2024 (10) TMI 1534 - HC - GST

Foreign expatriates seconded without invoices have nil service value under Para 3.7, no GST liability arises

Delhi HC held that where foreign expatriates were seconded to assist petitioners' functions without generating invoices, the service value must be treated ... Value of supply between related persons - open market value - second proviso to Rule 28 - import of services under reverse charge - CBIC Circular 210/4/2024-GSTCBIC Circular 210/4/2024-GST - second proviso to Rule 28 - open market value - value of supply between related persons - Whether, for supplies of services by foreign affiliates in the form of seconded employees where no invoice is raised by the related domestic entity, the value of such services must be treated as Nil for the purposes of the Second Proviso to Rule 28 and whether that precludes tax liability under the Act. - HELD THAT: - The Court proceeded on the basis of Paragraph 3.7 of CBIC Circular No. 210/4/2024-GST which clarifies that where a foreign affiliate provides services to a related domestic entity and full input tax credit is available to the recipient, the value declared in the invoice by the related domestic entity may be deemed as the open market value under the second proviso to Rule 28; further, where no invoice is issued by the related domestic entity, the value of such services may be deemed to be declared as Nil and treated as the open market value. In the present matters it is conceded that no invoices were generated by the writ petitioners in respect of the services provided by their related foreign affiliates. The Court therefore accepted the CBIC clarification as binding on the respondents and held that the value of the service rendered must be treated as Nil. On that basis, the Court concluded that no plausible tax liability could arise under the Act in respect of the impugned notices, rendering the show cause proceedings futile. [Paras 11, 12, 13, 14]The show cause notices insofar as they seek to impose tax on the secondment services (where no invoice was raised) are quashed because, in light of the CBIC Circular, the value of those services is to be treated as Nil under the second proviso to Rule 28, precluding the asserted tax liability.Penalty and interest - quashing of consequential orders - value of supply between related persons - Whether orders imposing interest and penalty (and consequential Orders in Original) survive once the CBIC clarification is applied to the secondment transactions. - HELD THAT: - The Court observed that where the CBIC clarification governs assessees pan India and indicates that no tax liability arises in the factual scenario of no invoice for services from the foreign affiliate, continuation of penalty or interest proceedings would not be tenable. The Court noted that one writ petitioner (Sony India) had already discharged tax and taken credit; nevertheless, in view of the CBIC position, the imposition or continuation of penalty and interest could not be sustained. Consequently, the Court quashed the consequential Orders in Original and the proceedings for interest and penalty to the extent they relate to the secondment issue. [Paras 15, 16, 17, 18]Consequential orders imposing interest and penalty arising from the same secondment related tax liability are quashed; Orders in Original impugned in the writ petitions are set aside to the extent indicated.Final Conclusion: Writ petitions allowed: show cause notices dated 29.09.2023, 28.09.2023, 27.09.2023, 28.09.2023 and 31.05.2024 are quashed insofar as they relate to tax on seconded employees (value treated as Nil under CBIC Circular and second proviso to Rule 28); consequential Orders in Original imposing interest/penalty are also quashed to that extent; other issues in the impugned SCNs remain open for adjudication by the respondents. Issues Involved:1. Legality of Show Cause Notices (SCNs) issued under the Central Goods and Services Tax Act, 2017 concerning tax liability for the secondment of employees.2. Application of Rule 28 of the Central Goods and Services Tax Rules, 2017 regarding the valuation of supply between related persons.3. Impact of Circular No. 210/4/2024-GST on the valuation of services provided by foreign affiliates.4. Imposition of interest and penalties under the CGST Act, 2017.Detailed Analysis:1. Legality of Show Cause Notices (SCNs):The writ petitions challenged the SCNs issued by the respondents, which alleged a tax liability under the Central Goods and Services Tax Act, 2017, related to the secondment of employees from foreign affiliates to the petitioners in India. The SCNs demanded Integrated Goods and Services Tax (IGST) under the Reverse Charge Mechanism for services imported during the specified period. The petitioners initially contested the presence of seconded employees but later refrained from pursuing this issue due to clarifications from the Central Board of Indirect Taxes and Customs (CBIC). The court noted that the SCNs were based on the Supreme Court's decision in CCE & Service Tax vs. Northern Operating Systems (P) Ltd., which treated such transactions as manpower supply, triggering the issuance of the SCNs.2. Application of Rule 28 of the CGST Rules, 2017:The principal issue revolved around the valuation of services supplied between related entities, as governed by Rule 28 of the CGST Rules. The rule stipulates that the value of such supply should be the open market value or, if unavailable, the value of similar goods or services. The petitioners argued that, according to the Second Proviso to Rule 28, where the recipient is eligible for full input tax credit, the value declared in the invoice should be deemed the open market value. The court acknowledged this argument, emphasizing that if the secondment was considered an import of services, the tax liability should align with the Second Proviso.3. Impact of Circular No. 210/4/2024-GST:The CBIC's Circular No. 210/4/2024-GST clarified that if no invoice was issued by the domestic entity for services provided by a foreign affiliate, the value of such services would be deemed 'Nil' and treated as the open market value under the Second Proviso to Rule 28. The court highlighted that since no invoices were raised by the petitioners for the services rendered by their foreign affiliates, the value should be considered 'Nil,' leading to no tax liability. The respondents were bound by this circular, which effectively nullified the SCNs' basis.4. Imposition of Interest and Penalties:In the case of Sony India Private Limited, the court noted that the petitioner had paid the tax and claimed credit on a reverse charge basis. However, the Order-in-Original imposed interest and penalties. The court opined that once the CBIC clarified the position applicable nationwide, the continuation of penalty proceedings or imposition of interest was unsustainable. The petitioner was absolved of tax liabilities due to the CBIC's stand.Conclusion:The court quashed the impugned SCNs and related Orders-in-Original, concluding that the proceedings were futile given the CBIC's clarification. The judgment was confined to the issue of seconded employees, leaving other issues in the SCNs open for adjudication. The court did not express opinions on other matters in the SCNs, preserving the rights and contentions of the parties involved.