Place Of Supply – Immovable Property Based Services

Introduction

In the previous article, we had examined the Integrated Goods and
Service Tax (‘IGST’) framework in the backdrop of the provisions of the
Constitution. The IGST framework dealt with the concept of location of supplier
and place of supply (‘POS’) which aids in determining whether a supply is to be
treated as intrastate or interstate and accordingly, helps in determining the
applicable tax (CGST + SGST in case of intra-state and IGST in case of
interstate).

There are specific provisions prescribed for determination of place
of supply for both goods as well as services under Chapter V of the IGST Act.
Sections 10 & 11 thereof deal with goods while Section 12 deals with
services where both the supplier as well as recipient are located in India and
section 13 deals with services where either the supplier or recipient is
located in India.

The general rule for determination of place of supply is that the
location of the recipient is to be treated as POS except for cases where the
recipient is unregistered and his address on record is not available, in which
case location of supplier is treated as the POS.

This general rule
is subject to various exceptions where the POS is to be determined in a
different manner. One such exception pertains to cases where services relate to
immovable property and the same is covered u/s. 12 (3) in cases where both the
service provider and the service recipient are located in India. In cases where
either the service provider or the service recipient is located outside India,
Section 13(4) is applicable. In this article, we shall specifically deal with
the said exception and the issues revolving around it.

Relevant
Provisions

Section 12
of the IGST Act

(3) The
place of supply of services–

(a) directly in relation to an immovable
property, including services provided by architects, interior decorators,
surveyors, engineers and other related experts or estate agents, any service
provided by way of grant of rights to use immovable property or for carrying
out or co-ordination of construction work; or

(b) by way of lodging accommodation by a
hotel, inn, guest house, home stay, club or campsite, by whatever name called,
and including a house boat or any other vessel; or

(c) by way of accommodation in any
immovable property for organising any marriage or reception or matters related
thereto, official, social, cultural, religious or business function including
services provided in relation to such function at such property; or

(d) any
services ancillary to the services referred to in clauses (a), (b) and (c),
shall be the location at which the immovable property or boat or vessel, as the
case may be, is located or intended to be located:

Provided
that if the location of the immovable property or boat or vessel is located or
intended to be located outside India, the place of supply shall be the location
of the recipient.

Explanation.––Where the immovable
property or boat or vessel is located in more than one State or Union
territory, the supply of services shall be treated as made in each of the
respective States or Union territories, in proportion to the value for services
separately collected or determined in terms of the contract or agreement
entered into in this regard or, in the absence of such contract or agreement,
on such other basis as may be prescribed.

Services directly in relation to Immovable
Property

The practice of treating the place of supply as the location of
property in case of transactions involving immovable property is not new. Even
under the service tax regime, Rule 5 of the Place of Provision of Service
Rules, 2012 which dealt with the determination of place of provision of service
was similarly worded. However, with the concept of dual GST, this provision has
its’ own ramifications. This is because GST is a state specific law. Therefore,
deciding the type of GST applicable (CGST + SGST vs. IGST) is very important.
More importantly, in cases where the recipient of supply is not registered in
the State where the immovable property is located, the credit is lost even if
the recipient uses the services in the course of his business.

For instance, if a supplier is providing services of renting of
immovable property, in such a case, he will have to consider the Place of
Supply as the state in which the immovable property is located, whether or not
the recipient is registered in that state. Same position will apply even in
case of other transactions such as supply of maintenance and repair services
relating to immovable property. All these services apparently have a direct
relation with an immovable property and therefore, would rightly get classified
under this particular rule.

While in general, the recipient of renting service would be
registered in the state where the immovable property is located if he is into
business, the challenge may arise in case of hotels. Most companies use hotel
facilities in other states for the stay of their executives while on business
trips. Such companies may not have any branches or fixed establishments in
other states and therefore may be unregistered. This results in loss of credit
since the hotel would charge CGST & SGST relevant to that State in view of
the place of supply provision mentioned above.

Moving forward, what is meant by the phrase “directly in relation to
immovable property” needs to be analysed, as there are many other transactions
where the services involve use of immovable property as well, but there are
other factors which are also related with the supply of service and hence,
classification under this rule might not be applicable. Let us understand this
with the help of following examples:

Example 1 – ABC is a container freight
station located in Nhava Sheva. DEF, a manufacturer exporter has received an
order for export of goods from Nhava Sheva and has accordingly dispatched the
goods from his factory. When the goods reach Nhava Sheva, the exporter is
informed that the ship in which the goods are to be exported out of India will
berth at the port after 15 days and hence, DEF is required to make temporary
arrangements to store his goods. DEF enters in to a contract for the same with
ABC. The issue in this case would be whether the POS is Maharashtra, being the
location of immoveable property or Gujarat, being the location of recipient? If
ABC, taking a conservative view, classifies the service under this clause, it
would impact the credit availment for DEF as they are registered only in
Gujarat and hence, the credit of taxes for supplies consumed in Maharashtra
would not be available to them. Therefore, they are contending that the
exception clause is not applicable as the services provided by DEF are not
directly in relation to the immovable property.

Example 2 – An advertising service provider provides service in the
context of Out Of Home Advertisements. Under this model, the advertiser takes
on rent advertising space across the country by entering into agreements with
various landlords. Subsequently, the service provider enters into advertising
contract with various clients to allow the display of the advertisements from
such locations. In this context, while the services supplied by the landlords are
directly in relation to an immovable property, can the same be said for the
second leg of the transaction since the service is in relation to advertising
activity, which is distinct from leasing of an immovable property?

Before actually
analysing the above issues, we shall first discuss the following two terms,
which form the crux of this particular entry:

Scope of the phrase
“in relation to”

Directly in relation to – to be applied to what extent

The scope of the phrase “in relation to” has been dealt with by the
Supreme Court in the case of Doypack Systems Private Limited vs. Union of
India [1988 (036) ELT 0201 SC] in the context of Swadeshi Cotton Mills Co.
Limited (Acquisition and Transfer of Undertakings) Act, 1966. The issue was
whether the investments owned by the undertaking were also covered under the
provisions of the said Act and liable for acquisition? The Act provided that on
the appointed day “every textile undertaking” and “the right, title and
interest of the company in relation to every textile mill of such textile
undertakings” were transferred to and vested in the Central Government and such
textile undertakings would be deemed to include “all assets”. The contention of
the Appellants was that the investment in shares of the company were not in
relation to textile mills/undertakings and hence, they were not liable for
nationalisation.

The Supreme Court in the above case held that the expression “in
relation to” is a very broad expression which pre-supposes another subject
matter. These are words of comprehensiveness which might both have a direct
significance as well as an indirect significance depending on the context. The
Court also referred to 76 Corpus Juris Secundum at pages 620 and 621
where it is stated that the term “relate”’ is defined as meaning to bring into
association or connection with. It has been clearly mentioned that “relating
to” has been held to be equivalent to or synonymous with as to “concerning
with” and “pertaining to”. The expression “pertaining to” is an expression of
expansion and not of contraction.

From the above, it is more than evident that the term “in relation
to” has to be given a very wide interpretation. This however gives rise to the
next issue, and that is when a service is said to be in relation to immovable
property. While the GST law is silent about this respect, under the service tax
regime, the Education Guide issued by CBEC at the time of introduction of
negative list-based taxation explained that for a service to be considered in
relation to immovable property, the same should consist of lease, right to use,
occupation, enjoyment or exploitation of an immovable property or service
should have to be performed on the immovable property.

In this background, let us try to understand the above clarification
with an example. A lawyer, having his office in Delhi, provides chamber
consultancy in the form of discussion with client (based in Mumbai) on a legal
matter concerning a real estate in his Delhi Office. The client had travelled
from Mumbai for the specific meeting. Can it be said that the services in this
case are in relation to immovable property and not legal advisory?

Taking a more practical approach to the above aspect, let us take
another example of a supplier providing document management services.
Generally, this service includes receiving the documents from the customer,
scanning & storing them at supplier location. Only when the customer
requires them, they are retrieved from the respective warehouse and provided to
the customers. The customer is not aware about the location where his documents
are stored. In this context, can it be said that the services are in relation
to an immovable property merely because in supplying the services, there is an
element of immovable property involved. Both the above situations clearly
demonstrate that the service in none of the cases is in relation to immovable
property, if the interpretation of the Education Guide is accepted.

In fact, this distinction was applied even under the service tax
regime wherein Rule 4 specifically dealt with the aspect of place of provision
for performance-based services in the context of which, the Education Guide had
provided that the service of storage of goods is actually in relation to goods
and not immovable property. Relevant extracts are reproduced for reference:

5.4.1 What are the services that are provided “in respect of goods
that are made physically available, by the receiver to the service provider, in
order to provide the service”? – sub-rule (1):

Services that are related to goods, and which require such goods to
be made available to the service provider or a person acting on behalf of the
service provider so that the service can be rendered, are covered here. The
essential characteristic of a service to be covered under this rule is that the
goods temporarily come into the physical possession or control of the service
provider, and without this happening, the service cannot be rendered. Thus, the
service involves movable objects or things that can be touched, felt or possessed.
Examples of such services are repair, reconditioning, or any other work on
goods (not amounting to manufacture), storage and warehousing, courier service,
cargo handling service (loading, unloading, packing or unpacking of cargo),
technical testing/inspection/certification/ analysis of goods, dry cleaning
etc. ….

The above interpretation has been followed even in the context of EU
VAT which contains similar provision for determination of place of supply of
services. In this context, reference to the decision of the First Chamber Court
in the context of EU VAT in Minister Finansow vs. RR Donnelley Global
Turnkey Solutions Poland (RRD) is also relevant. The issue in the said case
was that RRD was engaged in providing a complex service of storage of goods
involving storage, admission, packaging, loading / unloading, etc. The issue
was whether the service could be classified under Article 47 or not, which deal
with supply of services connected with immovable property. The same is
reproduced below for ready reference:

The place of
supply of services connected with immovable property, including the services of
experts and estate agents, the provision of accommodation in the hotel sector
or in sectors with a similar function, such as holiday camps or sites developed
for use as camping sites, the granting of rights to use immovable property and
services for the preparation and coordination of construction work, such as the
services of architects and of firms providing on-site supervision, shall be the
place where the immovable property is located.

From the above, it is evident that Article 47 is worded similarly to
section 13 (4). In the context of Article 47, the Court had held as under:

Article 47
of Council Directive 2006/112/EC of 28 November 2006 on the common system of
value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008,
must be interpreted as meaning that the supply of a complex storage service,
comprising admission of goods to a warehouse, placing them on the appropriate
storage shelves, storing them, packaging them, issuing them, unloading and
loading them, comes within the scope of that article only if the storage
constitutes the principal service of a single transaction and only if the
recipients of that service are given a right to use all or part of expressly
specific immovable property.

In fact, Article 47 has been amended w.e.f 1^st
January 2017 to specifically provide transactions which shall be treated as
being in connection with an immovable property and transactions which shall not
be treated as being in connection with an immovable property. Some specific
inclusions and exclusions are tabulated below:

One another issue that is being faced
is from the view point of location of supplier where the services are in
relation to an immovable property. For example, ABC is a property investment
company which has acquired commercial / residential property across the country
and provides the same on lease basis to various customers. ABC has physical
presence only in Mumbai. All the lease agreements specifically provide that the
agreement has been entered into with ABC, Mumbai and the customer for leasing
the respective property which may be located anywhere across India. While
admittedly the POS in case of transactions entered in to by ABC will have to be
the location where the immovable property is situated, the issue that arise is
whether ABC is required to bill the customer from the locations where the
immovable property is located or can they continue to bill from Mumbai treating
Mumbai as the location of supplier of service?

In this regard, reference to Section 22 of the CGST Act might be
necessary which provides that registration has to be taken in each state from
where the taxable supply is being made. Therefore, it needs to be analysed as
to whether the location of supplier of service in this case will be Mumbai or
the respective locations where the property is situated? To analyse the same,
let us refer to the definition of location of supplier of service which
provides that the location of supplier of services shall mean:

(a) where a supply
is made from a place of business for which the registration has been obtained,
the location of such place of business;

(b) where a supply
is made from a place other than the place of business for which registration
has been obtained (a fixed establishment elsewhere), the location of such fixed
establishment;

(c) where a supply
is made from more than one establishment, whether the place of business or
fixed establishment, the location of the establishment most directly concerned
with the provisions of the supply; and

(d) in absence of such places, the location of the usual place of
residence of the supplier;

As can be seen from the above, location of supplier of service has
to be either a Place of Business or a Fixed Establishment, which have been
defined under the GST law as under:

While there is no concern in treating the
Mumbai office of ABC as its Place of Business, the issue arises in the context
of other locations where ABC owns immovable property. Whether they can be
classified as POB/ FE? Evidently, ABC does not carry out any business from such
locations. The business continues to be carried out from Mumbai, only the
underlying service is delivered at such locations and hence, it can be
concluded that clause (a) of the definition of POB will not be applicable.
Similarly, clause (b) and (c) shall also not be applicable. Therefore, the only
question that needs to be determined is whether such locations can be treated
as FE or not? Even that seems improbable because for a place to be classified
as FE, the same needs to be characterised by
a sufficient degree of permanence and suitable structure in terms of human and
technical resources to supply services, or to receive and use services for its
own needs. While one can say that the locations have a sufficient
degree of permanence, the second limb, that is human & technical resources
to make the supply will not get satisfied. That being the case, such locations
cannot be even classified as FE.

Therefore, it would be safe to conclude that such locations, since
not classifiable as either POB/ FE, the question of the same being classifiable
as Location of Supplier of Service may not arise.

In this context,
one may even refer to the FAQ issued by the CBEC in this context where in one
of the questions, it was clarified that there can be interstate billing for
rental services as well.

Service by
way of lodging accommodation

This clause applies to lodging accommodation services provided by a
hotel, inn, guest house, home stay, club or campsite including a house boat.
This rule makes lodging accommodation costly as in cases where the supplier and
recipient are located in different states, it makes the transaction tax
ineffective. For example, if a hotel in Maharashtra provides accommodation
service to an employee of Gujarat based company, even if the transaction is B2B
in nature, yet the company in Gujarat will not be able to claim the credit of
taxes as the POS will be Maharashtra. In fact, the businesses are in a losing
situation as credit was eligible under the pre-GST regime.

However, one particular issue for this kind of transaction is where
transactions are routed through online portals / agents. As stated above, this
entry is applicable only in cases where the services are provided by hotel,
inn, guest house, home stay, club or campsite including a house boat.
Therefore, in cases where the transaction is routed through online
portals/agents, the rule may not apply. Let us try to understand with the help
of following example.

A Hotel in Goa has entered into a contract with two selling agents,
one located in Bangalore and another in Mumbai. The arrangement with the
Bangalore selling agent is on a Principal to Principal basis wherein the Hotel
blocks specified number of rooms for the Bangalore based agent to sell and
whether or not the Bangalore agent is able to sell the rooms, the charges are
recovered from the agent. However, the terms of the transaction with the Mumbai
based agent are different. In that case, it is provided that the Mumbai based
agent shall merely facilitate the supply on behalf of the hotel for which they
would charge service charges.

The issue arises in the case of transactions through Bangalore
agent. The reason being:

In case of billing by Hotel to Agent – whether the supply is to be
treated of lodging / accommodation service or some other service? In case the
same is treated as lodging / accommodation, the POS will be Goa, and since the
agent is located in Bangalore, credit will not be eligible resulting in a tax
inefficient structure. Further issue arises when the agent bills to the
customer. The agent is not registered in Goa. Will he treat the place of supply
as Goa or will he treat the place of supply to be that of the recipient of the
service? Will one consider the service as directly in relation to an immoveable
property and covered under sub clause (a) or will one believe that sub clause
(b) is applicable? If sub clause (b) and not subclause (a) should be the
correct classification, the issue is that the service provider is not a hotel,
inn, guest house, home stay, club or campsite including a house boat though the
actual provision of service might be by a hotel and in such a case, one can
take a view that since the supply is not by the specified class of supplier,
the exception is not applicable and accordingly, POS may have to be determined
as per the general rule. This position will have to be tested at judicial
forums.

Similarly, in the
case of second set of transactions routed through Mumbai agent, since the Hotel
will be billing directly to customer, the POS will be determined as per the
exception. The Mumbai agent billing to Hotel / Customer for arrangement fees
will be as per the applicable rule and may not get classified under this
basket.

There is one more aspect on credit front in case of B2B transactions
involving lodging accommodation. Let us take an example of a company having
operations in two states, say Maharashtra & Gujarat and hence, registered
in the two states. An employee working with Gujarat office travels to Mumbai
for a client meeting and stays in hotel. Since the company is registered in
Maharashtra, he provides the company with the GSTIN of Maharashtra and asks the
hotel to issue invoice to Mumbai office. Is there any issue in this practice?

The probable answer
to the above question may be found in section 16 of the CGST Act, which
provides that every registered person shall be entitled to take credit of input
tax charged on supply of goods / services which are used / intended to be used
in the course or furtherance of his business. The issue that can be raised here
is whether the credit can be denied on the grounds that the invoice pertained
to a different registered person (being Gujarat) and was used in the course or
furtherance of a different registered person. If this conservative view is
accepted, the credit claim might be in danger. However, to counter this view,
can it be argued that while the GST law provides for deeming branches in
different states as distinct person, the same does not apply for business? That
is, the concept of business will have to be considered at entity level and not qua
the registration and accordingly, credit should be available.

Immovable property in multiple states –
Determining POS

There can be transaction for supply of services wherein under a
single contract, services for multiple immovable properties located across
multiple states might be provided. Lets’ take an example of Clean Ganga
initiative undertaken by the Central Government and awarded to an engineering
company. The river passes through multiple states.

The Government has entered into a single contract with the company
for undertaking the task of cleaning the river. Evidently, there is no issue
with respect to whether the services are in relation to an immovable property
or not? The only issue here that arises is how the POS has to be determined as
one can say that the POS is all such states through which the river flows.

While the proviso to section 12 (3) does deal with such a scenario,
it merely provides that the supply shall be treated as made in each of the
respective States / UT in proportion to the value for service separately
collected / determined in terms of the contract or agreement and in absence of
such contract/ agreement, the POS shall be determined on such other basis as
may be prescribed.

Therefore, in cases where the agreement provides for breakup of
consideration basis the work done in each state, the POS shall be determined
accordingly. However, in case the agreement is silent, one needs to be
determined in the prescribed manner. Unfortunately, no such manner has been
prescribed as on date for determining POS for such supplies. Even if the manner
for determination of POS is prescribed, even then it has to be noted that there
is no provision under the GST law for splitting of value / supply itself. The
provisions exist only for splitting of POS.

Therefore, the
issues that arise is whether the levy will sustain in the absence of proper
provision for determination of value of supply, even if the notifications are
issued in this regard? In this context, reference can be made to the decision
of the Supreme Court in the case of CIT vs. B. C. Srinivasa Shetty wherein
it was held that the charging sections and the computation provisions together
constitute an integrated code and the transaction to which the computation
provisions cannot be applied must be regarded as never intended to be subjected
to charge of tax.

Conclusion

While there are
specific provisions for determining the place of supply in the context of
property-based services, the same has its’ own share of interpretation issues
as well as interlinkages with other aspects of the law, viz., valuation,
credits, registration, etc. and such exception rules can result in breaking the
credit chain and the intent of the GST Law to enable free flow of credit and
open up trade and commerce amongst the States.