A recent ruling by Authority for Advance Ruling (AAR), Maharashtra, in the case of NES Global Specialist Engineering Services Private Limited (the Applicant) has ruled that that back-office operations will be considered as export of services.
The primary questions involved in the application was whether support services (as covered by the Master Service Agreement) provided by the Applicant in respect of the foreign business carried on by its sister concern, is a “zero rated supply” and if such a transaction is a zero rated supply then is the same considered as an export of service under the GST Act.
- The Applicant is engaged in supply of man-power services to highly technical industries. It has a sister concern named NES Global Talent Recruitment Services in Abu Dhabi.
- NES India & NES Abu Dhabi have proposed to enter into a service agreement through which NES India will provide support service in respect of the foreign business carried on by NES Abu Dhabi. Every service provided by NES India will form part of the Master Services Agreement (“MSA”) & its Schedules in detail.
- The services provided by NES India would include Accounting, Sales Invoicing, Purchase Invoicing, Cash receipt posting, Bank Payment entries, Other receipt entries, Credit Control work, Support Assignment work, Payroll assistance, Storing and scanning of data to the data storage disk and any other work as per requirements stated under the MSA.
- As per the agreement, NES India is not allowed to outsource or sub contract the work to any other person and hence, in order to provide the above mentioned services, NES India will have to use its current place of business, which is on rent along with current employees and will also incur other related expenses, in order to carry out the desired work for NES Abu Dhabi.
- In view of the above and as per the MSA, NES India will charge NES Abu Dhabi the cost incurred in India for providing the desired services, as identified and allocated with a margin of 10% plus taxes as applicable during the period.
- The Applicant submits and presents that the above transaction with NES Abu Dhabi qualifies to be an “export of service”.
Observations and Ruling by AAR:
- The AAR from the MSA observed that that the services being provided by the Applicant to their client is in the form of Administrative and support services. It was further observed that services provided by NES India will be charged on a time and costs basis.
- The payment for such transaction is received in convertible foreign exchange which is one of the requirements under the definition of “export of services”
- On the basis of submissions made by the Applicant, the AAR noted that the Applicant and NSA Abu Dhabi are not establishments of the same person, even though they are group companies because:-Shareholding pattern of both the companies proves that Key Management Personnel and Board of Directors are different and neither of them hold shares of each other and thus there exists no “control”.
- On scrutiny of MSA, the AAR observed that the relationship between the parties is that of independent contractors meaning that the agreement does not intend to create relationship of principal and agent. Thus the applicant is not a person who arranges or facilitate supply of services between two or more persons and therefore the proposed service would not fall to be classified as “intermediary service”.
- Basis above observations, AAR has held that transactions covered under the MSA between the Applicant and NES Abu Dhabi is a an export of service and hence “Zero rated supply”.
In an another order from the Appellate AAR in the case of Vserv Global in July 2018, the AAR had ruled that the export of back offices services were in the nature of intermediary services and subject to GST. This ruling has introduced an unexpected tax uncertainty for the IT-BPM sector and it can majorly dent the industry’s export competitiveness. NASSCOM is hopeful that the government will step in soon and put an end to this confusion.
We shall keep you posted on further developments in this regard.