (C) are placed at the recipient's location under Section 13(2), qualify as export of services under Section 2(6) and are zero-rated under Section 16; testing activities performed on goods supplied by the foreign recipient as described in Appendix I item (A) attract Section 13(3)(a) and are liable to CGST and SGST. Issues Involved:1. Whether the services provided by the applicant to entities located outside India fall under Section 13(2) of the IGST Act, 2017.2. Whether the services provided by the applicant are eligible for zero-rated supply under Section 16 of the IGST Act, 2017 or liable to CGST and SGST.Summary:Issue 1: Applicability of Section 13(2) of the IGST Act, 2017The applicant, engaged in R&D services for foreign entities, argued that their services qualify as 'export of service' and are exempt from IGST. They contended that the place of supply for their R&D services should be the location of the recipient, as per Section 13(2) of the IGST Act, 2017. The GAAR initially ruled that the services fell under Section 13(3)(a), making the place of supply Gujarat, thus subjecting the services to CGST and SGST. However, upon appeal and presentation of new facts, it was determined that the services related to product development and engineering (services mentioned in (B) and (C) under Appendix-I) qualify under Section 13(2), as the goods/prototypes are not supplied by HAG but developed by the applicant. Therefore, the place of supply is the location of the recipient, outside India.Issue 2: Zero-Rated Supply under Section 16 of the IGST Act, 2017The applicant asserted that their services should be treated as zero-rated supply under Section 16 of the IGST Act, 2017. The GAAR initially disagreed, stating that the services were liable to CGST and SGST. Upon appeal, it was clarified that the services listed in (B) and (C) under Appendix-I qualify as zero-rated supply since they meet all conditions under Section 2(6) of the IGST Act, 2017: the supplier is in India, the recipient is outside India, the place of supply is outside India, payment is received in foreign exchange, and the supplier and recipient are distinct legal entities. However, the services listed in (A) under Appendix-I, involving testing activities on goods provided by HAG, do not qualify as zero-rated and are subject to CGST and SGST.Ruling:1. The services provided by the applicant to entities outside India are covered under Section 13(2) of the IGST Act, 2017, for services mentioned in (B) and (C) under Appendix-I, subject to the condition that goods/prototypes are not supplied by HAG. Services listed in (A) under Appendix-I do not fall under Section 13(2).2. The services mentioned in (B) and (C) under Appendix-I qualify as zero-rated supply under Section 16 of the IGST Act, 2017. Services listed in (A) under Appendix-I are liable to CGST and SGST.