Exporting IT Services to a Singapore Subsidiary: GST Reversals and Transfer Pricing Exposure

Step 1 – Credit that is never available:

• ₹10,00,000 on inputs used exclusively for exempt training supplies → not available (section 17(2), Rule 42 T2).
• ₹2,00,000 on club memberships → blocked under section 17(5)(b)(iii) irrespective of use.
• Common credit C2 = ₹28,00,000.

Step 2 – Rule 42 reversal on common credit: D1 = C2 × E/F, where E = exempt turnover for the year (₹1 crore training) and F = total turnover (₹10 crore). D1 = 28,00,000 × 1/10 = ₹2,80,000 to be reversed (monthly on a provisional basis, trued up annually).

Critical point: Exports are zero-rated, not exempt. Zero-rated turnover is excluded from E. Had the consultant wrongly included ₹9 crore of exports in E, the reversal would have been 28,00,000 × 9/10 = ₹25,20,000 – a fatal error.

Step 3 – Net credit available: 40,00,000 – 10,00,000 – 2,00,000 – 2,80,000 = ₹25,20,000.

Step 4 – Refund for zero-rated supplies: Since the company exported under an LUT, unutilised credit is refunded under section 16(3)(a) read with Rule 89(4). Refund = Net ITC × (zero-rated turnover / adjusted total turnover). Adjusted total turnover excludes exempt supplies but includes zero-rated supplies, so it is ₹10 crore – ₹1 crore = ₹9 crore. Refund = 25,20,000 × 9/9 = ₹25,20,000. Claim in RFD-01 within two years of the relevant date, with the statement of invoices.

Consistency: Note the different denominators used by Rule 42 (₹10 crore) and Rule 89(4) (₹9 crore). Using one formula's logic in the other is the standard exam trap.

Compliance thresholds: The aggregate value of international transactions with the associated enterprise is ₹9 crore + ₹1.50 crore = ₹10.50 crore, which exceeds the ₹1 crore threshold in section 92BA/92E. Therefore:

1. Form 3CEB (accountant's report) must be furnished by 31 October 2025; the return of income is due by 30 November 2025 for a TP case.
2. TP documentation (local file) must be maintained under Rule 10D as on the specified date and kept for eight years; contemporaneous benchmarking with TNMM or CUP is essential.
3. A Master File (Form 3CEAA) is needed only if the group's consolidated turnover exceeds ₹500 crore, and CbCR only above ₹5,500 crore – verify the group figures before concluding these do not apply.

Penalties for default: ₹1,00,000 under section 271BA for not furnishing Form 3CEB; 2% of the value of each transaction under sections 271AA and 271G for documentation failures; and, if the adjustment is sustained, penalty at 50% of the tax on under-reported income under section 270A.

Contesting the ₹1 crore adjustment:

1. Re-benchmark with a defensible method, documenting the FAR analysis, comparable search strategy, filters and multiple-year data; the TPO must give the assessee an opportunity to be heard.
2. Because a TP adjustment is proposed, the company is an eligible assessee under section 144C: the TPO's proposal must be routed through a draft assessment order, against which objections are filed before the Dispute Resolution Panel within 30 days. Skipping the DRP route is a jurisdictional error.
3. Alternatively, consider the safe harbour rules or an Advance Pricing Agreement for future years to eliminate the recurring exposure.
4. Preserve the ARM and audit trail – the burden of proving the arm's length price effectively shifts to the assessee once the TPO's comparables are accepted.

Equalisation levy: The 2% levy on e-commerce supply of goods or services by a non-resident operator and the 6% levy on online advertisement and related services were withdrawn for transactions from 1 August 2024 by the Finance (No.2) Act 2024. For FY 2024-25, therefore, no equalisation levy is payable on transactions on or after that date; any levy already discharged for April–July 2024 must be verified separately. In any event, marketing services rendered by a group company are not an 'e-commerce supply' unless made through a digital platform to a specified person, so the levy would not have applied on the merits.

Withholding under section 195: Tax must be withheld only if the sum paid is chargeable to tax in India. The Singapore subsidiary's business profits are taxable in India only if it has a permanent establishment here. On the facts – an overseas subsidiary providing marketing services from Singapore – there is presumably no PE, so Article 7 of the India–Singapore DTAA bars Indian taxation and no withholding arises. The company must, however, document the position:

• obtain a Tax Residency Certificate and Form 10F from the Singapore entity;
• file Form 15CA and obtain a Form 15CB chartered accountant's certificate before remitting foreign exchange;
• keep the FAR analysis showing the services were rendered outside India and that no fixed place of business or dependent agent exists in India.

Risk if a PE is found: The payment becomes chargeable as business profits attributable to the PE and section 195 withholding applies at the treaty rate (with the TRC/10F conditions satisfied), with interest under section 201 for delay. The same facts feed directly into the TP documentation, so the GST, withholding and transfer pricing files should be prepared on a single consistent set of facts rather than in isolation.