The CBIC has received various representations to clarify the place of supply for “Data Hosting Service” provided by a supplier located in India to a “Cloud Computing Service Provider” located outside India. As per representations received, some of the field formations are of the view that the place of supply of such service shall be the location of the service provider, i.e., India, and therefore, the benefit of export of services shall not be available on such supply of service.
CBIC has issued a clarification on the manner of determining the place of supply for data hosting service via Circular No. 232/26/2024-GST dated 10th September 2024.
1. Issue under discussion
- “Data hosting service providers” are located in India and provide their data centers to the “Cloud computing service providers”, which are located outside India.
- These data centers are used to host cloud computing services.
- Data hosting service providers operate data centers on their own or leased premises.
- They procure infrastructure and human resources, handle operations like infrastructure monitoring, IT management, and equipment maintenance, etc. to provide data hosting services.
- The data hosting service provider generally handles all aspects of data centers like rent, software and hardware infrastructure, power, net connectivity, security, human resources, etc.
- Importantly, the data hosting service providers do not deal with end users of cloud computing services and may not even know about the end users.
2. Questions on which clarification is required
- Whether a data hosting service provider qualifies as an ‘Intermediary’ between the cloud computing service provider and their end customers and accordingly, whether the place of supply shall be determined as per section 13(8)(b) of the IGST Act.
- Whether the data hosting services are provided about goods “made available” by the recipient and accordingly, the place of supply shall be determined as per section 13(3)(a) of the IGST Act.
- Whether the data hosting services are provided directly about “immovable property” and the place of supply shall be determined as per section 13(4) of the IGST Act.
3. Clarification
The CBIC has issued the following clarification to the determination of the Place of supply for the data hosting service:
3.1 Whether the data hosting services are covered as “intermediary services” and place of supply shall be determined as per section 13(8)(b) of the IGST Act.
- As per section 2(13) of the IGST Act, a broker, agent, or any other person who arranges or facilitates the main supply of goods or services or both or securities and has not involved himself in the main supply on his account is considered as an ‘intermediary’. Persons who supply goods or services or both on their account are not covered in the definition of “intermediary”.
- The “cloud computing service providers” enter into a contract with “data hosting service providers” to use their data centers for hosting cloud computing services.
- The premises are either owned or leased by the Data hosting service provider.
- Further, all the resources required to provide a Data hosting service are managed by the service provider himself.
- The data hosting service providers do not deal with end users of cloud computing services and may not even know about the end users.
- Data hosting service is provided on a web platform through computing and networking equipment to collect, store, process, distribute, or allow access to large amounts of data.
- The cloud computing service provider provides cloud-based applications and software services to various end users for data storage, analytics, artificial intelligence, machine learning, processing, database analysis and deployment services, etc..
- The end users access cloud computing services over the internet through technology hosted in data centers.
- There appears to be no contact between the data hosting service provider and the end users. Therefore, the data hosting service is provided on a principal-to-principal basis and the service provider is not acting as a broker or agent.
- Accordingly, the services provided by the data hosting service provider cannot be considered as intermediary services and hence, the place of supply of the same cannot be determined as per section 13(8)(b) of the IGST Act.
3.2 Whether the data hosting services are provided about goods “made available” by the recipient and accordingly the place of supply of the same is to be determined as per section 13(3)(a) of the IGST Act, 2017.
- As per Section 13(3)(a) of the IGST Act, place of supply in cases where the services are supplied in respect of goods that are made physically available by the recipient of services to the service provider, the place of supply will be the location of the service provider.
- In the instant scenario, the data hosting service provider is providing data hosting services to the overseas customers independently through the premises, hardware, and personnel at the data center which not only comprises hardware but also other essential infrastructure like ventilation and cooling system, network connectivity, security protocols, etc.
- All these hardware are owned by the service provider himself and are independently handled, operated, monitored, and maintained by them.
- These service providers are charging their clients as consideration depending on the specific terms and conditions as per agreements between them.
- Therefore, throughout the provision of the said services, the data hosting service provides service through its premises and resources and the overseas cloud computing service providers cannot be considered to own such infrastructure and make the same physically available to the service provider.
- Therefore, data hosting services provided cannot be considered as a service about the goods “made available” by the service recipient. Accordingly, the place of supply of the same cannot be determined under section 13(3)(a) of the IGST Act.
- Further, There may be some cases where some of the hardware is provided by the recipient of the service. Even in these cases, a data hosting service provider handles all aspects of a data center and in this case, also, it can’t be said that service is provided using the hardware made available by the service recipient.
- Accordingly, even in these cases, the place of supply cannot be determined under section 13(3)(a) of the IGST Act.
3.3 Whether the data hosting services are provided directly concerning “immovable property” and whether the place of supply of the same is to be determined as per section 13(4) of the IGST Act
- Section 13(4) of the IGST Act provides for the place of supply where services supplied are directly about immovable property.
- In the given case, the data hosting service providers either use owned or leased premises for keeping IT infrastructure and other hardware required for providing data hosting services.
- Data hosting services are not the passive supply of service directly in respect of immovable property but are regarding the supply of a comprehensive service related to data hosting which involves operating a data center, ensuring uninterrupted power supplies, backup generators, network connectivity, backup facility, firewall services, and monitoring and surveillance service for ensuring continuous operations of the servers and related hardware, etc. which are essential for service recipient to provide cloud computing services to the end users.
- Therefore, the data hosting services cannot be considered as the services provided directly about immovable property and place of supply shall not be determined under section 13(4) of the IGST Act.
4. Place of supply for data hosting service provided to clients located outside India
- CBIC has clarified that the place of supply for the data hosting services provided to overseas clients does not fit into any of the specific provisions in sections 13(3) to 13(13) of the IGST Act.
- Therefore, the place of supply shall be determined according to the default provision under section 13(2) of the IGST Act, i.e., the location of the recipient of the services.
- Accordingly, the supply of data hosting services to an overseas cloud computing entity can be considered as an export of services, subject to the fulfillment of the other conditions mentioned in section 2(6) of the IGST Act.
5. Conclusion
This was a much-needed clarification in the present economy when the data center service is the key to all the IT-related services provided. Where the data center sector is emerging in India, any ambiguity regarding its taxability must be cleared promptly to avoid monetary and penal repercussions.
