Cloud SaaS, Third-Party INR Payment and Dubai Training
TechnoSoft Solutions Pvt Ltd (TSPL), Bengaluru, supplies a cloud-based analytics platform to Northwind Inc., a US corporation with no place of business in India. The contract is signed in Delaware and invoices are raised on Northwind in US dollars. At Northwind's request, however, the invoices are settled in Indian rupees by Northwind's wholly owned Indian subsidiary, NW India Pvt Ltd, from its Mumbai bank account. TSPL holds a Letter of Undertaking and treats the supply as a zero-rated export. TSPL also sends two trainers to Dubai for ten days to train Northwind's staff; the training contract is with Northwind, but NW India booked and paid for the hotel. During audit, the department argues that (i) rupee payment through NW India makes the recipient an Indian entity, (ii) the platform is an OIDAR service, and (iii) the Dubai training is a supply to NW India. TSPL's export turnover for the year is ₹12 crore. Advise.
1. Examine whether TSPL's cloud platform supply to Northwind qualifies as export of services under the IGST Act. Address the INR payment through NW India and the department's OIDAR argument.
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Statutory test: Section 2(6) of the IGST Act requires five cumulative conditions: supplier in India; recipient outside India; place of supply outside India; payment received in convertible foreign exchange or in Indian rupees where permitted by RBI; and supplier and recipient not merely establishments of distinct persons.
- Supplier and recipient: TSPL is in India. Northwind is outside India if the contract, purchase order and invoice show Northwind as recipient. Payment by a third party does not, by itself, change the recipient; NW India is a payer, not necessarily the recipient. Retain board authorisation, correspondence and ledger entries showing NW India paid on Northwind's behalf.
- Place of supply: For B2B services, section 13(2) fixes the location of the recipient. Northwind is outside India, so the place of supply is outside India. OIDAR classification does not make the supply domestic; OIDAR rules principally address supplies to non-taxable online recipients, and Northwind is a business recipient. Even if OIDAR provisions apply, the place of supply remains outside India.
- Payment condition: This is the weak link. INR payment is permissible only where RBI permits it. Obtain the FEMA permission, purpose code, bank certificate and an undertaking from Northwind/NW India confirming third-party payment. If RBI permission is absent, the payment condition fails and the supply cannot be zero-rated. It may then be an inter-state supply under section 7(5)(a), attracting IGST at 18%.
- Distinct persons: Northwind and NW India are separate persons; TSPL is not an establishment of Northwind. This condition should be satisfied.
Conclusion: The supply is export if documentation shows Northwind as recipient and RBI permits INR payment. Otherwise, treat it as taxable inter-state supply and pay IGST. The LUT does not cure a failed export condition.
2. Determine the place of supply and export status of the Dubai training. Does NW India's hotel booking change the analysis?
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Place of supply: Training services are governed by section 13(5). Where training is provided to a registered person, the place of supply is the location of such registered person. Where the recipient is unregistered, the place of supply is the location where the training is performed. Northwind is not registered in India, and the training is performed in Dubai. The place of supply is therefore outside India.
Export status: Supplier TSPL is in India; recipient Northwind is outside India; place of supply is outside India. The remaining conditions are payment in convertible foreign exchange or permitted INR and not being establishments of distinct persons. If Northwind pays in USD, the export condition is met. If NW India pays in INR, the same RBI-permission issue arises as for the cloud supply. The hotel booking by NW India is ancillary; it does not make NW India the recipient of the training unless NW India contracted the training as principal. If NW India did contract it, section 13(5) would fix the place of supply at NW India's registered location in Maharashtra, making it an inter-state supply from Karnataka and attracting IGST at 18%.
Practical point: Keep separate contracts and invoices for the training, attendance sheets, trainer travel documents and payment evidence. Do not bundle hotel charges into the training invoice unless the contract genuinely makes TSPL responsible for them.
3. What safeguards should TSPL adopt before treating both supplies as zero-rated, and what are the consequences of getting it wrong?
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Safeguards:
- Obtain and retain RBI permission or bank confirmation for INR payment by NW India, with a clear tripartite arrangement showing NW India pays as agent of Northwind.
- Keep the contract, purchase order and invoices consistently in Northwind's name; do not raise invoices on NW India.
- File and maintain the LUT, GSTR-1 and GSTR-3B disclosures, shipping-type evidence, FIRC/BRC or bank realisation certificate and purpose code.
- For the Dubai training, retain the training contract, attendance, venue and travel records showing performance outside India.
- Avoid any intermediary arrangement; if TSPL merely arranges services, section 13(8)(b) would fix the place of supply in India.
Consequences if wrong: If the export conditions fail, TSPL must pay IGST at 18% on the taxable value, with interest under section 50. The zero-rated refund claim would be rejected, and penalty exposure arises under sections 73 or 74 depending on whether there is suppression. The LUT is not a defence. The department may also allege OIDAR non-compliance, though that argument is weak if the recipient is a business outside India. Before filing refunds, reconcile the export turnover with foreign remittances and obtain professional certification.