RCM applicable on mere transfer of monetary proceeds by Foreign Company to it’s Indian Subsidiary: AAR

The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 by M/s. IVL India Environmental R&D Private Limited, the applicant. seeking an advance ruling in respect of the following questions.

Whether mere transfer of monetary proceeds by the IVL India Environmental R&D PVT Ltd (hereinafter referred to as ‘the Applicant’ or “IVL India”) to IVL Swedish Environmental Research Institute Limited (hereinafter referred to as “IVL Sweden”), without underlying import of service will be liable for payment of Integrated Goods and Service Tax under reverse charge mechanism under entry no. 1 of Notification 10/2017 – IGST (Rate) dated June 28, 2017.

Facts:

As per their submissions “IVL Sweden” was successfully awarded the tender for ‘Project Management Consultancy Services’, by the Municipal Corporation of Greater Mumbai (MCGM), for projects at four locations in Mumbai as mentioned in the subject application. The tender was awarded on the basis of their credentials, work experience and various certifications received from different government organizations as required in the bidding eligibility criteria

Since as per the bidding eligibility criteria, the contract could only be executed by a wholly owned subsidiary (WOS) of IVL Sweden, the applicant company was incorporated in India in order to execute the said contract and MCGM issued the Letter of Award (‘LoA’) in the name of the ‘IVL Sweden’.

The applicant has submitted that, alongwith IVL Sweden it has executed a contract (as required under the terms of the bidding criteria) with MCGM (hereinafter referred to as ‘the MCGM contract’) governing the scope of work, payment terms and general conditions of contract.

The applicant is transferring monetary proceeds to IVL Sweden and from the question raised we find that, the main issue is whether mere transfer of such monetary proceeds by the applicant IVL Sweden, without underlying import of service will be liable for payment of Integrated Goods and Service Tax under reverse charge mechanism under entry no. 1 of Notification 10/2017 – IGST (Rate) dated June 28, 2017. In other words the applicant is stating that no services are rendered by IVL Sweden to the applicant and therefore there is no import of service in this case.

Observations:

From the submissions, made we find that as per the Minimum Qualifying condition (mentioned at pars 2 D of the submissions), only wholly owned subsidiary (in this case, the applicant) of the foreign company was eligible to quote based on the credentials of its parent company/sister concern, if they submitted a certificate from the parent company/sister concern to that effect and in case the wholly owned subsidiary qualified on the basis of credentials of the Parent Company/sister concern, then the contract with MCGM was to be signed by both, the subsidiary as well as the Parent Company (if the bidder qualified on the basis of Parent Company}. Thus the applicant has submitted that it was eligible to quote for the tender/ contract.

However in para 8 of its submissions, the applicant has submitted that only the Wholly owned subsidiaries of the foreign company are eligible to execute for this project and the foreign company in its capacity can bid and execute this project through an Indian entity. Hence, LOA has been issued in the name of the foreign company.

There is a contradiction in the submissions made in as much as in para 2D it has been submitted that the applicant was eligible to quote for the tender/contract on the basis of the credentials of IVL Sweden whereas in para 8 a it has been made clear that it was IVL Sweden which has bid for the project and the applicant, as a wholly owned subsidiary, was only supposed to execute the project. We, therefore, observe that the IVL Sweden qualified for the tender/contract and was to execute the project through the applicant. Thus the applicant would execute the project only on the credentials and expertise of the IVL Sweden which would further imply that, without the transfer of the expertise by IVL to Sweden, the contract could not be performed. The application is silent as to how such expertise is transferred from IVL Sweden to the applicant without any supply of services or goods or both.

In para 9 of the submissions it has been stated that IVL India has only been incorporated to meet the contractual obligations and without IVL Sweden’s support, it would not have been possible for it to execute the contract. The importance of IVL Sweden is clearly underlined and stated by the applicant, who on its own can not provide service to MCGM.

In para 10 it has been submitted that even after incorporation of IVL India by IVL Sweden, the entire obligation, performance, and responsibility shall still remain in the hands of IVL Sweden.

The entire submissions made by the applicant points out to the fact that the ultimate responsibility of the performance of the contract shall remain with IVL Sweden. It has been submitted that the main consultant to this contract is IVL Sweden. The applicant has concluded by stating that : services are provided by IVL Sweden to the recipient directly pertaining to Municipal Corporation of Greater Mumbai only; IVL India is merely a conduit for payment of consideration by MCGM, since there was a condition in the contract to create an Indian entity by MCGM; India is not involved in either providing of service or in any way, user or experience the service provided by the IVL Sweden.

The applicant is itself making contradictory statements. On one hand it is stating that services are provided by IVL Sweden to MCGM directly with the applicant not being involved in providing the service in any way and, on the other hand as seen from their submissions made in para 2, it is clear that the applicant is rendering service which includes: ensuring that requisite insurances have been received and they comply with the requirements of the contract; checking and vetting of Detailed designs submitted by the contractors ; Scrutinize the contractor’s detailed work program, suggest modifications, if any, to the program ; after a careful study and ensure the contractor complies with the program; and the same shall be vetted and approved by PMC; carry out day to day supervision of all works as per approved method ; supervise the Contractor’s work in all matters including safety, compliances quality and care of the work including environmental aspects and labour welfare; Monitor closely and regularly the progress of work; maintain a day­to-day diary recording all events related to the works; assist the Contractor for Coordination with various departments of the corporation, other Government Agencies; Advise & recommend on variation, extra/excess items to Employer on regular basis ; Scrutinize and approve contractor’s proposal for temporary work, if any; assist the Employer for getting statutory permissions/clearances; etc.

Thus, from the submissions made by the applicant it is crystal clear that, the applicant is the one which is performing the service at the ground level and the entire support for such service is being provided by IVL Sweden who has obtained the contract on the basis of its own credentials and work experience and it is a fact that the applicant cannot provide the services under the contract without receiving support services from IVL Sweden.

In view of the above, we find that services are received by the applicant from IVL to further perform its services under the contract, for which monetary proceeds flow from the applicant to IVL Sweden.

As per Section 2(11) of the Integrated Goods and Service Tax Act, 2017, “Import of services” means the supply of any service, where: The supplier of service is located outside India; The recipient of service is located in India; and The place of supply of service is in India.

We find that in the subject case other than the service provided by the applicant to MCGM, there is a very definite service being provided by IVL Sweden, located outside India – on account of its experience, credentials and expertise – to the applicant, located in India that enables the applicant to perform under the contract. Further, there is no doubt that the services are being supplied in taxable territory i.e. in India.

Therefore, in view of Sr. No. 1 of Notification No. 10/2017 Integrated Tax (Rate) dated June 28, 2017, since support services ore being supplied by IVL Sweden, located in a non-taxable territory to the applicant the whole of integrated tax leviable under section 5 of the Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services i.e. the applicant. Thus the applicant has to pay GST on the money proceeds which is being transferred to IVL Sweden.

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