QUESTION

We are a Private Limited Company based at Kanpur. We are engaged in the business of manufacturing Plastic Automotive parts and Engineering Components, Assemblies etc. for Auto Industries and cater to both domestic as well as overseas markets. For the development of certain parts, we have entered into a Technical Collaboration in the year 2009 with one Service provider in Italy under the terms that we will pay Royalty on per part basis based on number of parats sold and full payments reallised. Initially this arrangement was for Program life of the part (Progem life means till the model of Csr is alive i.e. say 3 years, 5 years or 7 years etc.). However, this arrangement was terminated in the year 2014 by the Service provider. Since the initial arrangement was for the program life, our auditors suggested us to take provision of Royalty in our books of accounts on conservative basis (though the arrangement was terminated in the year 2014). The provision was made only upto F.Y. 2018-19 but in 2019-20 & 2020-21 no provision was taken for Royalty in the books of Accounts. As regards the provisions of Royalty made, we have neither received any Invoice from the collaborator and nor any payment of Royalty was made and also such provision has been written back in the books of Accounts in the F.Y. 2020-21. In recent GST Audit, we have been asked by the GST Audit team to make the payment of GST on RCM basis on the provision of Royalty made in our books of Accounts for F.Y. 2017-18 & 2018-19. Kindly advise on this matter, whereas - As per our understanding since it was only a book provision for which no Invoice was received by us nor any payment of Royalty was made by us as such. Rather the provision was reversed in F.Y. 2020-21, hence it shall not attract GST under RCM. We need your kind advise in this connection. Regards,` Rajesh Agarwal (GM-Finance)

ANSWER

The services mentioned in your question are covered under RCM as per Section 9(3) of CGST Act.

The liability of payment of tax will be decided on the basis of Time of Supply (TOS). TOS of services to be taxable on RCM basis is to be determined as per sub section (3) of Section 13 of CGST Act, the same is reproduced below:

(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:''

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Provided further that in case of supply by associated enterprises, where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier.

Section 13(3)(a) and 13(3)(b) is not applicable in your case because no invoice is issued or any other document is received from the supplier. So first and second provisos are to be applied.

Second proviso is related to supply by Associated Enterprises. We assumed that your case is not related to Associated Enterprises, therefore we are left with first proviso only. the same is as follows:

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply:

Your case is covered under first proviso. But the applicability of first proviso will come into force when there is supply of service.

As per your mail, the arrangements are terminated in the Year 2014, therefore no supply of service is made. Since there is no supply of service, the question of TOS of service does not arise. But this logic will not be entertained by the GST Officer because you are making provisions in the Books of Accounts on regular basis and have availed corresponding Income tax benefits for the AY 2015 onwards declaring receipt of services.

Further, you have mentioned that the impact of these provisions is nullified by the reversal entries in the Year 2020-21.

*** The impact of doing reversal is that the tax should have been paid at the TOS in the years 2017-18 & 2018-19 (in GST regime) and refund of the same should be applied after making reversal of that in the Year 2020-21.

Conclusion: Your case is weak as we discussed in the foregoing paragraphs. But you can go for litigation considering the overall transaction. There are good chances that you may get relief in Higher Courts.
There are also chances that the Department Officer may get confused and not take the logic we discussed in Para ***. (Reply dt. 08/04/2021)