Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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GST and Foreign Affiliate Services: Recent Delhi High Court Ruling Explained

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In an important recent ruling, the Delhi High Court clarified the valuation rules under GST for services provided by foreign affiliates to their related domestic entities. The court's decision in Metal One Corporation India (P.) Ltd v. Union of India  reaffirms that in cases where no invoice is issued for services provided by a foreign affiliate, the value of such services should be deemed as Nil. This interpretation provides relief to many companies facing tax liabilities due to seconded employees and similar cross-border service arrangements.

This article dives into the key aspects of the case, the legal interpretations, and what this ruling means for businesses and GST compliance.

Key Highlights of the Ruling

  1. Background of the Case
    The case involved multiple writ petitions challenging Show Cause Notices (SCNs) issued to Indian entities that had received services from their foreign affiliates. These services involved the secondment of employees (a temporary transfer of employees) from a foreign parent company to assist the Indian entity. The tax authorities argued that these arrangements were subject to GST, even if no invoices were raised.

  2. Issue of GST Liability on Seconded Employees
    The primary issue was whether the Indian entities were liable for GST on services deemed to be imported when employees were temporarily transferred from foreign affiliates. The companies argued that these transactions should not incur additional tax burdens under GST.

  3. Central Board of Indirect Taxes and Customs (CBIC) Circular No. 210/4/2024-GST
    This CBIC Circular clarified that if the recipient domestic entity is eligible for full Input Tax Credit (ITC), and if no invoice is raised by the foreign affiliate, the value of services would be deemed as Nil for GST purposes. This Circular was critical in shaping the court’s judgment.

Detailed Breakdown of the Court’s Decision

1. Interpretation of Rule 28 of the CGST Rules

The Delhi High Court relied heavily on Rule 28 of the Central Goods and Services Tax (CGST) Rules, which governs transactions between related or distinct persons. According to Rule 28:

  • Second Proviso to Rule 28: If the recipient of services is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value.
  • Implication of Non-Invoicing: The CBIC Circular further clarified that if no invoice is raised for these services, the value is deemed as Nil. Thus, for tax purposes, these services are considered to have zero value.

2. Applicability of CBIC Circular to Foreign Affiliates and Domestic Entities

The ruling emphasized that the CBIC Circular’s clarification holds in this scenario, as the recipient (the Indian entity) was eligible for full ITC. The absence of an invoice leads to the service value being considered as Nil. Consequently, no tax liability arises from these transactions, as confirmed by the court.

3. Impact on Show Cause Notices Issued to the Petitioners

The court invalidated the SCNs issued to the petitioners, as they were based on the assumption that taxes were due on these secondment services. Since the value of services was deemed Nil, the basis for GST liability was effectively nullified.

Legal Precedents Cited

The court referenced the Supreme Court ruling in CCE & Service Tax v. Northern Operating Systems (P) Ltd. (2022), which had set a precedent that foreign affiliates’ seconded employees could constitute “manpower supply” services. However, the Delhi High Court concluded that this precedent did not apply here due to the clarification issued by the CBIC and the specific provisions of Rule 28.

Implications for Businesses

  1. No GST Liability if No Invoice Raised
    The judgment clarifies that if a foreign affiliate provides services to a related domestic entity eligible for full ITC and no invoice is raised, the service value is deemed as Nil. This interpretation significantly reduces GST liability risks for companies in similar situations.

  2. Precedent for Other Cases Involving Foreign Affiliates
    This ruling sets an important precedent for companies with foreign affiliates that second employees or provide services to India. The value of such services, if un-invoiced, may be considered Nil for GST purposes, provided the recipient is eligible for full ITC.

  3. Broader Impact on Cross-Border Employment Arrangements
    The judgment helps clarify how cross-border employee transfers or secondments are treated under GST. Companies engaged in similar arrangements can rely on this ruling to structure their transactions and avoid unintended GST liabilities.

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