Examining Circular 232: Place of Supply Challenges for Data Hosting Services

On September 10, 2024, Circular No. 232/26/2024-GST was issued to clarify the place of supply for data hosting services provided by service providers located in India to cloud computing companies located outside India. This article examines the implications of the circular and addresses the potential inconsistencies with the provisions of the IGST Act.

What Are Data Hosting Services?

A data hosting service is a service provided by a company or platform that offers storage space on servers to house digital files, databases, or applications. These services enable users or businesses to store, manage, and access their data remotely over the internet or private networks, without the need to maintain in-house hardware or infrastructure.

GST Perspective on Online Information and Database Access or Retrieval Services (OIDAR):

Under the Goods and Services Tax (GST) framework, Section 2(17) of the Integrated Goods and Services Tax (IGST) Act defines "online information and database access or retrieval services" (OIDAR) as:

“services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply impossible to ensure in the absence of information technology and includes electronic services such as,""

(i) advertising on the internet;

(ii) providing cloud services;

(iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;

(iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;

(v) online supplies of digital content (movies, television shows, music and the like);

(vi) digital data storage; and

(vii) online gaming, excluding the online money gaming as defined in 12 of 2017. clause (80B) of section 2 of the Central Goods and Services Tax Act, 2017;”

In simpler terms, OIDAR services are delivered online, with no physical interaction between the supplier and recipient. For example, purchasing and downloading an e-book online constitutes an OIDAR service.

Given the nature of data hosting services, they fall under clause (vi) of the definition as they are akin to digital data storage services. These services are delivered electronically and reply on digital network for their provision. As a result, they fulfill the criteria to be classified as OIDAR services, clearly indicating that they qualify under this category.

Export of Services Criteria under the IGST Act:

When the supplier is located in India and recipient outside India, the transaction may qualify as an "export of services" under Section 2(6) of the IGST Act, provided the following conditions are met:

"export of services" means the supply of any service when,-

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) 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.”

The transaction in question, where the supplier of data hosting service is located in India and the service recipient is located outside India, may qualify as an export of service if all the required conditions are met. The first, second, fourth, and fifth conditions are easily satisfied—since the supplier is in India, the recipient is outside India, payment is assumed to be received in convertible foreign exchange, and the parties are not related entities. However, determining the place of supply (POS) requires further scrutiny.

Determining the Place of Supply:

Section 13 of the IGST Act governs the place of supply for services when either the supplier or recipient is located outside India. According to Section 13(12), the place of supply for OIDAR services is the location of the recipient. Therefore, it becomes essential to determine the location of the recipient of the service.

Location of the Recipient of Services:

The term 'location of the recipient of services' is defined under Section 2(14) of the IGST Act as follows:

"location of the recipient of services" means,"

(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and

(d) in absence of such places, the location of the usual place of residence of the recipient;”

The location of recipient of service shall be determined in accordance with this definition.

Further “fixed establishment” is defined u/s 2(7) of the IGST Act as “a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services or to receive and use services for its own needs”.

Notably, in the first three points, the phrase "where a supply is received" is crucial for determining the location of the recipient of services. The determination hinges on where the service is actually received, not merely on the existence of a GST-registered place of business or other establishments. However, if none of the first three criteria apply, the fourth criterion- the recipient's usual place of residence would be considered.

Let’s understand with the help of an illustration:

Example: Company ABC is located and incorporated outside India, and it also has a branch office in India registered under GST. ABC receives services from supplier XYZ, who is located in India with no involvement from the Indian branch.

In this example, the recipient's location will be determined based on Section 2(14) of the IGST Act. According to this section, the location of the recipient is determined based on where the service is actually received, not merely by the existence of GST-registered establishments. While it might initially seem that the Indian branch should be considered the recipient due to its GST registration, this is not the case as the service is received by the parent company ABC, abroad.

Therefore, the location of the recipient of service cannot be ascertained through the first criteria. Now, moving to the next criteria (b) if the service is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment will be considered the location of the recipient. As per the definition of fixed establishment, Company ABC, located outside India, qualifies as a fixed establishment and is also the entity receiving the service. Thus, based on criterion (b), the location of the recipient (LOR) is where the fixed establishment is located. In this case, the location of the recipient is outside India.

Returning to our primary focus on data hosting services, according to Section 13(12) of the IGST Act, the place of supply is determined by the location of the service recipient. By applying criterion (b) from Section 2(14), “the location of such fixed establishment” will be considered as the "location of the recipient" (LOR) of the data hosting service. In this instance, the recipient’s fixed establishment is located outside India. Therefore, the recipient's location is outside India, leading to the conclusion that the place of supply is also outside India.

Explanation to Section 13(12): A Twist in the Tale

However, an interesting turn arises, as the explanation to Section 13(12) adds a caveat. If any two of the following non-contradictory conditions are satisfied, the recipient of the OIDAR service is deemed to be located in the taxable territory, namely:

(a) the location of address presented by the recipient of services through internet is in the taxable territory;

(b) the credit card or debit card or store value card or charge card or smart card or any other card by which the recipient of services settles payment has been issued in the taxable territory;

(c) the billing address of the recipient of services is in the taxable territory;

(d) the internet protocol address of the device used by the recipient of services is in the taxable territory;

(e) the bank of the recipient of services in which the account used for payment is maintained is in the taxable territory;

(f) the country code of the subscriber identity module card used by the recipient of services is of taxable territory;

(g) the location of the fixed land line through which the service is received by the recipient is in the taxable territory.”

If two or more of these conditions are met, the service recipient location is considered to be within the taxable territory.

For instance, if the recipient satisfies two non-contradictory conditions, such as:

(b) The card used for payment (credit, debit, or smart card) is issued in the taxable territory, and

(f) The country code of the SIM card used by the service recipient is of the taxable territory.

In that case, the service recipient location would be considered within the taxable territory. Consequently, the place of supply would fall within the taxable territory.

The Circular’s Approach:

However, Para 4 of the Circular No. 232/26/2024-GST states that the place of supply for data hosting services provided by a data hosting service provider in India to an overseas cloud computing service provider does not fit into any of the specific provisions under Sections 13(3) to 13(13) of the IGST Act. As a result, the circular determines the place of supply under the default rule in Section 13(2), which states that the place of supply is the location of the recipient of service.

For brevity, we previously discussed how to determine the location of the recipient of service as per Section 2(14) of the IGST Act. It was concluded that the location of the recipient (LOR) for data hosting services is outside India. Thus, the recipient’s location is outside India, which corresponds to the place of supply also being outside India.

According to the Circular, the supply of data hosting services by a service provider located in India to a cloud computing service provider located outside India qualifies as an export. This is because all the export conditions are met, including the place of supply (POS), which, as per condition (c), is outside India. Therefore, the transaction is considered an export under the Circular.

Now, let’s revisit our earlier discussion on the requirement to meet two non-contradictory conditions specified in the explanation to Section 13(12), which addresses the determination of the place of supply for OIDAR services. If these two non-contradictory conditions are met, the LOR of the service would be considered within the taxable territory. In such a case, the place of supply would be regarded as within the taxable territory, meaning condition (c) for exports would not be satisfied. Consequently, the transaction would not qualify as an export of data hosting services, and the provisions related to exports would no longer apply.

Contradiction between Circular and Law:

Interestingly, the circular does not refer OIDAR services or Section 13(12), which deals specifically with the place of supply for OIDAR services. This suggests that the circular does not classify data hosting services as OIDAR services. Instead, it determines the place of supply using Section 13(2), which applies when the specific rules for other services do not apply.

However, given the nature of data hosting services, they arguably qualify as OIDAR services. As such, the place of supply should be determined under Section 13(12), which explicitly governs such services. This creates an inconsistency between the IGST Act’s provisions and the interpretation presented in the circular.

According to Section 13(12), if two non-contradictory conditions outlined in its explanation are satisfied, the location of the recipient (LOR) of the service will be deemed to be within the taxable territory, and thus, the place of supply (POS) will also be considered within that territory.

In contrast, the Circular suggests that the place of supply would be the location of the service recipient, which falls outside India. This leads to a contradiction between the statutory provisions of the IGST Act and the Circular, where the law determines the POS according to Section 13(12), while the Circular relies on Section 13(2).

Here’s a simple table summarizing the contradictions:

In summary, both sections state that the Place of Supply (POS) shall be the location of the recipient (LOR) of the service, as determined under Section 2(14). However, due to the explanation in Section 13(12), this changes the interpretation, making the LOR of the service different from what is determined under Section 2(14). This discrepancy arises because the circular does not classify data hosting services as OIDAR services. Had it done so, this contradiction may not have occurred.

This contradiction between the circular and the IGST Act indicates the need for further clarification or potential amendment by the authorities.

Judicial Precedents on Circulars vs. Statutory Provisions

Several judicial precedents have clarified that circulars cannot override statutory provisions:

• In the case of Vivo Mobile India Private Limited vs Union of India, decided on 05-09-2023 [2023(09)LCX0150], the Hon’ble Allahabad High Court held that pre-existing circular that conflicts with the amended statutory law is invalid.

• In the case of Alfa Laval (India) Ltd. Vs. Union of India, decided on 1-9-2014 [2014(09)LCX0008], the Hon'ble Bombay High Court ruled that Circular cannot override the Statutory Rules, and in cases of conflict, the statutory provisions prevail. The relevant extract is reproduced hereunder:

“Hence, read together and harmoniously it will have to be held that the Circular cannot override the Rules and particularly Rules 3 and 7 of the Drawback Rules and the sub-rules thereunder. This being the case, Clause (d) of the said Circular is clearly unsustainable and has to be struck down. On the same parity of reasoning, and more so because the orders/letters impugned herein, rely upon the said Circular to reject the applications of the Petitioner seeking determination of the Brand Rate of drawback under Rule 7, even the said impugned orders/letters will have to be set aside.”

Conclusion

In conclusion, while Circular No. 232/26/2024-GST aims to clarify the place of supply for data hosting services, its treatment of such services under Section 13(2) rather than Section 13(12) of the IGST Act creates inconsistencies. Given that data hosting services meet the definition of OIDAR services, the circular’s interpretation appears to conflict with the IGST Act's provisions. Judicial precedents suggest that statutory law takes precedence over conflicting circulars, underscoring the need for further clarification or amendment from the authorities to resolve this issue.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.