Service provided by subsidiary/ sister concern/ group concern located in India to Foreign Company located outside India is considered as Export

A lot of benefits are provided for “Export” of goods or services. However, various conditions are required to be fulfilled to qualify a transaction as “Export”. Similarly, to qualify a supply of service as “Export of service”, five conditions are provided under Section 2(6) of IGST Act, 2017. However, one of the conditions given in clause (v) of Section 2(6) of IGST Act is always covered with lots of ambiguity.

Considering the representations received, GST Council in 45th GST Council meeting recommended CBIC to issue necessary clarification around condition (v) of Section 2(6) of IGST Act, 2017. Therefore, CBIC issued clarification relating to export of services-condition (v) of section 2(6) of the IGST Act 2017 vide Circular No. 161/17/2021-GST dated 20th September, 2021.

1. Issue under Ambiguity

Issue under ambiguity is 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?

2. Relevant Legal Extracts

Export of Service is defined under Section 2(6) of IGST Act, 2017. Section 2(6) is reiterated below for ready reference:

“(6) “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 in accordance with Explanation 1 in section 8;”

As per condition (v) of Section 2(6), a supply of service shall qualify as “Export of Service” only when the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.

As per Explanation 1 to Section 8, following persons are considered as establishment of distinct persons:

“Explanation 1.––For the purposes of 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.”

Further, Explanation 2 to Section 8 of IGST Act is also reproduced below:

“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.”

Relevant definitions are also reproduced below:

Definition of “person” is given under section 2(84) of CGST Act, 2017. Relevant extract of Section 2(84) is reproduced below:

“(84) “person” includes—

….

(c) a company;

…..

(h) any body corporate incorporated by or under the laws of a country outside India;

…”

Further, definition of “Company” and “Foreign Company” is given under Section 2(20) and 2(42) of Companies Act, 2013 respectively. Relevant extract is reproduced below:

“(20) “company” means a company incorporated under this Act or under any previous company law;”

“(42) “foreign company” means any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.”

3. Analysis of the Issue

As per Explanation 1 to Section 8 of IGST Act, an establishment of a person in India and an establishment of person outside India is considered as “Distinct Persons”.
As per Clause (v) of Section 2(6) of IGST Act, supply of service shall not be considered as “Export of Service” where service is provided by one establishment to another establishment of the same person, considered as establishments of distinct persons as per Explanation 1 of section 8 of IGST Act.
Therefore, service provided by an establishment of foreign Company in India to another establishment of such foreign company outside India is not considered as “Export of Service”.
As per Explanation 2 to Section 8 of IGST Act, if a foreign company is conducting business in India through a branch office or an agency or a representational office, then the such branch office or agency or representational office shall be considered as establishment of the foreign company in India. Similarly, if any company incorporated in India, is operating through a branch office or agency or a representational office outside India, then such branch office or agency or representational office shall be treated as the establishment of the such company.
As per Explanation 2, branch office or agency or representation office of foreign company, not incorporated in India, is considered as a separate establishment and as per Explanation 1, establishment in India and another establishment outside India is considered as establishment of distinct person.
Therefore, as per Condition (v) of Section 2(6) of IGST Act, 2017, supply of services by a branch office or an agency or representational office of a foreign company, not incorporated in India, to any establishment of the said foreign company outside India, is considered as supply between establishments of distinct persons and accordingly, can not be treated as “Export of Service”.
Similarly, any supply of service by a company incorporated in India to its branch office or agency or representational office, located in any other country and not incorporated under the laws of the said country, shall also not be considered “Export of Service”.
From the perusal of the definition of “person” given under Section 2(84) of CGST Act, 2017 and definitions of “company” and “foreign company” given under Section 2 of the Companies Act, 2013, it is observed that a company incorporated in India and a foreign company incorporated outside India, are separate “person” for the purpose of CGST Act and accordingly, are separate legal entities.
Thus, a subsidiary/ sister concern/ group concern of any foreign company which is incorporated in India is considered as a separate “person” under the CGST Act and accordingly, would be considered as a separate legal entity.

4. Clarification provided by CBIC

As per above discussion, a company incorporated in India and a body corporate incorporated outside India, referred to as foreign company under Companies Act, are separate persons under CGST Act, and thus are separate legal entities.
Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.
Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc., which is incorporated in India, to the establishments of the foreign company located and incorporated outside India, would not be barred by the condition (v) of Section 2(6) of IGST Act 2017 for qualifying as export of services, as such supply is not considered as supply between merely 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 incorporated under the laws outside India, would not be treated as supply to merely establishments of distinct person under Explanation 1 of section 8 of IGST Act 2017.
Accordingly, supplies of service by subsidiary/ sister concern/ group concern etc. located in India to Foreign Company located outside India would qualify as ‘export of services’, subject to fulfilment of other conditions of Section 2(6) of IGST Act.