Introduction: – In general trade parlance, if a person located in India is rendering services to another person location outside India is considered as Export of Services. However, for the purpose of determining as Export of Services under the provision of GST Act, certain conditions are required to be fulfilled.

The provisions under Section 2(6) of IGST Act,2017 enumerates the 5 basic conditions of being export of service as-

• the supplier of service is located in India;
• the recipient of service is located outside India;
• the place of supply of service is outside India;
• the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

All the above conditions need to be fulfilled simultaneously.

• The supplier of service is located in India– This condition can be established with the constitution of the supplier of services.
• The recipient of service is located outside India- This condition can be established with the help of service agreement executed between the supplier and recipient of services.
• The place of supply of service is outside India- Whether a supply is rendered outside India or not shall be established with the help of Place of Supply provision under the IGST Act, 2017.
• Payment should be received in Foreign Currency or otherwise permitted in INR: The benefit of export is technically given in order to enhance the foreign reserve of the country which will ultimately contribute in the development of the domestic markets. Therefore, condition 4 is made for the inward remittance of the convertible foreign exchange by the supplier. Vide Master Direction – Export of Goods and Services (RBI/FED/2015-16/11), RBI has permitted member country of Asian Clearing Union (ACU) or Nepal or Bhutan for realizing export proceeds in Indian rupees.
• The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8: This condition becomes more pertinent to be established as this condition has created ambiguity as what is to be considered as merely establishment of distinct person.

Here the major question arises whether the relationship between the Holding Company located in India and Subsidiary Company located outside India and vice versa shall be considered as merely establishment of a distinct persons or not?

This is with respect to various representation has been sent to the CBIC to provide clarification on this issue, a Circular No, 161 dated 20/09/2021 has been issued to elucidate all the related doubts as stated below:

Question 1. Whether the Branch or Agency or Representational Office of Foreign Company located in India and Foreign Company located outside India shall be considered as merely establishment of distinct person?

Clarification 1: On perusal of Explanation 2 of Section 8 read as “A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory”, it is ample clear that in case foreign company is conducting business in India though a branch or an agency or a representation office, then the said branch or agency or representation office of the foreign company shall be considered as establishment of the foreign company.

Therefore, the Supply of services by a branch or an agency or representational office of a foreign company, not incorporated in India, to any establishment of the said foreign company outside India, shall be treated as supply between establishments of distinct persons and shall not be considered as “export of services” in view of condition (v) of sub-section (6) of section 2 of IGST Act.

Q2. Whether the branch or agency or representational office of Indian company located outside India be treated as establishment of Indian company located in India?

Clarification 2: Again, on perusal of Explanation 2 of Section 8, it is ample clear that if an Indian Company is carrying business activity outside India though a branch or agency or representational office located outside India, then the said branch or agency or representation office of the Indian company shall be considered as establishment of that Indian Company.

Therefore, any supply of service by a company incorporated in India to its branch or agency or representational office, located in any other country and not incorporated under the laws of the said country, shall also be considered as supply between establishments of distinct persons and cannot be treated as export of services under the provisions of GST Act.

Q3. Whether the relationship between the holding company & subsidiary company can be considered as merely establishment of distinct person?

Clarification 3: The constitution of the both the holding & subsidiary company are having separate legal entity and incorporated under the law of one or more countries. Thus, a subsidiary/ sister concern/ group concern of any foreign company which is incorporated in India, then the said company incorporated in India will be considered as a separate “person” under the provisions of CGST Act and vice versa. Accordingly, both would be considered as a separate legal entity/person and would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.

Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 (Subsidiary Company), to the establishments of the said foreign company located outside India (incorporated outside India i.e. Holding Company), would not be barred by the condition (v) of the sub-section (6) of the section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017 & vice-versa.

Conclusion: It is now clarified to remove the ambiguity that in case two entities where one is located in India and other is located outside India and vice versa, are incorporated in the laws of that respective country, in that that case both the entities cannot be considered as merely establishment of the distinct person and therefore qualifies for the Export of Services.