CBIC Clarification on Export of Services

On recommendations of the 45th GST Council meeting, the Central Board of Indirect Taxes and Customs (CBIC) issued the Clarification on Export of Services that supplier of service and recipient of service are not merely establishments of distinct persons. The current article briefs the Clarification relating to the export of services-condition (v) of section 2(6) of the IGST Act 2017. Know more about Starting an Export Business in India

Synopsis of Notification

As mentioned above, according to 45th GST Council meeting recommendations, CBIC vide Circular No. 161/15/2021-GST dated September 20, 2021, issued Clarification for the following representations:

CBIC received various representations for citing ambiguity caused in the interpretation of Explanation 1 under section 8 of the IGST Act 2017 about the condition (v) of export of services as mentioned in sub-section (6) of section 2 of the IGST Act 2017.
Doubts have been raised whether the supply of service by a subsidiary/ sister concern/ group concern, etc. of a foreign company in India, which is incorporated under the laws in India, to the foreign company incorporated under laws of a country outside India, will hit by condition (v) of subsection (6) of section 2 of IGST Act.

Definition of Export of Services Under IGST Act 2017

The export of services has been defined in sub-section (6) of section 2 of the Integrated Goods and Services Tax (IGST) Act 2017. "export of services" means the supply of any service when––

(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person following Explanation 1 in section 8;

An important feature that can be derived from the above definition of 'export of services is summarized as follows: Export of services means the supply of any service, and it should meet the following conditions:

The service supplier should be located in India, and the service recipient needs to be located outside India.
The place of supply of service should be outside India, and the payment for such service has been received by the supplier of service in convertible foreign exchange.

Note on Explanation 1 of Section 8 of the IGST Act

Explanation 1 of Section 8 of the IGST Act provides for the conditions wherein establishments of a person would be treated as establishments of distinct persons, which is reproduced below for ready reference; Explanation 1.––For this Act, where a person has,––

(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.

An important feature that can be derived from the above explanation is summarized as follows: As per the above Explanation, an establishment of a person in India and another establishment outside India are considered establishments of distinct persons.

Explanation 2 of Section 8 of the IGST Act

Reference is also invited to Explanation 2 of Section 8 of the IGST Act, which is reproduced below for ready reference: "Explanation 2.––A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory."

Definition of Person under CGST Act 2017

Person" has been defined under sub-section (84) of section 2 of the CGST Act 2017, "person" includes the following:

An individual
A Hindu Undivided Family
A company
A firm
A Limited Liability Partnership
An association of persons or a body of individuals, whether incorporated or not, in India or outside India
Any corporation established by or under any Central Act, State Act or Provincial Act, or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013
Anybody corporate incorporated by or under the laws of a country outside India.
A co-operative society registered under any law relating to co-operative societies
A local authority
Central Government or a State Government
Society as defined under the Societies Registration Act, 1860
Trust
Every artificial juridical person not falling within any of the above;

Definitions of company and foreign company

Definitions of company and foreign company have been provided under section 2 of Companies Act 2013, as under:

Company

A company means a company incorporated under the Companies Act 2013 Act or under any previous company law;

Foreign company

A foreign company means any company or body corporate incorporated outside India which has a place of business in India, whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

CBIC Clarification on Export of Services

Given the above explanation, CBIC clarified that a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as a foreign company under the Companies Act, are separate persons under CGST Act, and thus are separate legal entities. Accordingly, these two persons would not be considered "merely establishments of a distinct person following Explanation 1 in section 8". Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 (and thus qualifies as a 'company' in India as per Companies Act), to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the sub-section (6) of section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between mere establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017. Similarly, the supply from a company incorporated in India to its related establishments outside India, which are included under the laws outside India, would not be treated as supply to merely establishments of a distinct person under Explanation 1 of section 8 of IGST Act 2017. Such supplies, therefore, would qualify as 'export of services, subject to fulfillment of other conditions as provided under sub-section (6) of section 2 of IGST Act.

Import Export Code

The Import Export Code is a primary document that is necessary for commencing Import-export activities. For exporting or importing any goods or services the IE code is to be obtained.IEC has numerous benefits for the growth of the business. Certainly, you cannot ignore the necessity of IE code registration as it is mandatory. You can apply for an Import Export code through IndiaFilings and obtain it within 6 to 7 days.