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22 September 2021

Analysis of condition (v) of Section 2(6) of the IGST Act’2017 relating to export of service, clarified through Circular No. 161/17/2021-GST

Clarifications had been sought from the department in relation to the treatment of service by a subsidiary/ sister concern/ group concern, etc. of a foreign company in India, incorporated under the laws in India, to the foreign company incorporated under laws of a country outside India.

To understand the issue better, let us look into the definition of export of service, condition (v) of Section 2(6), which states that “export of service” shall include such supply of service when:

“(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;”

Explanation 1 of the Section 8 of the IGST Act provides for the conditions wherein establishments of a person would be treated as establishments of distinct persons, which is produced as under:

“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.”

On analysis of the above explanation, it can be concluded that an establishment of a person in India and another establishment of the said person outside India are considered as establishments of distinct persons.

To clarify the above issue, reference was made to the following further definitions:

“Person” has been defined under sub-section (84) of the section 2 of the CGST Act 2017, as under: (84) “person” includes—

(a) …….

(b) …….

(c) a company;

(d) …….

(e) …….

(f) …….

(g) …….

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

(i) …….

(j) …….

(k) …….

(l) …….

(m) …….

(n) …….

The definitions of company and foreign company have been provided under section 2 of Companies Act 2013, as under:

(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.

Clarification:

On analysis of the above definitions, it can be concluded that a company incorporated in India and a foreign company incorporated outside India, are separate “person” under the provisions of CGST Act and accordingly, are separate legal entities.

Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the sub-section (6) of the section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated 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. Such supplies, therefore, would qualify as ‘export of services’, subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of IGST Act.