By: Ram Chander Sankhla, Advocate | Former Chief Commissioner, GST & Customs| Managing Partner, Sankhla Law associates.

Author can be reached at www.rrsla.com

 

BEHIND THE SCENE:

  1. As of 31 March 2024, Infosys is the second-largest Indian IT company by revenue and the third-largest Indian company by market capitalization. Recently, it has been grabbing media spaces, as usual, but not for the reasons it may like to be. Directorate General of GST intelligence (in short DGGI), which is investigative wing of the Central Government (Central Board of Indirect Taxes & Customs [CBIC], to be precise) for cases related with evasion of GST (a la DRI for Customs cases), has recently slapped a notice (in short SCN) of more than 32,000 crores of rupees on them for the year FY 2017-18 to 2021-22. Reportedly, it was done (SCN) after the Karnataka government has withdrawn the DRC-01A (in short Pre-Show Cause Notice or PNC) issued to the Infosys.
  2. As per Infosys website, the yearly revenue for the FY ending march 2024, generated by Infosys was Rs.153670 crores and corresponding net profit (before Minority interest) was Rs.26248 crores. The SCN is worth more than Rs. 32000 crores, which is much more than the annual net profit (FY-2024) of the Infosys.
  3. It is not that the DGGI has issued notices to big tech units or major industries, for the first time. It is then strange as well as amazing that Infosys case has generated so much heat. No doubt, the Infosys is aggrieved with the said demand And Mr. Mohandas Pai has termed it no less than tax terrorism.
  4. Besides being labelled as text terrorism, social media is abuzz that the government is taking back the SCNs issued to Infosys and other foreign airlines. The various social media news and posts suggest that the action of the DGGI is not as per law, and hence perverse. But before commenting on the issues at hand, let us understand the nuances of law, rules and regulations, vis-a-vis, the allegations made, as reported in the media.

 

BUSINESS MODELS Vs LEGAL PROVISIONS:

  1. Various reports suggest that investigation was initiated by DGGI, on the belief that Infosys Ltd has not paid Integrated Goods & service Tax (in short IGST) on import of services received from their overseas branch or Subsidiary units. It seems that via Global Master Services Agreement (in short Global agreement) with their clients abroad for complete execution of the onsite project/contract located overseas, Infosys uses the services of their branch offices/subsidiary units located outside India. Thus, Infosys India is not providing the entire export of services to the client but some portion of the export project is implemented on site through their overseas branches or Subsidiary units (separate legal entity), which engages technical sub-contractor for implementation of the project.
  2. So far so good as these are supposed to be the business model of the Information Tech units. However, here comes the explanation 1 to Section 8 of IGST Act 2017, which says that these overseas branches or Subsidiary units are distinct person. The said provision is reproduced as,

Section 8: Intra-State supply:

“Explanation 1. For the purposes of this Act, where a person has,””

(i) an establishment in India and any other establishment outside India;

(ii) ……(iii)………

then such establishments shall be treated as establishments of distinct persons.”

Further, as per section 7(1)(b) & (c) of CGST Act 2017, para 4 of Schedule I of CGST Act, read with section 2(11), 5(3), Section 13(2) of the IGST Act, further read with Notification No. 10/2017- Integrated Tax (Rate)
28th June, 2017,  the services provided by overseas branches/subsidiary units to Infosys is import of service since Infosys is paying consideration to its overseas branches/subsidiary units in the form of branch expenses in lieu of the services provided by them to Infosys. Hence, there is IGST liability under reverse charge on import of service on total expenses paid to its overseas branches/subsidiary units for implementation of these projects. For the sake of clarity, let us read these provisions also,

THE INTEGRATED GOODS AND SERVICES TAX ACT, 2017:

“Section 2 (11) import of services” means the supply of any service, where
(i) the supplier of service is located outside India;
(ii) the recipient of service is located in India; and
(iii) the place of supply of service is in India”

 

Section 5:  Levy and collection:

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

 

Notification No. 10/2017- Integrated Tax (Rate)
28th June, 2017

GSR……(E).-In exercise of the powers conferred by sub-section (3) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of integrated tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-

Table

Sl. No. Category of Supply of Services Supplier of service Recipient of Service
(1) (2) (3) (4)
1 Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. Any person located in a non-taxable territory Any person located in the taxable territory other than non-taxable online recipient.

 

 

“Section 13: Place of supply of services where location of supplier or location of recipient is outside India:

(1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.”

 

THE CENTRAL GOODS AND SERVICES TAX ACT, 2017:

Section 7: Scope of Supply: (1) For the purposes of this Act, the expression “supply” includes

(a)  ….. (aa)……

Explanation. For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;]

(b)   import of services for a consideration whether or not in the course or furtherance of business; and

(c)    the activities specified in Schedule I, made or agreed to be made without a consideration;”

 

SCHEDULE I (Section 7): “ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION:

4. Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.”
  1. To simplify this, it need be said that as per Section 7 of CGST Act read with para 4 of Schedule-I, import of services for a consideration whether or not in the course or furtherance of business and  the activities specified in Schedule I, made or agreed to be made without a consideration fall under SUPPLY. Further, overseas branches or subsidiary units of Infosys are distinct person as per explanation 1 to Section 8 of IGST Act 2017. Services received from such branches/units are import of services (as per Section 2 (11) of IGST Act) and location of services shall be deemed to be the place of recipient of Services (as per Section 13(2) of IGST Act) that is Infosys in India. Accordingly, the services provided by such overseas entities or subsidiary units to Infosys India are liable to be IGST under RCM (as per Section 5(3) of IGST Act read with Notification No. 10/2017- Integrated Tax (Rate)
    28th June, 2017.
  2. Having gone through and understood the business model, the facts involved therein and the legal provisions, it seems that the liability to pay IGST is there on part of Infosys India, the question still remains whether what should be the value of the consideration for said supply or import of services.
  3. The valuation under CGST Act is dealt with under section 15. It says that the value of a supply of goods or services or both shall be the transaction value (in short TV), which is the price actually paid or payable for the said supply of goods or services or both where the supplierand the recipient of the supply are not related and the price is the sole consideration for the supply. Sub section 4 of this section further says that where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed. Such prescription has been done through rules 27 to 35 of CGST Rules. For the sake of understanding, section 15(1) & (4) and definition of related person are reproduced,

Section 15: Value of taxable supply:

“(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.”

 

Explanation. “For the purposes of this Act,””

“(a) persons shall be deemed to be “related persons” if

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;

                (v) one of them directly or indirectly controls the other;               

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.”

  1. Thus, it is clear that the branch offices/subsidiary units of the Infosys are related person as per section 15 of CGST Act. However, it is also settled that if there are transaction value available for both type of categories, that is, to a related person and unrelated person, And, there is no difference between the two prices as price is the sole consideration, the prices to a related person shall be treated as transaction value. The natural corollary to this can be said as ‘where the buyer and seller are related, the transaction value shall be accepted provided that the relationship did not influence the price’.  As a matter of fact, this is what Rule 3(3)(a) of customs valuation rule says. It appears that there are prices/cost available, in terms of expenses paid for running or maintaining the branch offices/subsidiary units of the Infosys. These prices are cost/value forming consideration for the import of services. Since the value/prices are available as transaction value, resorting or recourse to rule 27 to 35 are not warranted.
  2. In other words, Rule 27 to 35 of the valuation rules are to be resorted only where transaction value at arm’s length is not available. If the prices for a related person are available which are at arm’s length and do not get affected or manipulated because of the related person, it is the transaction value which has to be accepted.
  3. To put it differently, the phrase, ‘the price is the sole consideration for the supply’ is most important as it will determine if valuation rules are to be resorted, or not. If such independent price is available, even for related person, it will be taken as Transaction Value and valuation rules cannot be resorted to.
  4. In case of their overseas subsidiary units, the Infosys is discharging IGST under RCM on import of services, taking the TV as the expenditure paid for implementation of onsite projects by such overseas units. However, in case of branch offices, no IGST is being paid despite the expenditure required for implementation of onsite projects by overseas branches along with cost of technical sub-contractor are met by Infosys India.
  5. Consequently, it seems that, an amount of Rs. 18,00,19,22,42,165/- was paid as consideration by Infosys Limited, in form of branch expenses to its overseas branch for the period 2017-18 (July 2017 onwards) to 2021-22. Accordingly, there is alleged liability to pay IGST of Rs. 32403,46,03,590/- under reverse charges on import of service classifiable under SAC 9983 (Information technology services) attracting IGST at the rate of 18% as per Notification 8/2017-Integrated Tax (Rate) dated 28.06.2017.

 

  1. It seems that the investigation in the instant case was initiated in the year 2020 and was sent to Karnataka State GST (in short SGST) in May 2024 as they had already taken up the same issue during their audit. The same was returned back on 30.07.2024 to DGGI, Bangaluru unit. Considering the fact that the last date for issuance of SCN is 05.08.2024 for F.Y 2017-18, they hurriedly issued the Incident report on 30.07.2024 and DRC01A on 31.07.2024. Further, reportedly, upon receipt of reply from Infosys on 02.08.2024, the issue was re-examined in light of their reply and Circular No. 210/4/2024-GST dated 26.06.2024, and SCN was issued.
  2. It needs specific mention that much of the controversy revolves around circular no. 210/4/2024-GST dated 26.06.2024. Even, investigative authority seems to be peeved with this circular, and Para 3.7 of the circular, in particular. No doubt it needs reproduction than,

 

“Subject: Clarification on valuation of supply of import of services by a related person where recipient is eligible to full input tax credit – Reg

As per S. No. 4 of Schedule I of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”), import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business, is to be treated as supply even if made without consideration.

  1. Representations have been received from trade and industry stating that demands are being raised by some of the field formations against the registered persons seeking tax on reverse charge basis in respect of certain activities undertaken by their related persons based outside India, by considering the said activities as import of services by the registered person in India, based on an expansive interpretation of the deeming fiction in S. No. 4 of Schedule I of CGST Act, though no consideration is involved in the said activities and the same are not considered as supplies by the said related person in India. It has been represented that the same treatment, which is being given to domestic related parties/ distinct persons as per clarification provided by Circular No. 199/11/2023-GST dated 17.07.2023, may also be provided in cases where a foreign entity is providing service to its related party located in India, in cases where full ITC is available to the said recipient located in India.

3.1 In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby clarifies the issues as under:

3.2 Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the “CGST Rules”) is reproduced as below:

“Rule 28.Value of supply of goods or services or both between distinct or related persons, other than through an agent. –

(1) The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

3.3 As per second proviso to rule 28(1) of CGST Rules, in cases involving supply of goods or services or both between the distinct or related persons where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the said goods or services.

3.4 It may be noted that vide Circular No. 199/11/2023-GST dated 17.07.2023, clarification has been issued regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons. It has been clarified in the said circular that as per the second proviso to rule 28(1) of CGST Rules, in respect of supply of services by Head Office(HO) to Branch Offices(BO) of an organisation, the value of the said supply of services declared in the invoice by HO shall be deemed to be open market value of such services, if the recipient BO is eligible for full input tax credit. It has also been clarified vide the said circular that in cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.

3.5 The second proviso to rule 28(1) of CGST Rules, is applicable in all the cases involving supply of goods or services or both between the distinct persons as well as the related persons, in cases where full ITC is available to the recipient. Accordingly, it is evident that the clarification which has been issued vide Circular No. 199/11/2023-GST dated 17.07.2023 in respect of supplies of services between distinct persons in cases where full ITC is available to the recipient, is equally applicable in respect of import of services between related persons.

3.6 In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism. In such cases, the registered person in India is required to issue self-invoice under Section 31(3)(f) of CGST Act and pay tax on reverse charge basis.

3.7 In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.”

  1. …..

5……

  1. Further, The time of supply of services where tax is to be paid by the recipient (i.e. RCM basis) is determined in terms of Section 13(3) of CGST Act which provides that the time of supply shall be the earlier of the following dates i.e.: — (a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or (b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.
  2. It has been further provided that in case of supply by Associated Enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier. It may be seen, therefore, that the time of supply, in case of supply of services by an associated enterprise located abroad is earlier of the date of entry in the books of account of the recipient of supply or the date of payment by the recipient of services and it has nothing to do with issuance of invoice by the supplier and / or the recipient. It is interesting to note that after the terms related person, distinct person, a new term namely Associated Enterprises has been used in section 13 (3) of the CGST Act, where tax is to paid on RCM.
  3. Before explaining about Associated Enterprise, it is worthwhile to reproduce section 13 (3) as,

“(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely,

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or
(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.”

 

WHAT INCOME TAX LAW SAYS ABOUT RELATED PERSON:

  1. Associated Enterprise has been defined under section 2(12) of the CGST Act as, “associated enterprises” shall have the same meaning as assigned to it in section 92A of the Income-tax Act, 1961”. And Section 92A of the Income Tax Act states as,

Meaning of associated enterprise.

92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, —

(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.”

  1. Section 92A to Section 92F of Income Tax Act, 1961 & rule 10A to Rule 10E of Income Tax Rules are applicable to all International Transactions and specified domestic transactions, also termed as Transfer Pricing. It ensures that transaction between related parties is at the same price as compared to transaction between unrelated parties. Section 92 (Computation of Income from International transactions at Arm’s Length Price), Section 92A (Associated Enterprises), Section 92B (International Transaction), Section 92C (Methods of Calculation Arm’s Length Price) and Methods of calculating Arm’s length price under Transfer pricing regulations, Transfer Pricing Documentation, Section 92E (Audit under Transfer Pricing), Filing under Section 92 of Income Tax act, 1962 and Transfer Pricing Between India and SVG, are the important income tax provisions dealing with transactions between related person. If one carefully reads the concept and definition as provided in GST law and Income Tax law, one finds that Associated Enterprise is nothing but Related Person.
  2. Hence, Section 13(3) of CGST Act is equally applicable to related persons as it applies to associated enterprises.
  3. The recipient of services is required to enter the payment/cost incurred on these services in his financial books of account as per the GAAR principles / Transfer Pricing provisions / Indian Accounting Standards(IndAS) issued by the Institute of Chartered Accountants of India. In the “Conceptual Framework for Financial Reporting under Indian Accounting Standards (IndAS) issued by the ICAI, the Guidance Note provides that the liability needs to be recorded when there is an obligation (in lieu of services or goods received) and such obligation is expected to be met through payment etc. (outflow of economic resources).
  4. Also, Section 31(3)(f) and 31(3)(g) of the CGST Act, mandate that the importer of services i.e. the recipient need to issue an invoice and payment voucher as he has imported the services from an unregistered person and is also liable to pay tax in terms of Section 9(3) of the CGST Act / Section 5(3) of the IGST Act. Non issuance of an invoice and payment voucher by the recipient amounts to contravention of the provisions of the CGST Act.

 

IS THE CIRCULAR BEYOND ACT & RULES:

  1. The above analysis read together clearly brings out that Circular No. 210/4/2024-GST dated 26.06.2024 has gone beyond section 15 read with rule 28 of CGST Rules. It needs no mention that circulars issued by executive cannot go beyond Act and rules made by the parliamentarians. Also, it promotes non-compliance by the taxpayers as it directly hits in the teeth of Section 31(3)(f) and 31(3)(g) of the CGST Act.
  2. There is other interesting perspective available to above argument. It may be seen that the principle of ‘Arm’s length price’ is embedded in Section 15 of the CGST Act and therefore the Transaction value is regarded as the value of supply except inter-alia in case of related party transactions. It may further be seen that the Valuation Rules (Rule 27 to Rule 31) as contained in Chapter IV of the CGST Rules have been framed so as to arrive at a value which is as closer to the value determinable in terms of Section 15(1) of the CGST Act. These Valuation Rules cannot be read and interpreted in a manner so as to defeat the principles laid down in Section 15. The value determinable in terms of these Rules should at least be equal, if not more, to the monetary consideration for the supply. In other words, Rule 28 and Section 15 cannot be read in isolation and Rule is subservient to the Act. The value declared in the invoice for the purposes of 2nd proviso to Rule 28, therefore, cannot be less than the amount actually paid / payable to the supplier of services as that will amount to contravention of the provisions of Section 15 of the CGST Act, more so when such value is otherwise available.
  3. Let us also see section 168 of CGST Act which gives power to the Board to issue such circulars. It says that,

 “Section 168: Power to issue instructions or directions.

(1) The Board may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions.”

  1. Thus, the said power was given to the Board for the purpose of ensuring uniformity in the implementation of the Act and NOT TO REWRITE THE ACT. Implementation means to apply something which is already there. It is not to create something new.
  2. For an officer of CBIC, the dilemma will always remain whether to follow such circulars or not. As we are aware that there are court decisions on both sides. Certainly, Courts are not bound by the circulars. But what to do when something is as obvious as present circular, which is in clear violations of various provisions of GST law. Reportedly, for the period 2017-18 benefit of Circular No. 210/4/2024-GST dated 26.06.2024 has already been given to the taxpayer for this period by the DGGI.
  3. The export revenue and refund as claimed by the taxable person in accordance with section 54 of CGST Act read with Rule 89 of CGST Rules 2017 would get compromised by resorting to non-payment of IGST under RCM on the expenses incurred by the taxable person to obtain the export revenue in the overseas project by engaging overseas sub-contractor.
  4. One of the basic purposes of ITC is to ensure continuity in reporting the Transactions. It ensures that reporting chain does not get broken. This is with a purpose to control tax evasion. Further, in the name of revenue neutrality (full ITC available) non- reporting a transaction cannot be allowed.
  5. This circular is likely to lead to another absurdity. For income tax purpose, said overseas expenses will be accounted for, as expenditure and will get reduced from the income. However, for GST purpose its value will be zero and no documents are required. No doubt, one is direct tax and other is indirect tax. But the question remains that for one taxation system, a value is positive whereas for other tax system, it is zero. On top of it, both the tax systems are managed by one department i.e. Department of Revenue under Ministry of Finance, Govt of India.
  6. The precursor to this circular i.e. Circular No. 199/11/2023-GST dated 17.07.2023 also needs relook for same reasons.

 

TOWARDS END:

  1. So, the question remains as to whether the show cause notice issued to Infosys is as per the provisions of CGST Act and rules or not. Section 15 of CGST Act, which stresses Transaction Value, which is nothing in this case but the cost/ expenses incurred and paid by the Infosys to its overseas branches. When Transaction Value is available, Valuation rules cannot be resorted to, whether it is related person or not. At the cost of repetition, it may be said that the transaction value in terms of the cost/expenses by Infosys is available and hence the issue falls under four corners of section 15 of CGST Act. There is no need even to refer to valuation rules under CGST rules. Nevertheless, even if rules are resorted to, rule 28 never says that the invoices do not have to be issued by the taxpayer or a nil value can be declared by him even when cost/expenses/ transaction value is available.
  2. It is interesting to note that Infosys has issued invoices and paid IGST as far as their other outside offices/subsidiary units are concerned. They have not stopped issuing the invoices on the pretext that full ITC is available to them. Therefore, why the invoices for their overseas branch office/units have not been issued, leaves a big question mark to be answered.
  3. The circular number 210/4/2024-GST dated 26.06.2024 appears clearly in violation of section 15 of CGST Act and rule 28 of CGST rules, not to talk about non-compliance, it promotes.
  4. It is also amazing to know that if the show cause notice in question would have been issued prior to issuance of this circular number 210/4/2024-GST dated 26.06.2024, there would not have been much controversy. So, why to wait till last date of issuance.
  5. And, probably, the final question, though perplexing, remains. If ITC is available to Infosys, why did it not paid taxes and avail it. As per their website, it is employing more than three lakhs’ people. Surely it is having legal department. Then, is it unsound advice or working capital issue or oversight or calculated move, to adopt this kind of way out. Only time will reveal more but one thing is for sure that this controversy/issue will not rest here. We will be listening more about it in coming days and feel more enlightened.

 

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