Circulars Issued Pursuant to 54th GST Council Meeting

The Central Board of Indirect Taxes and Customs (CBIC) has issued circulars based on the recommendations of the Goods and Services Tax Council during its recently held 54th meeting to provide necessary clarifications on some industry issues.

• The circular seeks to clarify taxability of advertising services provided to foreign clients in the following scenario:
  • A foreign company enters into a comprehensive agreement with the advertising company/agency encompassing all the issues related to advertising services ranging from media planning, investment planning for the same, creating and designing content to procuring media space, etc. for displaying/ broadcasting/printing of advertisements including monitoring of the progress of the same.
  • Media owners raise invoice to the advertising agency for inventory costs, which are then paid by the advertising agency.
  • Subsequently, the advertising agency raises invoice to the foreign client for the rendered advertising services and receives the payments in foreign exchange from the foreign client.

Clarification

• In the present scenario, the advertising company enters into two agreements: one with the foreign client for rendering an end-to-end solution for the entire advertising activity, and the other with the media owners to buy space for advertising the foreign client’s content.
• The agreements are in the nature of two distinct principal-to-principal supplies, and no agreement of supply of services exists between the media company and the foreign client. The advertising company is not acting as an agent but has been contracted by the client to procure and provide certain services. The advertising agency is providing the services to the client on its own account.
• In view of the above, the advertising company cannot be treated as an intermediary in terms of Section 2(13) of the IGST Act.
• In this case, the foreign client who is paying the consideration for the advertising services shall be considered as the recipient of advertising services in terms of Section 2(93) of the CGST Act.
• Section 13(3) of the IGST Act refers to determination of place of supply in case of performance-based services that require goods or the physical presence of the recipient. Since advertising services do not involve the physical presence of the foreign client, the place of supply of the advertising services shall not be determined as per Section 13(3).

 Conclusion

• In view of foregoing, it was clarified that the place of supply of the advertising service supplied by the advertising company to the foreign clients in the given scenario shall be determined as per the default provision, i.e. Section 13(2) of IGST Act, which prescribes the location of recipient (foreign client) as the place of supply of services.

ITC on demo vehicles in light of restriction under Section 17(5) of the CGST Act

• Section 17(5)(a) restricts the availability of ITC on motor vehicles for transporting passengers with a seating capacity of not more than 13 persons, except when the vehicles are used for:
  • Further supply of such vehicles,
  • Transportation of passengers, or
  • Training for driving such vehicles.
• The usage of the expression ‘further supply of such vehicles’ implies that the intention of the lawmakers was not only to exclude from the blockage of ITC on the motor vehicle, which is itself further supplied, but also to exclude from the blockage of ITC on the motor vehicle which is being used for the purpose of further supply of similar type of motor vehicles.
• The demo vehicles used by dealers to demonstrate features and provide test drives to potential buyers qualify as vehicles used for further supply of similar motor vehicles. Therefore, ITC on these vehicles is not blocked under Section 17(5)(a) of the CGST Act.
• However, if the vehicles are used for purposes other than further supply (e.g., transportation of staff), ITC would be restricted.
• If a dealer merely acts as an agent or provides marketing services, including providing the facility of a vehicle test drive to the potential customers of the vehicle on behalf of the manufacturer, and is not directly involved in the purchase and sale of the vehicles on his own account, then the demo vehicle used by such a dealer would not be covered under the exclusion prescribed in Section 17(5)(a). Hence, ITC on demo vehicles in such a case would be blocked.
• When demo vehicles are sold after use, the applicable GST would be payable on the written down value.

Capitalization of Demo Vehicles in the Books of Account

• Even if demo vehicles are capitalized as assets in the books of the authorized dealer, the same still qualify as capital goods under Section 2(19) of the CGST Act, as they are used in the course of business and ITC would be available on the demo vehicles, provided the dealer does not claim depreciation on the tax component under the Income Tax Act, 1961.
• Upon the sale of these vehicles, dealers must comply with the provisions of Section 18(6) of the CGST Act and pay GST as per the rules.

Whether Data Hosting Service Providers are Intermediaries (Section 2(13) of the IGST Act)?

• The data hosting service provider generally handles all aspects of the data centre, and the end users/customers/subscribers access cloud computing services seamlessly over the internet through technology hosted on data centres. There appears to be no contact between the data hosting service provider and the end users/ consumers/ subscribers of the overseas cloud computing service provider.
• The data hosting service provider provides data hosting services to the cloud computing service provider on a principal-to-principal basis on his own account.
• Accordingly, data hosting service providers do not constitute intermediaries. Hence, the place of supply should not be determined under Section 13(8)(b) of the IGST Act, as the said provision is applicable to ‘intermediary’.

Whether Data Hosting Services Relate to Goods “Made Available” by the Recipient?

• Section 13(3)(a) of the IGST Act provides that in cases where the services are supplied in respect of goods that are made physically available by the recipient of services to the service provider, the place of supply will be the location of the service provider.
• In this case, data hosting service providers operate independently with their own hardware, infrastructure, and facilities. Even if some equipment is provided by the cloud computing provider, the service is not directly related to goods made available by the recipient.
• The data hosting services cannot be classified as services provided in relation to goods made available by the recipient, and hence, the place of supply should not be determined under Section 13(3)(a).

Whether Data Hosting Services relate to Immovable Property?

• Section 13(4) of the IGST Act provides for the place of supply where services supplied are directly in relation to immovable property.
• The data hosting services are not passive supply of a service directly in respect of immovable property but are regarding supply of a comprehensive service related to data hosting, including the supply of various services like operating data centre, ensuring uninterrupted power supplies, backup generators, network connectivity, monitoring and surveillance service for ensuring continuous operations of the servers and related hardware, etc., which are essential for cloud computing service providers to provide cloud computing services to the end users, customers, and subscribers.
• It is clarified that in such a scenario, the data hosting services cannot be considered as the services provided directly in relation to immovable property or physical premises, and hence, the place of supply of such services cannot be determined under Section 13(4) of the IGST Act.
• In view of the foregoing, the place of supply of data hosting services must be determined using the default provision under Section 13(2) of the IGST Act, which would be the location of the recipient of the services, i.e., cloud computing service providers located outside India.

• Rule 96(10)(b) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) provides for a bar on refund of IGST paid on exports in cases where the inputs are procured by availing benefit under specified notifications such as Notification No. 78/2017-Customs dated 13.10.2017 (exemption of IGST on procurement of goods by EOU) or Notification No. 79/2017-Customs dated 13.10.2017 (exemption of IGST on imports under Advance Authorisation or Export Promotion Capital Goods Schemes).
• An explanation was inserted with effect from 23.10.2017 in sub-rule (10) of Rule 96 of CGST Rules retrospectively to provide that the benefit of the notifications mentioned therein shall not be considered to have been availed only where the registered person has paid IGST and Compensation Cess on inputs and has availed exemption of only Basic Customs Duty (BCD) under the said notifications.
• Referring to the above explanation, it is clarified that in cases where inputs were initially imported without payment of IGST and compensation cess but subsequently, IGST and compensation cess on such imported inputs are paid at a later date, along with interest, and the Bill of Entry in respect of the import of the said inputs got reassessed to this effect, then in such cases, it can be considered that the benefits of notifications mentioned in Rule 96(10)(b) of CGST Rules have not been availed for the purpose of said sub-rule.

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