Sutherland Mortgage Services Inc vs The Principal Commissioner on 3 February, 2020

1. Outcome

The Kerala High Court quashed the Advance Ruling Authority's (AAR) order (Ext.P-2) which had rejected the petitioner's application for advance ruling. The Court remitted the application (Ext.P-1) back to the AAR for fresh consideration and a decision on merits, directing the AAR to render an advance ruling under Section 98(4) of the CGST Act within 3-4 months, after allowing further submissions and a hearing to the petitioner.

2. Core Issue

The core issue before the High Court was whether the "determination of the place of supply" of services, a crucial component for determining if a transaction qualifies as "export of services" and thus zero-rated, falls within the scope of questions on which an advance ruling can be sought under Section 97(2) of the Central Goods and Services Tax Act, 2017 (CGST Act). The AAR had held it did not, citing lack of explicit enumeration in Section 97(2).

3. Key Facts

• Petitioner: Sutherland Mortgage Services Inc., an India branch office located in the Cochin Special Economic Zone (CSEZ), is a branch of its principal company, M/s. Sutherland Mortgage Service Inc. USA.
• Business: The India branch provides information technology enabled services (e.g., mortgage orientation, servicing, cash management, analytics & reporting) directly to customers located outside India.
• Arrangement: Due to US laws preventing the principal from outsourcing to third parties, an "intra-company agreement" exists where the US principal reimburses the India branch for costs incurred. The India branch issues commercial invoices to the US head office.
• Petitioner's Claim: The services provided by the India branch directly to overseas customers qualify as "export of services" under Section 2(6) of the IGST Act, 2017, and are therefore zero-rated supplies under Section 16 of the IGST Act.
• AAR Application (Ext.P-1): The petitioner sought an advance ruling on whether the supply of services by its India branch to customers outside India would be liable to GST in light of the intra-company agreement.
• AAR Rejection (Ext.P-2): The AAR rejected the application, stating that "determination of place of supply" is not among the permissible issues listed in Section 97(2) of the CGST Act, and thus it lacked jurisdiction.
• Non-Appealable Order: Since the AAR's order was a rejection under Section 98(2) and not a ruling under Section 98(4), it was not appealable under Section 100 of the CGST Act, leading the petitioner to file a writ petition.

4. Arguments

Taxpayer (Sutherland Mortgage Services Inc.):
* The transaction qualifies as "export of services" under Section 2(6) of the IGST Act, and hence is a zero-rated supply.
* The services are rendered directly by the India branch to overseas customers, not to the principal company in the USA.
* The condition in Section 2(6)(v) of the IGST Act (supplier and recipient not being merely establishments of a distinct person, as per Explanation 1 of Section 8 IGST Act) is met because the recipient of the service is the overseas customer, not the US principal.
* The AAR erroneously denied jurisdiction by taking a "hyper-technical view."
* "Determination of the liability to pay tax on any goods or services or both," as per Section 97(2)(e) of the CGST Act, is a broad clause that encompasses the determination of the place of supply, as it is crucial for assessing tax liability.
* Parliament intended the advance ruling mechanism to provide certainty and precision to investors (domestic and foreign) regarding tax liabilities, which is vital for economic growth.

Revenue (Principal Commissioner, Commissioner of State Tax, Assistant Commissioner):
* The AAR's decision to reject the application was legally correct.
* The Advance Ruling Authority is a creature of statute and must function strictly within the legal bounds mandated by the Act.
* Section 97(2) of the CGST Act enumerates specific issues for advance rulings, and "determination of place of supply" is not explicitly listed.
* Therefore, the AAR correctly concluded it lacked jurisdiction to answer a question pertaining to the place of supply.

5. Court’s Reasoning

• The High Court analyzed Section 97(2) of the CGST Act, which lists seven categories of questions for advance rulings. It noted that clauses (a), (b), (c), (d), (f), and (g) are specific.
• However, clause (e) of Section 97(2) is widely phrased: "determination of the liability to pay tax on any goods or services or both."
• The Court reasoned that the determination of "place of supply" is an intrinsic and crucial aspect of determining the overall "liability to pay tax" on services. Without determining the place of supply, one cannot ascertain the tax liability.
• The Court held that the Parliament, in its wisdom, enacted Section 97(2)(e) with a wide vision, considering India's growing economy and the need for clarity and certainty for both domestic and foreign investors regarding tax liabilities. This certainty allows businesses to plan and operate effectively, maximizing economic efficacy.
• Taking a "hyper-technical view" that excludes "determination of place of supply" from the ambit of "determination of liability to pay tax" (Section 97(2)(e)) would defeat the legislative intent of providing precision and certainty through advance rulings.
• Therefore, the AAR's view that it lacked jurisdiction was legally wrong and faulty.

6. Statutory References

• Integrated Goods and Services Tax Act, 2017 (IGST Act):
  • Section 2(6) (Definition of "export of services")
  • Section 2(11) (Definition of "import of service")
  • Section 8 (Explanation 1 relating to distinct persons)
  • Section 13 (Place of supply of services where location of supplier or recipient is outside India)
  • Section 16 (Zero-rated supply)
  • Section 20 (xviii) (Application of CGST Act provisions, including advance ruling, to IGST)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 2(71) (Definition of "location of the supplier of services")
  • Section 2(93) (Definition of "recipient")
  • Section 95 (Definitions for Advance Ruling Chapter)
  • Section 96 (Authority for Advance Ruling)
  • Section 97 (Application for advance ruling)
  • Section 97(1)
  • Section 97(2) (a) to (g) (Questions on which advance ruling can be sought)
  • Section 97(2)(e) (Determination of the liability to pay tax)
  • Section 98 (Procedure on receipt of application)
  • Section 98(2) (Admission or rejection of application)
  • Section 98(4) (Pronouncing advance ruling)
  • Section 99 (Appellate Authority for Advance Ruling)
  • Section 100 (Appeal to Appellate Authority)
  • Section 100(1)
• Central Goods and Services Tax Rules, 2017: Rule 104
• Kerala Goods and Services Tax Rules, 2017
• Constitution of India: Article 226

7. Precedents Cited

No specific judicial precedents were cited by name in the judgment. The Court relied on its interpretation of the statutory provisions and the legislative intent behind the advance ruling mechanism.