2024 (10) TMI 1534 - HC - GST

Liability of tax on supply - secondment of employees - placement of foreign expatriates to aid and assist in the functions being carried out by the writ petitioners - value to be ascribed to the supply of goods and services and which is regulated by Rule 28 of the Central Goods and Services Tax Rules, 2017 - HELD THAT - Undisputedly, although payments, as asserted in the counter affidavit, were made, no invoices came to be raised by the writ petitioners entities in connection with the services provided by their related foreign. It is in the aforesaid backdrop that learned counsels had drawn our attention to the prescriptions contained in Para 3.7 of the Circular. It would perhaps be impossible for any of the respondents to assert that once the value of such services were to be treated or accepted to be Nil , no further tax implication under the Act would arise. While the correctness of the position as advocated in terms of that Circular may be questioned on the ground of whether it would be consistent with the statutory provisions or may be viewed as being contentious or contrary to the intent of the Second Proviso to Rule 28 itself, it is constrained to proceed further on the basis thereof - In the facts of the present writ petitions, it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as Nil . This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently, the proceedings initiated in terms of the impugned SCNs and their continuance would be futile and impractical. The impugned SCNs are essentially rendered impotent and would serve no practical purpose. The impugned SCN is set aside - petition allowed.

Issues Involved:

1. Legality of Show Cause Notices (SCNs) issued under the Central Goods and Services Tax Act, 2017 concerning tax liability for the secondment of employees.
2. Application of Rule 28 of the Central Goods and Services Tax Rules, 2017 regarding the valuation of supply between related persons.
3. Impact of Circular No. 210/4/2024-GST on the valuation of services provided by foreign affiliates.
4. Imposition of interest and penalties under the CGST Act, 2017.

Detailed Analysis:

1. Legality of Show Cause Notices (SCNs):

The writ petitions challenged the SCNs issued by the respondents, which alleged a tax liability under the Central Goods and Services Tax Act, 2017, related to the secondment of employees from foreign affiliates to the petitioners in India. The SCNs demanded Integrated Goods and Services Tax (IGST) under the Reverse Charge Mechanism for services imported during the specified period. The petitioners initially contested the presence of seconded employees but later refrained from pursuing this issue due to clarifications from the Central Board of Indirect Taxes and Customs (CBIC). The court noted that the SCNs were based on the Supreme Court's decision in CCE & Service Tax vs. Northern Operating Systems (P) Ltd., which treated such transactions as manpower supply, triggering the issuance of the SCNs.

2. Application of Rule 28 of the CGST Rules, 2017:

The principal issue revolved around the valuation of services supplied between related entities, as governed by Rule 28 of the CGST Rules. The rule stipulates that the value of such supply should be the open market value or, if unavailable, the value of similar goods or services. The petitioners argued that, according to the Second Proviso to Rule 28, where the recipient is eligible for full input tax credit, the value declared in the invoice should be deemed the open market value. The court acknowledged this argument, emphasizing that if the secondment was considered an import of services, the tax liability should align with the Second Proviso.

3. Impact of Circular No. 210/4/2024-GST:

The CBIC's Circular No. 210/4/2024-GST clarified that if no invoice was issued by the domestic entity for services provided by a foreign affiliate, the value of such services would be deemed "Nil" and treated as the open market value under the Second Proviso to Rule 28. The court highlighted that since no invoices were raised by the petitioners for the services rendered by their foreign affiliates, the value should be considered "Nil," leading to no tax liability. The respondents were bound by this circular, which effectively nullified the SCNs' basis.

4. Imposition of Interest and Penalties:

In the case of Sony India Private Limited, the court noted that the petitioner had paid the tax and claimed credit on a reverse charge basis. However, the Order-in-Original imposed interest and penalties. The court opined that once the CBIC clarified the position applicable nationwide, the continuation of penalty proceedings or imposition of interest was unsustainable. The petitioner was absolved of tax liabilities due to the CBIC's stand.

Conclusion:

The court quashed the impugned SCNs and related Orders-in-Original, concluding that the proceedings were futile given the CBIC's clarification. The judgment was confined to the issue of seconded employees, leaving other issues in the SCNs open for adjudication. The court did not express opinions on other matters in the SCNs, preserving the rights and contentions of the parties involved.

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