The Tamilnadu Appellate Authority of Advance Ruling (AAAR) has in its recent ruling in the case of Mr Rajesh Rama Varma has upheld the order of AAR and held that the person liable to pay consideration for the supply of services is ‘Recipient’ of such supply and ‘Consideration’ is any payment made whether by the recipient or any other person for such supply.
The substance of the ruling is that sub-contracting of export of services cannot be regarded as exports as the sub-contractor is providing services to the principal who is located in India and not to the principal’s client located outside India (to whom services are provided by the principal). Accordingly CGST + TNGST will be applicable on services of sub-contractor.
Facts of the Case:
- The Appellant, Rajesh Rama Varma has entered into contract with M/s Doyen Systems Private Ltd.(Principal) for providing Oracle services. His role was that of a consultant to provide support services to the Oracle ERP owned by the US Client of Doyen Systems based out of Boston.
- The original contract is between the Principal and their US Client and a part of the service stands contracted to the Appellant which he provides directly to US Client from the office premises of the Principal.
- As per the terms of the contract entered into be appellant with M/s Doyen Systems , the consultancy fee for his services was decided to be billed on an hourly basis in USD $ 33.90 per /hr. The fee was decided to be paid in equivalent INR based on the conversion rate of INR/USD on the average prevailing rate of last 3 month. The payment is subject to approval of client time sheet by the US Client. The GST taxes would be charged separately while raising the invoice by him on the Principal.
- The principal ultimately bills on the foreign client in USD and is availing the benefit of export of services.
Issues on which Ruling was sought before AAR:
1.Whether the service provided by the appellant is a supply of services under the CGST/TNGST Act or IGST Act.
2. Whether the applicant is liable to pay GST on such services provided to the US Client directly.
3. Whether the benefit of zero-rated supply can be availed by him for his services.
4. Whether he is eligible for refund of taxes already paid in the past if the refund is within the time period provided under the GST Act.
Ruling of Tamilnadu AAR:
The AAR held that the services provided by the applicant to Doyen Systems is a supply of services under CGST / TNGST Act and the applicant is liable to pay relevant tax on such supply. Rest questions were not answered being not in ambit of AAR as per Section 97(2) of the CGST Act.
Aggrieved by order of AAR, the appellant filed an appeal before AAAR.
Contention of the assessee:
The contention of appellant is based on his following averments:
- GST is a destination based consumption tax. the skill based service supplied by him is consumed by the client of Doyen Systems and therefore the recipient of his services are the client of Doyen Systems who is based outside India.
- Section 2(93)(a) of the GST Act which defines recipient has two parts to it, ‘Supply of Goods or Services’ and ‘Payable of Consideration’; ‘Consideration’ envisaged in the GST Act is wide enough to include payment obligation which can be satisfied by any other person other than the actual recipient.
The appellant had requested to set aside the ruling of the Original Authority and reconsider as to whether the services provided by the appellant is a supply of services under CGST/TNGST Act or IGST Act.
Order of Tamilnadu AAAR: Deliberation and Ruling
- The Apex Court in case of Commissioner of Customs (lmport), Mumbai v. Dilip Kumar & company [2018 (361) E.L.T.577 (S.C.)],has stated that the Statute is to be read and understood in the light of what is expressed and nothing can be imported in the statute to overcome any deficiency and if the words are ambiguous and open to interpretations, the benefit of interpretation is given to the subject.
- Recipient is defined u/s 2(93) of the CGST Act, 2017 based on whether a ‘Consideration’ is payable or otherwise. When a consideration is payable for the supply of goods or services, as is the case in hand, the person who is liable to pay that consideration is the ‘Recipient’ of such ‘Supply’. The Statute is clear and unambiguous in defining the ‘Recipient’ when a consideration is payable.
- As per Section 2(31) of the CGST Act, 2017 , consideration in relation to a supply should include any payment made for such supply whether by the recipient or any other person. This definition states about what is to be the value/consideration for supply on which tax is liable to be paid. This definition do not speak or clarify on ‘Recipient’ of supply but merely encompasses the elements of ‘Consideration’ for a supply.
- On a joint reading of both the definition, the statute is unambiguous in as much as it says, the person liable to pay the consideration for supply of services is the ‘Recipient’ of such supply and ‘Consideration’ is any payment made whether by the recipient or any other person for such supply.
- It is not disputed that the appellant is under contractual obligation to Doyen Systems to provide services through ‘Doyen Systems’ for which Payment is agreed to be made by Doyen Systems to the appellant after verifying the invoice and the client time-sheet as in the Contract Agreement.
- Further as observed by the lower Authority the payment of ‘Consideration’ to the appellant is entirely with the Doyen Systems and the appellant cannot claim consideration directly with the client of Doyen Systems or the client of Doyen Systems is not the person liable to pay the appellant for the services supplied by the appellant. Thus, it is clearly evident that the recipient of Services of the appellant is Doyen Systems. We find that the lower authority has considered the above and accordingly pronounced the ruling.
In view of above deliberations the two-member bench of M.A. Siddique and K.V. Krishna Rao while upholding the ruling of the lower authority ruled that we do not find any reason to interfere with the order of AAR and appeal is disposed accordingly.
In other words it has been held that sub- contractor of export of services cannot be treated / equated to exports. Rather it would be supply by sub-contractor to the principal (which is the recipient of services by the sub-contractor).
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
