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.

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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]

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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).”