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Taxation of intra-company cross-border supply of services
In India, liability to pay service tax arises when a ‘service’ is provided by one person to another. Taxand India highlights the exception to this rule and the main issues which can arise.
An exception to the service tax rule has been carved out in the context of offices of the same legal entity located within and outside the country. Such offices are deemed to be different ‘persons’. Services supplied by a branch / head office located outside India, to a head office / branch located in India is likely to be treated as provision of service by ‘one person’ for ‘another person’. This triggers the requirement to pay service tax, under the reverse charge mechanism, as an import of services. This has given rise to various interpretative issues around the taxation of supplies of services between 2 offices of the same legal entity.
The first issue is in the context of a company headquartered outside India which procures services from an overseas service provider. The taxability of such services, to the extent they are received and used by a branch office in India, is in debate. The following aspects are relevant to note:
- For intangible services, their receipt is typically determined on the contractual recipient of the service who contracts with the service provider. The contractual recipient is the overseas head office, therefore no reverse charge liability should technically arise at the hands of the Indian branch
- However, the above differs if the services in question are to be received in India. In this regard, when determining reverse charge service tax liability, the location of the service receiver is determined on the basis of the business or fixed establishment most directly concerned with the use of the service. Applying this principle, the revenue typically seeks to tax the value of services received by an Indian branch
- Further, service tax payment on an import of services is typically triggered at the hands of a service recipient in India on the payment made from India to an overseas service provider. It is possible that there could be adjustments / accounting entries made from a transfer pricing perspective attributing the cost of the India part of the services to the Indian branch
The second issue is in the context of an overseas company providing / delivering services contracted with its India based customers through a branch set up in India. This model results in potential dual taxation on such services, especially where the services in question are taxable based on the location of their performance.
Where an Indian branch provides warranty support services on behalf of its overseas head office, such services are technically exposed to a levy of service tax at the hands of the branch in India for the following reasons:
- As per a specific provision of law, where the provider and the recipient of the service are in India, the service is taxable in India (ie it is presumed the service is being carried out in India)
- The branch is the business or fixed establishment most directly concerned with the provision of the service
In this situation, notwithstanding payment of service tax by the Indian branch, the revenue typically seeks to tax any ‘cost-plus’ arrangement entered into by the Indian branch with the head office. A ‘cost-plus’ arrangement may be entered into for the purpose of recovering the costs and expenses incurred from providing the service (directly billed and realised by the overseas head office). The revenue may seek to tax the arrangement by invoking the deeming fiction under discussion. Added to this are doubts often expressed by the end-customer who contracts with the overseas head office, and also makes a payment in foreign currency for the services received, in terms of potential reverse charge liability on the same transaction. While technically the entire situation should be viewed as one service being provided by the Indian branch to the customer in India, this issue is far from resolved with emerging disputes between the revenue and the industry on this front.
An overall unresolved issue is the taxation of fund transfers including remittance of realisations between an office in India and an overseas office. An example of this is when funding is undertaken by an Indian head office for the operations of its overseas branch. The taxation of such fund transfer, taking into account the underlying services, if any, performed / received by the overseas branch, is currently in debate.
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Lack of clarity on the treatment of such cross-border transactions had led to services provided under a branch model being subjected to high profile demands and disputes. Multinationals should note the key to mitigating disputes around this area is strong and clear documentation supported by a clear tax position.
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