Repair and maintenance of machinery by a foreign company not import of service: AAR

West Bengal Authority of Advance Ruling in its recent ruling on the application filed by M/s IZ-Kartex named after P G Korobkov Ltd has held that repair and maintenance of machinery by a foreign company will not be regarded as import of service in case such foreign company supplies such service at the sites from fixed establishments as defined under section 2 (7) of the IGST Act, as the location of the supplier in such case would be in India in terms of section 2 (15) of the IGST Act.

Facts of the case

The applicant is the local branch of a Russian business entity by the same name (‘Foreign Company‟), which entered into a Maintenance and Repair Contract (“MARC”) with Bharat Coking Coal Ltd (“BCCL”) with respect to the machinery and equipment it had supplied. The MARC is a long-term contract spanning over seventeen years from the date of commissioning of the equipment.

The MARC Holder is responsible for supply of the spares, components, and consumables over the entire period. It will depute the officers, support staff and system expert at the site for maintenance and repair of equipment and train the BCCL personnel.

BCCL shall provide the MARC Holder access to the machines and repair facilities at all reasonable time. BCCL and the MARC Holder shall jointly sign the Equipment Logbook on daily basis recording the actual working hours per shift, breakdown hours and other details. The MARC Holder is to be paid at an agreed rate for supervision, supply of spares and consumables, and for overheads per working hour of the equipment for 5000 expected annual working hours.

Questions on which ruling was sought

  • Whether the MARC makes the supplier liable to pay GST (including IGST).

Highlights and Ruling in order of West Bengal AAR

  • The MARC is between the MARC Holder and BCCL. Although clause 9 of the MARC, dealing with „Taxes & Duties‟, distinguishes between a foreign MARC Holder and a domestic MARC Holder, nowhere else in the MARC two such entities exist separately.
  • The contract speaks of the rights, duties, and obligations of the MARC Holder only without any distinction between a foreign MARC Holder and a domestic MARC Holder. The distinction, therefore, is relevant only in the context of any statutory provision requiring the MARC Holder to be located in India.
  • The MARC Holder maintains suitable structures in terms of human and technical resources at the sites of BCCL. It ensures supervision of the equipment, supply of spares and consumable and overheads for 5000 annual working hours for seventeen years, indicating sufficient degree of permanence to the human and technical resources employed at the sites. The MARC Holder, therefore, supplies the service at the sites from fixed establishments as defined under section 2 (7) of the IGST Act. The location of the supplier should, therefore, be in India in terms of section 2 (15) of the IGST Act.
  • Supply of the MARC Holder to BCCL is not, therefore import of service within the
    meaning of section 2 (11) of the IGST Act. The MARC Holder should be treated as a
    supplier located in India triggering clause 9.2.2 of the MARC, and made liable to pay GST,
    the place of supply being determined in terms of section 12 (2) (a) of the IGST Act.
  • The applicant, being the registered branch of the Foreign Company, should be treated as the
    domestic MARC Holder in terms of clause 9.2.2 of the MARC and be liable to pay tax
    accordingly.

Based on the above discussion, the West Bengal AAR ruled as under:
Supply of service to BCCL in terms of the MARC is not import of service. The recipient is not, therefore, liable to pay GST on reverse charge basis in terms of Notification No. 10/2017
– Integrated Tax (Rate) dated 28/06/2017
. The applicant, being the domestic MARC Holder, is liable to pay tax as applicable in terms of clause 9.2.2 of the MARC.

For ready reference of our readers the order of West Bengal AAR is given below:

***

Kindly provide your feedback on the above article in comment section below. Also please intimate about other GST issues on which you would require our team to pen down articles.

[rainbow]Doubts on GST may be lodged[/rainbow] on ‘Ask GST query tab‘ under ‘Your GST queries’ tab on home page. National level GST experts will provide their reply on the matter raised at the earliest and same can be seen under ‘GST query resolved’ tab under ‘Your GST queries’ tab.

You can also subscribe to our free newsletter to always be updated on GST Law by filling the subscription form at home page.