Guj AAR: No GST on services by foreign security manager for subscription to secured notes

The Gujarat Authority of Advance Rulings (AAR) has ruled that GST is not chargeable for services rendered by security managers situated abroad to manage a subscription to secured notes placed in a foreign country. The advance ruling No. GUJ/GAAR/R/2022/30 was issued on 11th May 2022.

The case referred to was of the applicant, M/s Adani Green Energy Limited (AGEL). The company needed a vast working capital requirement for supplies. Hence, it raised $750 million by the issue of 2024 redeemable Senior Secured Notes bearing an interest of 4.375%. The terms were outlined in the Subscription Agreement. Intermediaries such as the Axis Bank Limited, Singapore and a few others would be the managers established outside India without a place of business in India to facilitate the issue of notes between the AGEL and the foreign investors or subscribers.

The process involved the manager soliciting and arranging for potential investors to subscribe to the Senior Secured Notes issued by the AEGL. The manager begins the book building process by announcing the coupon rate offered by the AGEL to the potential investors. The foreign managers would purchase the securities of the AGEL and resell them to the foreign investors as notes, an arrangement similar to American Depository Receipts (ADR).

In line with the GST law, the transaction would be similar to purchasing and selling securities. Furthermore, the AGEL paid fees to the managers who were nothing but discounts on the nominal or face value of the securities provided to such managers to purchase the notes. GST is not chargeable on such a transaction.

However, the applicant wanted clarity about the levy of GST under a reverse charge basis for subscription services that managers offer to the applicant in scenarios when they are in a non-taxable territory.

The Authority for Advance Rulings in Gujarat made specific observations regarding the matter. The authority noted down that the Senior Secondary Notes by AGEL are to be designated as securities. The AGEL and investors are the primary parties in the transaction, called the principals. Whereas the managers in non-taxable territories who facilitate the supply between the principals are providing ancillary supply, called the intermediaries. The Integrated Goods and Services Tax (IGST) Act defines intermediaries to include any person who arranges and facilitates the sale of securities from one person to another person. 

The manager also plays the role of agent or broker by arranging and supporting the main supply between two or more persons. Moreover, the authority confirmed that the place of supply is the manager’s location as per provisions of clause (b) of Section 13(8) of the IGST Act. Since both the location of the supplier, i.e. manager and the place of supply, is outside India or in the non-taxable territory, it is outside the scope of supply and the GST law. It cannot be denoted as import of services. Accordingly, the authority ruled that GST is not to be charged on such transactions.

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