Back-office operations will be considered as export of services, rules AAR-Maha

In an interesting development the Maharashtra Authority for Advance Rulings (AAR-Maha) seems to have held divergent views on taxability (Goods & Services Tax) of back-office operation in India.

In the matter of NES Global Specialist Engineering Services Private Ltd (NES India), which had proposed to enter into agreement with another subsidiary (NES Abu Dhabi) of its parent (NES UK), the AAR-Maha felt that the transaction was ‘Zero Rated Supply’, and also an export of service under the GST Act — which meant no GST.

However, when a similar issue was raised in the matter involving Vserv (Vserve Global Private Ltd) before the same AAR, the response was quite opposite. In case of NES India, it was proposed that this was to provide services in respect of the foreign business carried by NES Abu Dhabhi. The services would include accounting, sales invoicing, purchase invoicing, cash receipt posting, bank payment entries, other receipt entries, credit control work, support assignment work, payroll assistance, etc.

Seeks clarification

In other words, the Indian office will provide back-office operations. The Indian firm approached AAR with two questions: whether the transaction in question is a Zero Rated Supply or Normal Supply under the GST Act, and if the said supply is Zero Rated Supply, then can the same be considered as an export of service under the GST Act?

The AAR observed that both the applicant and the client are not establishments of the same person, even though they are of group companies. Key management persons are different and neither of them holds shares of each other, which means they do not control each other. The Indian firms will receive charges in the foreign exchange for services.

The Bench also observed that there is no relationship like principal and agent. “We find that the applicant is not a person who arranges or facilitate supply of services between two or more persons and therefore the proposed services would not fall to be classified as ‘intermediary services’, the Bench said.

“This is one of the good rulings given on the aspect of taxability of back-office operations in India. Indeed such operations do qualify as exports and no GST should apply,” Anita Rastogi, Indirect Tax Partner at PwC, said.

However, when a similar issue was raised in the matter involving Vserv (Vserv Global Private Limited) before the same AAR, the response was quite opposite. The Bench observed that the place of supply in case of services provided by the applicant being intermediary would be the location of the supplier of services i.e. the location of the applicant which is located in Maharashtra.

Supply of services

To qualify a transaction of supply of services as export of services, that transaction has to satisfy all the ingredients (the supplier of service is located in India, the recipient is located outside India, the place of supply of services is outside India, payment for such services to be received in foreign currency and the supplier of service and the recipient of services are not merely establishments of a distinct person). Keeping all these in mind, the AAR replied in the negative to the question that the transaction be treated as ‘Zero Rated Supply.’

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