GST has revolutionized indirect taxation by unifying multiple taxes into a single taxregime. It has also brought fundamental changes to the supply of goods across India with a focus on sections pertinent to the "Place of Supply" of goods and services. It is crucial for businesses to accurately identify the Place of Supply to ensure taxability and adherence to regulations. This is based on the concept of GST being a ‘destination-based consumption tax’, where tax will accrue to the State where the supply is consumed.
There are two important components that determine the tax to be charged on a supply:
- Location of the Supplier
- Place of Supply
The place of supply determines whether a transaction is intra-state, inter-state, or import-export. This in turn determines which taxes will apply: a combination of central (CGST) and state (SGST) taxes, or an integrated tax (IGST).
Through this article, we have tried to address the GST implications, focussing mainly on Place of Supply of services in relation to testing services, so as to comply with the GST law.
In case of goods, the movement of goods largely decides the place of supply. Services, being intangible, have no fixed manner of delivery. Also, in certain cases of supply of service, the location of the supplier and/or recipient may not be fixed or unascertainable.
Applicability of Section 13(3)(a)
Referring to provisions of IGST Act, 2017
Sec. 13 (3) (a) of the IGST Act, 2017, The place of supply of the following services shall be the location where the services are actually performed, namely: —
Services supplied in respect of goods which are required to be made physically
available by the recipient of services to the supplier of services, or to a person acting
on behalf of the supplier of services in order to provide the services:
Provided that when such services are provided from a remote location by way of
electronic means, the place of supply shall be the location where goods are situated
at the time of supply of services:
Provided further that nothing contained in this clause shall apply in the case of
services supplied in respect of goods which are temporarily imported into India for
repairs or for any other treatment or process and are exported after such repairs or
treatment or process without being put to any use in India, other than that which is
required for such repairs or treatment or process.
Scenario:
M/s. ABC Ltd (Based in USA) supplies goods to M/s. XYZ Ltd (Based in India). After such supply, M/s. ABC hires M/s. PQR Ltd to perform testing services on the goods supplied by it to M/s. XYZ Ltd. M/s. PQR Ltd performs quality check services on the goods post the supply done by M/s. ABC Ltd to M/s. XYZ Ltd. Here as the services are performed by M/s. PQR Ltd on the goods supplied in India, the place of supply shall be India even though such services are performed for M/s. ABC Ltd which is based in USA.
Effect of Sec 13(3)(a) on Testing services
In case of testing services provided by the supplier on the goods sent by the recipient of service, 2 possible outcomes arise:|
1. Goods are being sent by the recipient himself
OR
2. The recipient can direct the service provider regarding the goods on which testing services are to be performed. The service provider will himself procure the goods but as per the specifications of the recipient.
In the first instance, section 13(3)(a) shall be triggered and the place of supply will be the place where such testing services are performed.
However, in second case, following interpretations may arise:
1. Literal Interpretation:
As per rule of literal interpretation, goods are not sent by the recipient of service himself and as such there is no direct provision of goods by the recipient. Hence section 13(3)(a) may not be applicable.
2. Substance over form:
Considering the substance involved in this scenario, the goods that the supplier will procure will be as per the specification of the recipient. It will be as per his direction and requirement only. The service provider cannot procure different goods than specified by the recipient. He is bound by the specifications stipulated by the recipient. It can be treated as indirect provision of goods by the recipient to the service provider. In this case though recipient is not providing the goods for testing he is influencing the said procurement by the service provider. In such case section 13(3)(a) will be applicable, place of supply will be where such services are performed and transaction will be taxable.
This particular scenario exists mainly in case of parties which are related to each other, wherein tax is not paid basis the literal interpretation of the law. However, one needs to be mindful of the second interpretation which could be adopted by the ex-chequer (specifically in case of related parties) resulting in litigation.
Brief Example on Testing Services:
Let us understand through an example, Assuming that Service provider is located in India, providing various technical services including testing, designing, technical analytics services to foreign entities. It receives goods from Customer free of cost on which services are to be performed. It is imported after payment of appropriate customs duty and IGST on the assessable value of such goods.
Three possible outcomes can be envisaged:
1. Testing services are provided on the goods sent by the recipient
2. Testing services are performed on the goods and the said goods are re-exported by the service provider to the recipient of service.
3. Goods are destroyed or cannot be used for any other purpose.
In first case, it is a simple and plain transaction on which sec 13(3)(a) will be applicable and place of supply will be the place where such services are performed.
In second case, we need to refer Proviso to section 13(3)(a) which states that
Provided that when such services are provided from a remote location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services:
Provided further that nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs or for any other treatment or process and are exported after such repairs or treatment or process without being put to any use in India, other than that which is required for such repairs or treatment or process.
Referring to above Proviso, as the goods on which the testing services are performed are exported back to the recipient. The goods are not retained by the service provider; hence the proviso shall be applicable and such testing services will not be taxable.
For above proviso to apply, testing should be included in process.
Process means a series of actions or steps taken in order to achieve a particular end. It is a procedure, something you do in order to achieve a certain result.
Testing is checking criteria in continuous and predefined steps. The test process involves identifying defects, validating functionality and verifying if the product meets the specified requirement. It involves careful planning, execution, analysing data and continuous improvement to ensure reliable and accurate results. Thus, testing can be considered as process.
In third case, goods are sent to service provider for destructive testing and in course of testing such goods are destroyed.
Destructive testing is undertaken in order to understand a specimen’s performance or material behaviour, these procedures are carried out to the test specimen’s failure. Destructive testing procedures can either follow specific standards or can be tailored to reproduce set service conditions. E.g., Cars, Huge Machinery etc.
In such scenario, there can be two possibilities: -
i. Literal Interpretation:
As goods are sent to the service provider by the recipient of service, section 13(3)(a) will be applicable and such service shall be taxable even though goods are destroyed as testing service has been performed on such goods.
ii. Situation of Impossibility:
As goods get destroyed in the course of testing, such goods were not put to use in India other than that for performance of such testing service and in the course of such destructive testing goods gets destroyed. It is impossible for such destructed goods to be put to further use in India. As per the proviso to section 13(3)(a), the goods were temporarily imported in India for testing service and were not put to further use in India, hence such service may not be taxable and the condition of reexport may not be required to be fulfilled.
Conclusion:
We have tried to analyse various scenarios for GST implications on Import of services under Section 13(3)(a). The taxpayers should evaluate the GST implications basis the different business scenarios as mentioned in this article. We have summarised gist of the article in the following flowchart: -
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