Place Of Supply Of Services – Part III

Introduction

As discussed in the previous article,
generally, the place of supply is determined on the basis of the location of
the recipient except in 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.

While in the previous article we discussed
at length the exception rule in case of services relating to immovable property,
in this article, we shall specifically deal with the following exceptions:

–   Certain Performance based services (restaurants, catering services,
personal grooming, health services, etc.)

–    Service relating to
training & performance appraisal

–    Services relating to events
(admission as well as organisation)

–   Transportation services
(goods, passengers, as well as services on board a conveyance)

–    Telecommunication services

–   Banking & other
financial services

–    Insurance services

–    Advertising services
provided to Government.

We will now discuss each of the above
exceptions as well as specific issues surrounding the same.

Certain Performance based services:

This exception to the general rule, covered
u/s. 12 (4) of the IGST Act provides that the Place of Supply in case of
services of restaurant & catering, personal grooming, fitness, beauty
treatment, health service including cosmetic and plastic surgery shall be the
location where services are actually performed. 

While this rule is not expected to have any
interpretational issues, the same has probable issues on credit front, in case
of B2B transactions. Let us try to understand with the help of following example:

ABC is a film production house operating out
of Mumbai. They have a film titled “###” under production, which is to be shot
extensively in Chandigarh. The local production activities are being managed
in-house by ABC. They have hired a catering company to supply food for their
employees as well as other people involved in the production activity. In
addition, they have make up artists who travel from Mumbai, Delhi as well as
outside India to Chandigarh for the said activity. The entire revenue from this
project will be earned in Mumbai. On account of this exception, in all cases
(including where Reverse charge applies), the Place of Supply will be taken as
Chandigarh while the Location of Recipient of Service is Maharashtra, thus
making the taxes attached with the services as ineligible for credit and thus
increasing the costs.

While admittedly, the performance of the
service is in Chandigarh, owing to the fact that the transaction is a B2B
transaction, the ultimate benefit / consumption of the said service takes place
in Mumbai where the recipient is located and hence, a hybrid rule for the
industry would have been beneficial.

Training & Performance Appraisal:

This exception to the general rule, covered
u/s. 12 (5) of the IGST Act provides for a hybrid rule for determination of
place of supply in case of services in relation to training & performance
appraisal as under:

 –   If services are provided to
registered person – place of supply shall be the location of such registered
person i.e. the recipient.

 –   If services are provided to
a person other than a registered person – place of supply shall be the location
where services are actually performed.

The important issue that needs to be
considered here is whether the “and” between training and performance appraisal
has to be read as “and” only or should it be read as “or”? The reason behind
this is if the word “and” is actually read as “and”, it will restrict the scope
of this particular section, as “and” is normally conjunctive.

For example, ABC Limited is a company
engaged in the business of providing education support services. They have
entered into an agreement with CBSE to evaluate the papers of all the students
of HSC / SSC. The papers are located at various locations across the country and
ABC shall send its’ evaluators at all those locations. The issue that needs
consideration is whether these services of performance appraisal will be
classified under this exception rule, since the services provided by ABC
Limited are only of performance appraisal and no element of training is
involved? Similarly, if PQR Limited undertakes training courses and does not
undertake any activity of performance appraisal, will it get covered under this
clause?

It is in this context that the need to
analyse whether “and”, which is normally conjunctive in nature has to be read
as “or”, i.e., give it a disjunctive interpretation or not for the purpose of
interpreting this exception. In this context, reference to the Supreme Court
decision in Union of India vs. Ind-Swift Laboratories Limited [(2011) 4 SCC
635] is made. The case was in the context of Rule 14 of the erstwhile
CENVAT Credit rules which provided for levy of interest in cases where credit
was taken or utilised wrongly or erroneously refunded. The issue in the
case was whether the or had to be read as and necessitating the
satisfaction of both the conditions, i.e., taking as well as utilisation of
credit for invocation of these rules or occurrence of either of the event would
suffice? The Supreme Court, relying on the decision of Commissioner of Sales
Tax, UP vs. Modi Sugar Mills Limited in (1961) 2 SCR 189 held that a taxing
statute must be interpreted in the light of what is clearly expressed and it is
not permissible to import provisions so as to supply any assumed deficiency.

Similarly, in A.G vs. Beauchamp (1920) 1
KB 650, it was held that the words “and” and “or” can be interchangeably
used if the literal reading produces an unintelligible or absurd result even if
the result of such interchange is less favourable to the subject provided that
the intention of the legislature is otherwise quite clear. For instance,
section 7 of the Official Secrets Act, 1920 reads:

“Any person who attempts to commit any
offence under the principal Act or this Act, or solicits or incites or
endeavours to persuade another person to commit an offence, or aids or abets
and does any act preparatory to the commission of an offence”.

The word “and” was read as “or”, for by
reading “and” as “and”, the result produced was unintelligible and absurd and
against the clear intention of the Legislature. (R v. Oakes (1959) 2 All ER 92)

However, in one particular case involving
the use of expression “sports and pastimes” in Common Regulation Act, 1965, it
was held that sports and pastimes are not two classes of activities but a
single composite class which uses two words in order to avoid arguments over
whether an activity is a sport or pastime. As long as the activity can properly
be called a sport or a pastime, it falls within the composite class (R vs.
Oxfordshire County Council (1999) 3 All ER).

It is felt that the test of purposive
interpretation will permit the reading of “and” as “or” and standalone
activities of training or performance appraisal may be covered under this exception
rule.

Event based services – admission &
organisation

There are two different exceptions to be
discussed here, which are covered u/s. 12 (6) & 12 (7) of the IGST Act. The
relevant provisions are reproduced below for ready reference:

(6) The place of supply of
services provided by way of admission to a cultural, artistic, sporting,
scientific, educational, entertainment event or amusement park or any other
place and services ancillary thereto, shall be the place where the event is
actually held or where the park or such other place is located.

(7) The place of supply of services
provided by way of ,—

(a) organisation of a cultural, artistic,
sporting, scientific, educational or entertainment event including supply of
services in relation to a conference, fair, exhibition, celebration or similar
events; or

(b) services ancillary to organisation of
any of the events or services referred toin clause (a), or assigning of
sponsorship to such events,––

(i) to a registered person, shall be the
location of such person;

(ii) to a person other than a registered
person, shall be the place wherethe event is actually held and if the event is
held outside India, the place of supply shall be the location of the recipient.

Explanation.––Where the event is held in
more than one State or Union territory and a consolidated amount is charged for
supply of services relating to such event, the place of supply of such services
shall be taken as being 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.

It is important to note that section 12 (6)
deals with services provided by way of admission to events while section 12 (7)
deals with services of organisation of event as well as services ancillary to
the organisation of such event.

However, the scope of services to be covered
u/s 12 (6) is limited. It is important to note that the said section does not
cover within its’ scope one specific class of events, i.e., business events,
being conferences, seminars, etc. wherein company sponsors delegates for
attending the events. This distinction is also evident from the fact that while
section 12 (6) does not specifically mention the services of admission to
conference, in the context of services classifiable u/s. 13 (5), i.e., cases
where location of supplier or recipient is outside India, the services of
admission to conferences is specifically covered. In fact, it can be said that
the intention of the law is to ensure free flow of credits in case services are
provided to registered persons, which is evident from the example taken in the
next paragraph.

Let us now try to understand the interplay
of operations of sub-sections (4), (6) & (7) with the help of an example in
the context of a charitable institution (XYZ) conducting a Residential
Refresher Course (RRC) for its’ members. The institution may have an inhouse
team which manages the logistics for the organisation of the event. They enter
into a contract with a hotel to provide accommodation, conference and catering
facilities during the course of the RRC. The issue that needs to be determined
is whether the services provided by XYZ to its’ members will get covered under
sub-section (4), (5) or (6) of Section 12?

Before analysing the probable answer to this
query, let us first decide on the nature of supply, i.e., whether the supply
will have to be treated as composite supply or mixed supply considering the
fact that there is only a single consideration charged for the entire RRC
without any breakup? In our view, it would be safe to conclude that this is a
composite supply with the principal supply being the participation in
conference. Having concluded so, let us now proceed to analyse the exception
rule in which the services provided by XYZ to its’ members will be covered.

Therefore, it can be argued that the
services rendered by XYZ do not fall under any of the exception rules mentioned
above and would be classifiable under the general rule.

Another issue that arises in the context of
Explanation provided in section 12 (7) is whether the explanation will have to
be read in the context of services provided to both, registered as well as
unregistered persons? This is because the explanation is silent with regards to
its’ applicability. However, one can apply the intention theory behind the said
explanation and say that this covers only services supplied to unregistered
persons, as in case of registered persons, the intention of the law is to provide
free flow of credit. Providing for multiple place of supplies would defeat the
said intention.

Therefore, in cases where the events are
held in multiple states, in cases where the agreement identifies consideration
for each event, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of
services where the agreement is silent with regards to division of contract
state wise. Notwithstanding the same, 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 question that needs consideration 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.

Services
relating to transportation of goods

This exception is contained u/s. 12 (8) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(8) The place of supply of services by
way of transportation of goods, including by mail or courier to,––

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the location at which suchgoods are handed over for their
transportation.

One important shift in policy is that while
under the service tax regime, in case of service of transportation of goods
outside India, as per Rule 10 of Place of Provision of Service Rules, 2012, the
destination of goods was the place of supply, the GST law provides for the
place of supply to be the origin of goods. In other words, export cargo was not
liable to service tax. The same applied even for services provided by shipping
companies / airlines. However, in view of the above provisions, the position
changed under GST and the tax was imposed on service of transportation of goods
outside India as well. It is however important to note that w.e.f 25.01.2018,
an exemption has been provided for services of transportation of goods by an
aircraft / vessel from customs station of clearance in India to a place outside
India. However, the said exemption is not applicable in case the services are
provided by a supplier located in India for transportation of goods or arranging
for transportation of goods where the origin and destination, both is outside
India.

Services relating to transportation of
passengers

This exception is contained u/s. 12 (9) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(9) The place of supply of passenger
transportation service to,—

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the place where the passenger embarks on the conveyance for a
continuous journey:

Provided that where the right to passage
is given for future use and the point of embarkation is not known at the time
of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).

Explanation––For the purposes of this
sub-section, the return journey shall be treated as a separate journey, even if
the right to passage for onward and return journey is issued at the same time.

One critical
issue under this entry for determination of place of supply is in the context
of structuring of transactions as principal to principal basis vis-à-vis principal
to agent. Let us take the example of an air travel agent, who books tickets on
behalf of passengers with the airlines. The issue that arises here is whether
the airline will have to treat the agent as the recipient of service or the
passenger, considering the definition of supply of service? This will be
important because if the transaction is structured as P2P, the agent will have
issues in claiming credit since the condition u/s. 16 (2)(b) regarding receipt
of services may not be satisfied. However, the second option of treating the
transaction as P2A will also have its’ own set of operational difficulties,
especially in case of B2B transactions. This is because each airline operating
from multiple states would be issuing invoice in the name of recipient, in
which case each of the invoice would have to be accounted separately by the company
for each ticket as against single invoice for multiple tickets that were issued
under the service tax regime. This can also have issues on the credit matching
front as well as the agent might have mentioned wrong GST details of the
company in which case communication with the airline would be required to be
initiated which in itself would be a long drawn out process.

Telecommunication Services

This exception
is contained u/s. 12 (10) of the IGST Act and prescribes different place of
supply provisions depending on the transaction entered into, which is tabulated
below:

Further, this sub-section has two provisos,
which read as under:

Provided that where the address of the
recipient as per the records of the supplier of services is not available, the
place of supply shall be location of the supplier of services:

Provided further that if such pre-paid
service is availed or the recharge is made through internet banking or other
electronic mode of payment, the location of the recipient of services on the
record of the supplier of services shall be the place of supply of such
services.

In addition, there is also an explanation
for cases where the place of supply is determined to be in multiple states
(similar to the explanation provided for immovable properties/event related
services and hence not reproduced for the sake of repetition).

Let us now try to understand some peculiar
issues faced in the above set of supplies for which provisions for determining
place of supply have been prescribed.

Example: ABC Limited is a e-education
service provider wherein it does live streaming of lectures provided by its
faculties from its head office located in Mumbai to various franchise
locations, spread across the country. The responsibility for arranging the
internet services to enable live streaming is on ABC. Accordingly, ABC has
entered into an arrangement subsequent to which, the vendor has agreed to
provide dedicated lines for enabling unhindered connection between the Head
Office and the franchise locations and a single invoice is issued for these
services. The issue that arises is that there are multiple Place of Supplies
and therefore, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of services
where the agreement is silent with regards to division of contract state-wise.
Notwithstanding the same, even if the manner for determination of POS is
prescribed, even then the issues discussed in the context of events, where the
POS is spread across multiple states will continue to persist here as well.

In the context of online recharges, at the
time of selling the online vouchers to the portal, the supplier would charge
tax as per the location of the online portal. However, when the online portal
further sells the recharge to the end customer, the place of supply has to be
taken as per the address on record of the supplier. In other words, a telecommunication company/DTH company will have to open up its customer
database to each of the online portals to enable the sale of vouchers for
provision of service.

Similarly, even in the context of post-paid
services, there can be instances wherein between the billing cycle, there is a
change in the billing address of the service recipient after having provided
service for a specified number of days. In such a case, the question that
arises is whether the billing address has to be considered as applicable at the
start of billing cycle or end of the cycle or will there be a need to actually
do split billing, i.e., one invoice for the service provided before change in
the billing address and second invoice for service provided after change in
billing address.

Banking & Other Financial Services

This exception is covered u/s 12 (12) of the
IGST Act which provides that in general cases, the place of supply shall be the
location of recipient of service on record of the supplier of service, except
in cases where the location of recipient of service is not available on record
of the supplier.

The exception will generally apply in cases
of a walk-in customer who avails services for which KYC facilities may not be
mandatory, for instance availing demand draft facilities, money changing
services, etc. In all other cases, the place of supply will have to be taken as
per the address available on records.

The aspect of change in the location of
recipient of service cannot be ruled out in the context of banking & other
financial services as well as between two billing cycles and hence, proper
strategy will need to be developed to deal with such instances.

Insurance Services

This exception is covered u/s. 12 (13) of
the IGST Act, which is similar to the general rule for determination of place
of supply of services. The section provides as under:

–  In case of services provided
to registered persons – the place of supply shall be the location of such
person.

–  In case of services provided
to other than registered persons – location of recipient of services on the
records of the supplier.

Conclusion:

In the context of other services for which
exceptions for determination have been carved out, there are various important
aspects that needs to be considered, right from the stage of classification of
supply to the contractual treatment (P2P vs. P2A) to the contractual arrangement
(bifurcation of consideration in case of multiple place of supplies) and the
need to take care of minor issues (like change of address between the billing
cycle in case of telecom/banking services) and may also have credit impacts.
Therefore, businesses will have to be careful while determining the applicable
POS for their activities.