GST: Submission on taxability of import of Free of Cost (FOC) software from Related parties
Blog: NASSCOM Official Blog
Background & Issue:
As you may be aware, a number of enquiries have been initiated by GST authorities on companies in the recent past seeking details of cross-border Free of Cost (“FOC”) supply of software between related parties. This has caused quite a stir in the industry given that these enquiries have been initiated during the COVID-19 lockdown where IT/ ITeS companies have been working remotely and already dealing with several other business challenges.
Typically, access to software provided by overseas affiliates to Indian companies are for the limited purpose of enabling provision of services back to the overseas affiliate and not for any other purposes. Indian companies access the software only for provision of service under the contract with the affiliate and not for any “commercial exploitation” with third party customers.
Further, the agreements entered into between the parties clearly specify that the Indian affiliate would need to provide services using the software/ tools that would be given by the overseas affiliate. Indian companies cannot access or use such interfaces, software technology or any other confidential information for any purpose other than for provision of IT/ ITeS services to overseas entity.
The Indian companies will be unable to perform their services back to the overseas entity without these software technology being made available by the overseas entity, given the interdependency of the service and access provided with such software.
The software/ interfaces/ tools are generally accessed on internal websites/ web-links of overseas entity. In most occasions, the said technology is not downloaded onto servers in India, but are remotely accessed. This also reiterates the fact that usage of such software technology is for limited purposes of providing IT services to overseas affiliate.
In this regard, NASSCOM made a submission to GST Officials highlighting that such FOC supplies should not get covered under entry 4 of Schedule I of CGST Act as the software usage is not a separate import of service but for limited purposes to facilitate provision of main service. Access to software provided without an intention of “commercial exploitation” cannot be considered liable to GST. Hence, there is no “service” in the first place and the question of it qualifying as a deemed supply does not arise. The current interpretation would lead to unnecessary litigation and results in a huge pile-up of cases.
Thus, there is an urgent need for a clarification that access/ use provided to software by overseas affiliated to Indian Companies to facilitate provision of service does not get covered under Entry 4 of Schedule I of CGST Act, as it fails to satisfy the conditions for qualifying as a “supply”. Further, an instruction may also be issued to the ground level authorities for putting on hold the ongoing investigations on this matter and no show cause notice to be issued till such time that the clarification is issued.
We will keep you posted on further developments in this regard.
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