R & D Service whether taxable U\Rule 4 of POP rules 2012

[Yatin Bhopi]

Dear experts

We are manufacturer of organic chemicals. We have also researchanddevelopment center in our factory where we are developing new products.

We have our US base parent company for them only we develop new products. Parent company will be sole owner of discoveries made in R & D center. All expenses incurred by us on R & D center which includes salary of employees reimbursed by parent company through quarterly invoice raised by us.

Our EA-2000 audit is going on and audit team is of view that service tax will be payable according to Rule 4 of place of provision rules 2012 i.e. we are doing R & D on goods which are reimburse by our parent company.

Please share your views

[Rajagopalan Ranganathan]

Sir,

Rule 4 (a) of Place of Provision of Service Rules, 2012 " services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service."

In your case no goods are provided by your parent company on which you are providing any service, namely, repair etc. Since you are doing only R & D work on behalf of your parent company who is located outside taxable territory what you are doing is export of service and no service is leviable on output service exported. This is my view.

[Ganeshan Kalyani]

Here the service receiver is foreign company and provider of service is in India . Thus it is export of service which is exempt from service tax.

[YAGAY and SUN]

Place of provision of service are from taxable territory to non taxable territory. In our view matter does not come under purview of 4 (a) of POPs. However, this need further exploration since POPs are technical Rules and should be applied very intelligently.

[KASTURI SETHI]

I support the views of all the three experts to the extent that service tax is not payable, service being exempted by virtue of export of service.

[MUKUND THAKKAR]

what ever details you submitted in your query on the basis of the same expert express their valuable inputs.

In addition please clear that what ever R & D your unit is carried out and same product are you selling in india? than such situation your service may be not consider as a export service.

This is my view..

[Yatin Bhopi]

Thanks for your valuable replays

We are doing R & D project in factory situated in India. We are doing R & D on chemicals & Resins for our parent company situated in USA. We are raising quarterly bills to our parent company for all expenses incurred on salaries of employees working in R & D project, expenses incurred in connection with carrying out R & D project i.e. cost of material, utilities, deprecation of equipment, cost of repairs and maintenance etc.with profit margin.

Our parent company will be the only owner of all innovation, discoveries, R & D reports, drafts, know how, suggestions, ideas designs, model etc. achieve during the project. The owner of all innovations is our parent company, Indian company have no rights on innovations.

We are selling products which are discovered by us but we are paying royalty on sale of such product to parent company (paying service tax on royalty under RCM).

[MUKUND THAKKAR]

ok

when you are paying service tax on royalty need not pay the service tax as explain by expert.

In your case, the service recipient is located abroad and so, the place of provision of service is a non-taxable territory. Therefore, you need not pay service tax on such services.

[KASTURI SETHI]

There is a gulf of difference between the phrases, "Export of Service" and Export of Goods". The new products manufactured/came into existence on the basis of your R & D, may be sold in India and other countries of the world. The sale of your new products is not restricted to India. I mean to say it is, undoubtedly, export of service and hence exempted from ST.

In this way and taking into reasoning given by Sh.Mukund Thakkar, an expert I fully endorse his views expressed above.

AI Summary

Export of service: R&D supplied to a foreign parent is outside taxable territory when no recipient provided goods are involved.
When an Indian entity conducts R&D for a foreign parent and invoices reimbursed expenses plus mark up, with all innovation rights assigned to the parent and no goods physically provided by the recipient, the service constitutes export of service under the Place of Provision Rules and the place of provision is outside the taxable territory, so service tax is not leviable on the output service; factual deviations such as recipient supplied goods or domestic sale arrangements may alter the tax outcome.