Place of Supply of Services – Critical Analysis

Introduction

The Goods and Services Tax [“GST”] is a landmark piece of
legislation to be introduced in India. It is a destination based tax on
consumption of goods and services i.e., the tax should accrue to the taxing
authority which has jurisdiction over the place of consumption. For this
purpose, one needs to determine what is popularly known as Place of Supply
[“POS”] i.e. the place where goods or services have been supplied so as to
decide the taxing jurisdiction. ‘Place of Supply of Services’ [“POSoS”]¹
alongwith the ‘Location of Supplier of Service’ [“LS”] would
determine whether the supply is intra-state or inter-state, that are the two
types of supplies in GST but having different GST implications.

_________________________________________________________________________________________________

1   The author while
dealing with the concept of Place of Supply of Service has assumed that the
basic concepts such as supply, dual levy and input tax credit mechanism has
already been explained in other articles. All those concepts are relevant for
study of POS

Types of Supply

Intra-state supply will be the case where the LS and POS
are in the same State. Inter-state Supply would be a case where LS is in
one state and POS is in another state. Since there are other kinds of
Inter-state supply as well, for ease of reference we refer to this Inter-state
supply as Domestic Inter-state supply.

There are four types of Inter-state supplies as envisaged by
section 7 of the Integrated Goods and Services Tax Act, 2017 [“IGST Act”]:

(i)  Domestic Inter-state supply i.e. supply
between two states.

(ii) Cross border supply.

(iii) Supply to or by a

a. SEZ Developer; or

b. SEZ Unit.

(iv) Non Intra-state supply not covered above.

Domestic Inter-state supply is a case where the LS and
POS are:

(i)   in two different States; or

(ii)  in two different Union Territories; or

(iii)  one in a State and another in a Union
Territory.

N.B.: For ease of
reference, while referring to Domestic POSoS in this article, the elucidation
of the provisions will be in respect of (i) above though it would be the same
for (ii) and (iii).

Cross Border supply of service will cover the following
supply of services:

(i)  Import of Services.

(ii) Export of Services.

N.B.: (i) Import of
services and export of services is separately
explained in Annexure 1 attached.

(ii) On a perusal of the said
Annexure 1, it will be noted that in respect of export of services under GST
scenario, the condition of receipt of foreign currency is a must as against the
current Place of Provision of Services Rules, 2012, where the said condition of
receipt of foreign currency is relevant only to the extent of allowance of
input credit in respect of services used for exports but service tax would not
be payable.

Place of Supply of Services [“POSOS”]

The POSoS is the Heart of GST which is very likely
to be subjected to “Attacks” post GST implementation. A proper study of
POSoS may ensure “Bypass” ensuring no need of a “Stent” or a “Stunt”.

As explained in the earlier paragraphs, two factors are
relevant to determine whether the supply is inter-state or intra-state viz. LS
and POSoS. Further, as per the POSoS provisions, the basic
principle is that the place of supply of service shall be the ‘Location of
Recipient of service’ [“LR”]. However, exceptions have been provided in
case of performance based services, immovable property based services, certain
specified services and transportation service etc. where other criteria
such as location of supplier of service, location of performance of service,
location of immovable property etc. are relevant. Thus in effect, there
would be three factors which are relevant in determining whether the
supply is intra-state or inter-state viz. i) LS; ii) LR; and iii)
POSoS. The ‘Location of Supplier of Service’ and ‘Location of
Recipient of Service’ are defined separately in GST based on certain tests.
Of course, these tests will really test the legal acumen of assessee,
department and the judiciary in the years to come. In fact, to locate the LS
or LR would be in many cases a Big Challenge. It is separately being
dealt in Annexure 2 attached so as not to disturb the flow of the article on
the subject under consideration viz. POSoS. However the readers are
advised to carefully read the said Annexure 2 before proceeding further. In
fact. it is MOST IMPORTANT!

Once the LS and LR both are determined, it
would be necessary to determine the POSoS in order to determine whether
the supply is inter-state or intra-state.

Determining the POSoS has always been a challenging
task world over. However, internationally, the POSoS is generally
determined in a cross border transaction i.e. where either the Service provider
or the Service recipient is abroad and the other is in home country. However,
Indian Curry and Indian Laws are always spicy!!! The GST in India has
complicated the entire issue of POSoS by its dual structure [i.e.
Central Tax (“CT”) & State Tax (“ST”)]. Thus, the study of POSoS would
involve:

(i)   Study of Domestic POSoS i.e. where LS
and LR both are in India. [Section 12 of IGST Act]

(ii)  Study of Cross Border POSoS i.e. where
either LS or LR is outside India. [Section 13 of IGST Act]

Keeping in mind the constraints of space in this article [Of
course also the reader’s tolerance level – otherwise there would be a taxable
supply of tolerating an act – Consideration???], I would deal with the Domestic
POSoS which is unique and has raised various challenges and issues. As
regards the Cross border POSoS; they are similar to the existing Place
of Provision of Service Rules, 2012 under the Service tax law, and hence I
shall deal with it very briefly.

Domestic Place of supply of Service [Section 12 of the IGST
Act]

While the catchword is “One nation, One Tax”, The Central
Goods and Services Tax Act, 2017 [“CGST Act”] and The State Goods and Services
Tax Act, 2017 [“SGST Act”] have been so designed that each state is an
independent taxing jurisdiction. Each state has been ring fenced i.e. a
tax paid in one state cannot be adjusted against tax liability of another
state. Further, Inter – unit supply between an unit in one State to an unit in
another State though belonging to the same entity is considered as
supply. The LS and POS will also have far reaching impact on
ultimate cost of goods and services based on the credit availability. Thus, the
study of Domestic POSoS is most crucial to the business.

Section 12(1) of the IGST Act provides for determination of
the Domestic POSoS i.e. where the LS and LR both are in
India. The provisions dealing with Domestic POSoS for different
situations are explained below.

General principle – POSoS is Location of
service recipient [Section 12(2)]

The general or default principle is that the POSoS is
the –

(i)  ‘LR’ if the supply is made to a
recipient registered for GST (i.e. B2B transactions); 

However in case of supply to an unregistered person (i.e. B2C
transactions), the POSoS will be –

(a) ‘LR’ where the recipient’s address is
available in the records of the supplier; and

(b) ‘LS’ in other cases. 

The above general principle would apply unless the
transaction falls within any of the other sub-sections of  Section 12.

POSoS relating to immovable property would be the
location of immoveable property [Section 12(3)].

The POSoS of the following services shall be the place
where the immovable property is located or intended to be located [i.e.
property to come into existence]:

(i)   Services provided directly in relation to
an immovable property e.g. construction, repair, renovation of a building, etc.
Services remotely connected to immovable property would not be covered u/s.
12(3) e.g. real estate feasibility studies or advice on capital gains, etc;

(ii)  services provided by experts e.g. architects,
interior decorators, surveyors, engineers, and other related experts or estate
agents;

(iii)  grant of rights to use immovable property.

(iv) carrying out or co-ordination of construction
work;

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

(vi) Ancillary services to above 5 services.

POSoS relating to lodging accommodation in immovable
property or boat or vessel would be the location of immovable property or boat
or vessel [Section 12(3)].

The POSoS by way of lodging accommodation in a hotel,
inn, guest house, home stay, club or campsite, by whatever name called, and
including a house boat or any other vessel and ancillary services thereto shall
be the place where the immovable property or boat or vessel is located
or intended to be located [i.e. property to come into existence].

Comments: When a company’s employee based in
Mumbai goes to Delhi for office work, the supply for hotel accommodation would
be an intra-state supply [LS and POSoS fall in Delhi] but the Delhi CT+ST
charged by hotel may not be available as credit to the Mumbai-based company due
to the ring fencing.

N.B. (i) Where
the location of immovable property or boat or vessel is located or intended to
be located outside India the POSoS shall be the ‘LR’ in India. [Proviso to Section
12(3)]

Comments: This is
akin to the existing rule 8 read with rule 5 of the Place of Provision of
Services Rules, 2012 where the place of provision of service is where the ‘LR’
is situated and not where the immovable property is situated.

(ii) Where the
immovable property or house boat or vessel is in more than one State/Union
Territory [“UT”], the supply would be considered to be made in each of
respective State or UT in proportion to value for service separately collected
or determined as per contract / agreement and if there is no contract /
agreement then on such other basis in the manner prescribed.

Comments: It would
involve a laborious exercise to determine the POSoS when the boat wherein the
accommodation services are provided, moves from one state to another state.
Perhaps it would have been better to provide that the POSoS be the place of
commencement of journey by the house boat or vessel.

Performance based services [Sections 12(4) and 12(5)]

Event Based services
[Sections 12(6) and 12(7)]

*Specified Events are
cultural, artistic, sporting, scientific, educational and entertainment event.

Goods Transportation
services [Sections 12(8)]

Comments: This rule would apply to transport by road, rail, air and sea
whether locally or outside India provided the supplier and recipient both are
in India. An important change is that ocean freight for cargo exported for a
shipper in India would be subject to GST though presently ocean freight for
export cargo undertaken for a shipper in India is not liable to service tax in
view of Rule 10 of the Place of Provision of Service Rules, 2012.

Passenger transportation service [Sections
12(9)]

*Return journey to be treated as separate journey

Services provided on board a conveyance [Section 12(10)]

The POSoS on board a conveyance including a vessel, an
aircraft, a train or a motor vehicle, shall be the first scheduled point of departure
of the conveyance on that journey.

Comments: Issues – Can it be said that
supply of packaged Drinking water/packed Biscuit is ‘Supply of goods’ and
Supply of Sandwich/Samosa is ‘Supply of Service’. While POS of Service is first
scheduled point of departure irrespective of where the food/eatables is taken
on the board, the POS of goods is the location at which the goods are taken on
board. Thus it is imperative to decide whether the said supply is supply of
goods or supply of services.

Telecommunication / data
transfer / broadcasting / cable / DTH services [Sections 12(11)]

Banking & Other Financial services (including stock
broking services) [Section 12(12)]

N.B.: The CGST law does not define what is Banking
and Other Financial Services. Does it cover only services provided by banks or
NBFC? What about merchant banking services, asset management services etc.,
which under the existing definition are covered under Banking and Other
Financial Services. The only saving grace is whether it is rule 12(2) [Para
4.3] or 12(12) [Para 4.12] it may not make a significant difference.

Insurance services [Section 12(13)]

N.B.: The policy holder’s address will be
there in Insurance company’s records

Advertisement services to Central / State
Government/Statutory Body/Local Authority/UT for identifiable States [Section
12(14)]

The POSoS for the above services shall be each state
and the value of supply would be proportionate to the amount attributable for
dissemination in each State determined as per contract/agreement or in absence
of contract/agreement on any other basis as maybe prescribed

Cross –border place of supply of services [Section 13 of IGST
Act]

Section 13 of IGST Act provides for determination of the
Cross border POSoS i.e. where the ‘LS’ or ‘LR’ are outside
India [section 13 of IGST Act]. The Cross border POSoS for different
situations envisaged by section 13 are given below:

Notes:

(i)  Performance based services are of two types:

A.  Work upon goods: services supplied
in respect of goods made physically available by service recipient to
the supplier or to any person acting on behalf of the supplier in order to
provide the service e.g. Repairs, Storage and cargo handling. There are two
exceptions.

(a) Remote access – POSoS is Location of
goods at the time of supply of service;

(b) Goods temporarily imported into India for
repair and re-exported subject to the condition that goods not put to use in
India (except for such repair). POSoS under sl. no. 2 would not apply.
Basic principle (sl. No. 1) would apply.

B.  Work upon individuals: Services
supplied to individuals physically present in their personal capacity or on
service recipient’s behalf e.g. beauty treatment, plastic surgery, etc.

(ii) In this case, it would cover supply of
admission to an event as well as organisation of event and services ancillary
thereto. Thus, in case of cross-border supply of event based services, POSoS
is location of event but in case of Domestic POSoS the location of event
is relevant for the services of admission but for organisation of the event,
the POSoS is different as explained in para 4.7.

(iii) Thus, on a reading of sl. No. 5 & 6 above
it appears that if an architect in India provides services for his client’s
immovable property abroad, the POSoS would be outside India. But
however, if he supplies services to the same person for 3 properties – one in
UK, one in Karnataka, and one in Kerala, the POSoS for the entire
consideration would be Kerala and Karnataka.

(iv)
Specified services are:

(a) Services supplied to Account holders by banks,
Financial Institutions, NBFCs ;

(b) Intermediaries

(c) Hiring means of transport [including yachts but
excluding aircrafts & vessels] upto a month.

(v) Person receiving OIDAR services is deemed to be
located in Taxable Territory (TT) –

if any 2 of the following non-contradictory conditions are
satisfied viz.:-

–  location of address presented by service
recipient (SR) via internet is in TT;

–  credit card /debit card/ store value card/
charge card/ smart card/ any other card by which SR settles payment has been
issued in TT;

–  SR’s billing address is in TT;

–  Internet Protocol [IP] address of device used
by SR is in TT;

–  SR’s bank account used for payment maintained
in TT;

–  country code of SIM card used by SR is of TT;

–  location of SR’s fixed land line through
which service is received by person, is in TT.

Challenges

I have dealt with some of the challenges in the
implementation of GST qua POS provisions while elucidating the provisions
to determine Location of supplier of service and Location of recipient of
service in Annexure 2. I have also given my comments on some of the significant
Domestic POSoS provisions.

However as explained in Annexure 2, the Biggest Challenge is
WHO is providing service to WHOM and from WHERE? This will be the most crucial
question to be answered. This will also involve examining whether LS and
LR be – the contracting office or actual performing / receiving office.
There are several situations that may arise when the determination of three
factors viz. LS, LR and POSoS may pose a challenge. Due to
restrictions of space, I take up only 2 case studies.

CASE STUDY 1

In a typical case of contract for renting of offices, say, a
landlord based in Mumbai owns several properties at different places in India
which he has given on rent to various corporates across India. The landlord’s
Principal Place of Business [“PPoB”] is in Mumbai and accordingly, all the
license/rental agreements are entered into by the landlord from his PPoB in Mumbai.
This may be given by way of table.

In the above case, the issue arises whether the landlord has
Place of Business [“PoB”] at all places [i.e. where the properties are
located], since that would decide LS which is one of the important
factors to determine whether the supply is intra-state or inter-state. A view
that could be taken is that the landlord is located only in Mumbai since the
registered PoB is Mumbai and the other locations cannot be considered as Fixed
Establishment [“FE”] since he has no people working in those locations so as to
constitute a FE. The result would be as under;

N.B.: In the last case, the licensee in Hyderabad
may not get the credit of Maharashtra CT + ST due to ring fencing as explained
in Para 4.1 above

CASE STUDY 2

A Partnership firm of 8 CAs specialising in internal audit
based in Mumbai [Head Office (“H.O”)] having branches in the cities of Delhi,
Bangalore and Chennai gets an internal audit assignment from a leading
Mumbai-based IT company who also have branches in the cities of Delhi,
Bangalore and Chennai. The letter of engagement for the assignment comes from
the registered office of the client based in Mumbai addressed to the CA Firm’s
Head Office in Mumbai. But the CA firm does the internal audit of Delhi,
Bangalore and Chennai using its resources at the relevant locations viz.,
Delhi, Bangalore and Chennai. Thus, an issue may arise as to which unit of
CA firm should bill to which unit of client and how much.

The issue in such cases that arises is to determine the LS
or LR, the contracting unit is relevant or performing unit is
relevant.

(i)  Firstly the letter of engagement is given to
the Mumbai CA H.O. from the Mumbai based office of client

(ii) The planning of audit, maintaining client
interface, signing, responsibility and accounta-bility are all from H.O. at
Mumbai.

It is not possible to slice the value attributable to each
location of the supplier or the recipient so as to say that supply comes from
one LS to a specific LR. The best course of action would be to
consider location of contracting party [i.e. Head office of the CA firm] as ‘location
of supplier’ and accordingly the Head Office should bill to the client and
the concerned branches should bill to the Head Office at the appropriate rate
as may be prescribed. Of course this would have to be backed by a Policy
Document / Framework so as to provide –

i)   Only H.O would interact with client.

ii)  The branches provide service to H.O and not to
client – Accountability, service level expectation etc.

iii)  Branches bill H.O at cost plus.

Conclusion

The analysis and the views given above have to be taken by
the reader with a pinch of salt considering that GST is a very new law. GST law
has evolved over the last 6 months with at least 3 versions. It is also still
evolving and almost every day a rule or a clarification is coming out and many
issues are still unfolding. By the time this article reaches you, there could
be some more changes in the rules / notifications. Please note the author is
also evolving and revolving with the GST law. In time both the law and the
author will mature. Till then HAPPY GST (Great Super Time) with GST!!!

Annexure 1

Relevant extract of section 2 of IGST Act:

“2(11)
“import of service” means the supply of any service, where

          (a) the supplier of service is
located outside India,

          (b) the recipient of service is
located in India, and

          (c) the place of supply of service is
in India,

“2(6)
“export of service” means the supply of any service when

          (a) the supplier of service is
located in India,

          (b) the recipient of service is
located outside India,

          (c) the place of supply of service is
outside India,

          (d) the payment for such service has
been received by the supplier of service in convertible foreign exchange, and

          (e) the supplier of service and
recipient of service are not merely establishments of a distinct person in
accordance with explanation 1 of section 8;

N.B.:
In respect of export of services under GST scenario, the condition of
receipt of foreign currency is a must as against the current Place of Provision
of Services Rules, 2012, where the said condition of receipt of foreign
currency is relevant only to the extent of allowance of input credit in respect
of services used for exports, but service tax would not be payable.

Annexure 2

Location of supplier of service and Location of recipient of
services [sections 2(15) and s. 2(14) of the IGST Act]

A2.     Provisions to determine Location of
supplier of service and Location of recipient of service

A2.1   The ‘location of supplier of services’ and
‘location of recipient of services’ are most relevant to determine the
nature of supply – whether intra-state or inter-state. The provisions to
determine the LS and LR are explained below.

A2.2   The ‘location of the supplier of services’
[Section 2(15) of IGST Act] is to be determined by applying the following 4
rules in seriatum

Notes:

1.  Place of business includes –

–   Place from where business ordinarily carried
on and includes warehouse, godown, any other place where goods are stored or
goods/services are provided / received

–   Place where Account books are maintained

–   Place where taxable person engaged in
business through agent

           [Section 2(85) of CGST Act]

2.  “Fixed establishment” means a place (other
than the registered place of a business) which is 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 own needs.
[Section 2(50) of CGST Act]. In a nutshell, three factors are determinative
of a ‘fixed establishment’: (i) a place; (ii) people, (iii) with
a degree of ‘permanence’ [the three PPPs like a three piece suit!].
The definition has almost all the attributes of a PoB. In fact, all FEs would
be a PoB.

3.  ‘usual place of residence’, means –

(a) in case of an individual, the place where he
ordinarily resides;

(b) in other cases, the place where the person is
incorporated or otherwise legally constituted. [Section 2(113) of CGST Act].

A2.3   The ‘location of the recipient of
services’ [Section 2(14) of IGST Act] is to be determined by applying the
following 4 rules in seriatum

A2.4   The following rules apply as to
establishments:

(i)  Establishment outside India and Establishment
in India are treated as separate persons [Clause (i) of Explanation 1 to
Section 8 of IGST Act].

(ii) Establishment in a State/UT² and
Establishment outside that State/UT are treated as separate persons [Clause
(ii) of Explanation 1 to Section 8 of IGST Act]

_______________________________

2  UT
= Union Territory

(iii) A person carrying on business though a
branch, agency or representational office in a territory shall be treated as
having establishment in the territory [Explanation 2 to section 8 of IGST Act].

(iv) Where LS/PoS is in the territorial
waters (12 nautical miles from Indian shores), the LS / PoS would be in
the coastal State/UT where the nearest point of appropriate baseline is located
[Section 9 of IGST Act].

Establishment most directly
concerned in providing/ receiving a supply

A2.5   The rules provide that where services are
supplied / received from more than one establishment, whether Place of Business
or fixed establishment, the PoB/establishment most directly concerned with
the supply / receipt of the service would be relevant. This provision is going
to pose a Big Challenge. There will be several instances where the contract
with the client will be with the Head Office but the Services maybe provided
from the several branches in different states. The client also may have several
offices in different states, which are being serviced by the Service provider. The
issue is what would the LS and LR qua the transaction – the
contracting office or actual performing / receiving office. WHO is providing
service to WHOM and from WHERE? This will be the most crucial question to
be answered. What will be the factors to be taken into account to arrive at a
conclusion. This is an issue which is being pondered world over by all the
nations having GST. But generally, it concerns cross border transactions.
However, in India, it would be relevant for Domestic Inter-State supply also.
Each State may say that the supply is from their state. If it goes into
litigation, the assessee cannot ask the two States to settle between
themselves, but may have to pay the GST in one State and claim refund in
another State if matter goes against him in an adjudicating forum – thus
perhaps leaving the poor assessee in a SORRY STATE.

A2.6   In order to ascertain the ‘establishment
more directly concerned in provision of supply’, the test adopted is to
consider the significance of the activities performed by the establishments in
question and the part they play in their contribution to the service supplied.
[Chinese Channel (Hongkong) Ltd. vs. Commissioners of Customs and Excise
(1998) Simon’s Tax Cases 347 (High Court of Justice – Queens Bench Division,
UK)]. In this context when the present Place of Provision of Services Rules,
2012 was introduced, the CBEC’s Education Guide has given guidance as follows:

        “This will depend on the facts and
supporting documentation, specific to each case. The documentation will include
the following:-

–   the contract(s) between the service
provider and receiver;

–   where there are no written contracts, any
written account (documents, e-mail etc.) between parties which sets out
in detail their understanding of the oral contract;

–   details of how the business fits into any
larger corporate structure;

–   the establishment whose staff is actually
involved in the execution of the job;

–   performance agreements (which may sbe
indicative both of the substance and actual nature of work performed at a
particular establishment).”