Zero-Rated or Not: Place of Supply on Cross-Border Services with an Indian Recipient

The five conditions in section 2(6) of the IGST Act

1. The supplier of service is located in India.
2. The recipient of service is located outside India.
3. The place of supply of service is outside India.
4. The payment for such service has been received by the supplier in convertible foreign exchange, or in Indian rupees wherever permitted by the Reserve Bank of India.
5. The supplier and the recipient are not merely establishments of a distinct person in accordance with Explanation 1 to section 8.

Application to arrangement (i)

• Supplier: Nexa, located in Pune, India - satisfied.
• Recipient: Helios Pte Ltd, Singapore. The recipient is the person liable to pay consideration; Helios Pte Ltd is the contracting party and is invoiced - satisfied.
• Place of supply: this is a business-to-business supply where either the supplier or the recipient is outside India, so section 13(2)(a) applies and the place of supply is the location of the registered recipient, Singapore - satisfied.
• Payment: received in USD through a bank; the FIRC/BRC will evidence it - satisfied.
• Not establishments of a distinct person: Nexa and Helios Pte Ltd are unrelated - satisfied.

Conclusion: arrangement (i) is an export of services.

Consequences

The supply is zero-rated under section 16(1)(a). Because Nexa has furnished an LUT, it may supply without payment of IGST and claim refund of unutilised input tax credit under section 16(3)(a) read with rule 89(4). If it had not furnished an LUT, it would have had to pay IGST and claim refund of the tax so paid under section 16(3)(b).

One caveat to examine: if Nexa were merely arranging or facilitating the supply for another person, it would be an 'intermediary' and the export benefit would fail. Here it performs the analytics itself on its own account, so it is a supplier, not an intermediary.

Arrangement (ii) - Helios India Pvt Ltd, Pune

• The recipient of service is the person who is liable to pay the consideration. The Indian subsidiary is the contracting party, is invoiced, and pays. A parent company signing as 'group guarantor' does not become the recipient; a guarantee is not a supply of the services in question.
• Place of supply under section 13(2)(a) is the location of the registered recipient, i.e. Pune.
• Since both supplier and place of supply are in Maharashtra, this is an intra-State supply. It is taxable at CGST plus SGST.

Not an export. Billing an overseas entity, or describing the overseas parent as the 'client', does not alter the position where the actual recipient and the place of supply are in India.

Arrangement (iii) - Bhubaneswar branch of the Bhutan hospital

• The branch is separately registered in India and is a distinct person under section 25(4)/(5) read with Explanation 1 to section 8 of the IGST Act.
• The recipient is therefore located in India. Under section 13(2)(a), the place of supply is the location of the registered recipient, i.e. Bhubaneswar.
• That the end user or the parent hospital is in Bhutan, or that the ultimate benefit flows abroad, is irrelevant for place of supply.

Not an export. It is an inter-State supply (Pune to Bhubaneswar) chargeable to IGST at the applicable rate, and the INR payment confirms that the transaction was never routed as a foreign exchange transaction.

Cross-cutting point: the tests in section 2(6) are cumulative. Arrangements (ii) and (iii) fail conditions 2 and 3 even though the services were physically performed in India and might look 'international' commercially.

Correct refund entitlement

Only the zero-rated turnover (arrangement (i)) supports a refund of unutilised ITC under section 16(3)(a) with rule 89(4). For a supplier other than a notified supplier, the formula is:

Refund = (Turnover of zero-rated supply of services × Net ITC) ÷ Adjusted total turnover

where net ITC is ITC availed on inputs and input services during the relevant period, and adjusted total turnover excludes the value of zero-rated supplies and includes exempt turnover. The refund is restricted to the ITC attributable to zero-rated supplies; the ITC attributable to the taxable domestic supplies in (ii) and (iii) is not refundable because those supplies bear tax that is collected from the customer.

Exposure on the claim already filed

1. The portion of the ₹9,40,000 referable to arrangements (ii) and (iii) has been claimed without authority. Tax on those supplies was payable - CGST plus SGST on (ii), IGST on (iii) - and has not been paid.
2. Demand under section 73 (or section 74 if suppression is alleged), with interest under section 50(1) on the unpaid tax and under section 50(3) on the wrongly availed and utilised credit.
3. Penalty exposure, and possible prosecution thresholds if the amount is large.
4. Reversal of the excess credit in the electronic credit ledger before adjudication may mitigate penalty under section 73(5).

Documentation to be maintained

• Contract and purchase order identifying the overseas recipient, invoices in foreign currency bearing the rule 96 declaration, FIRC/BRC evidencing realisation, and the LUT acknowledgement.
• For (ii) and (iii), tax invoices in INR, the recipient's GSTIN, and evidence of tax charged and paid.

Practical advice: segregate the export and domestic streams contractually and in the billing system so that the rule 89(4) numerator and denominator can be supported from the books.