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Payments for R&D activity taxable
December, 27th 2006

We are part of a global group and have been based in India for the past several years. The parent company in the US carries out a range of research and development activities for the benefit of the entire group. 
 
The company accordingly charges the various companies in the group towards the actual costs incurred by it in carrying out these activities. Quarterly invoices are raised on us and we settle them by remittances of foreign exchange. Is there any liability on us to discharge service tax with regard to such payments? 
 
The query suggests that the parent company abroad carries out a range of research and development activities. 
 
These activities are undoubtedly taxable under the Indian service tax law as scientific and technical consultancy services or possibly as intellectual property services, based on the nature of the contractual arrangements between your company and the parent company, the provision of such services and the manner of its chargeout to you. 
 
Since the services are taxable, the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 will apply to the situation. 
 
Consequently, while taxable services are provided abroad by the parent company, they are deemed to be received and put to use by you in India, for which you are consequently remitting out monies to the parent company. The fact that these charges are recovered by the parent company at cost and without any mark-up does not detract from this position. 
 
Therefore, in terms of the aforesaid Rules, you, as a service recipient, are required to get registered with the service tax authorities, declare the receipt of such services and pay the service tax accordingly, as per the reverse charge mechanism whereby the recipient of the service discharges the tax, instead of the normal or typical situation where the service provider is required to discharge the tax. 
 
We are a manufacturing company. In the course of manufacture and sale of our products, we need to transport goods and hence use the transport services. We have been discharging service tax liability after availing abatement of 75 per cent on the taxable value of the said services, as per the bills received from the transporters. 
 
Recently we have received a letter from the department questioning our eligibility to avail the said abatement as we are paying service tax as the recipient of the transport services. 
 
The point raised by the department is that the abatement of 75 per cent can be availed only when service tax is paid by the transporters as service providers, and cannot be availed where service tax is paid by recipient of transport services. We wish to know whether we, as a recipient of transport services, are lawfully entitled to the said abatement. 
 
It is a fact that many assessees are receiving notices from the department denying the above abatement regarding goods transport agency (GTA) services where the service tax liability is discharged by the recipient of such services. 
 
In this case, it is relevant to examine Notification No. 1/2006-ST (earlier Notification No. 32/2004-ST), which grants an abatement of 75 per cent of the value of GTA services. 
 
As per the said notification, the abatement is available for the taxable services provided by GTA subject to conditions that the service provider has not availed credit on inputs, capital goods and services used for providing the taxable service and has also not availed the benefit of Notification No. 12/2003- Service Tax dated 20-06-2003. In a majority of situations, the service recipient of the GTA services, as opposed to the GTA service provider, i.e. the transporter, is liable to pay service tax. The service provider is liable for service tax only in a few limited situations. 
 
Now, the above notification cannot be interpreted to mean that the said abatement is meant only for service providers. As long as the conditions of the notification are satisfied, the benefit of abatement can be availed by any person paying the tax. In case the service provider pays the tax on GTA services, he can produce sufficient documentation for ensuring compliance with the above conditions. 
 
For instance, he may take a declaration from the GTA service provider to the effect that the above conditions have been satisfied. The department, in its Circular FN B1/6/2005-TRU (dated 27-07-2005), has clarified exactly this point. Therefore, the abatement on taxable service would equally apply whether the tax is paid by the service provider or by the service recipient. 
 
In the light of the circular and the relevant notification discussed above, your company is lawfully entitled to avail the abatement on GTA services, provided you have sufficient documentation evidencing the fulfilment of the conditions of the notification. 

S Madhavan
(The writer is leader, indirect tax practice, PricewaterhouseCoopers)

 
 
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