1. Introduction
The Central Board of Indirect Taxes and Customs issued an important clarification on the export of services under the IGST Act 2017. The clarification removes long-standing confusion on whether a subsidiary, sister concern, or group company incorporated in India can treat its services to its foreign parent or related entity as an export.
The circular confirms that an Indian-incorporated company and a foreign-incorporated company are separate legal persons under GST. Therefore, their transactions do not fall under the category of “merely establishments of a distinct person.” This clarity helps many multinational groups structure their cross-border service flows with confidence.
This explanation plays a major role for IT/ITES companies, shared service centres, back-office operations, and other Indian service providers that receive foreign exchange for services delivered to their foreign parent or affiliates.
CBIC GST Circular No. 161/17/2021 dated 20/09/2021: Clarification relating to export of services-condition (v) of section 2(6) of the IGST Act 2017
2. Legal Background
To understand why this clarification matters, it helps to revisit the core provisions governing export of services.
2.1 Definition of Export of Services
Section 2(6) of the IGST Act states that a service qualifies as an export only when all five conditions are met:
- Supplier of service is located in India.
- Recipient of service is located outside India.
- Place of supply for the service is outside India.
- Payment is received in convertible foreign exchange.
- Supplier and recipient are not merely establishments of a distinct person.
It is the fifth condition that often caused confusion, especially for multinational structures.
2.2 Understanding Distinct Persons
Explanation 1 to section 8 of the IGST Act explains that establishments of the same person located in India and outside India are treated as establishments of distinct persons.
Explanation 2 adds that if a person operates through a branch, agency, or representative office in another territory, that office is an establishment in that territory.
This means:
- An Indian branch of a foreign company is considered the same person as the foreign company.
- A foreign branch of an Indian company is also treated as the same person.
In both cases, supplies between these establishments cannot be treated as exports.
2.3 The Definition of “Person”
Section 2(84) of the CGST Act treats the following as separate persons:
- A company incorporated in India
- A body corporate incorporated outside India
A foreign company and its Indian-incorporated subsidiary are therefore separate legal entities under GST. This distinction is central to the CBIC clarification.
3. Core Clarifications Issued by CBIC
Circular No. 161/17/2021 resolves the main interpretational issue.
3.1 Indian Subsidiary and Foreign Parent Are Separate Persons
A company incorporated in India and a company incorporated abroad are separate persons under GST law.
They are not merely different establishments of the same person.
3.2 Supplies between These Entities Can Quality as Export
When an Indian-incorporated subsidiary, sister concern, or group entity supplies services to its foreign parent or affiliates, the supply is not hit by condition (v) of section 2(6).
Therefore, such supplies may be treated as exports, subject to the other conditions:
- Place of supply outside India
- Recipient outside India
- Payment in convertible foreign exchange
3.3 Branch vs. Company Distinction
A branch or representative office is not a separate person from the company that owns it. But an incorporated company (Indian or foreign) is a separate person. This means:
- Branch-to-HO supplies → Not exports
- Subsidiary-to-parent supplies → Eligible for export classification
This distinction also helps prevent wrongful denial of zero-rated benefits.
4. Practical Business Impact
The CBIC clarification has several positive implications for businesses.
4.1 Clear Eligibility for Zero-Rated Supplies
Services provided by Indian subsidiaries to foreign group entities:
- Qualify as exports
- Are eligible for zero-rated benefits
- Can be supplied under LUT without payment of IGST
- Or supplied with IGST payment and refund claimed later
4.2 Reduced Litigation Risk
Earlier, field officers often denied export status citing the “distinct person” rule. The clarification standardises the position across all formations and reduces disputes.
4.3 Certainty for Transfer Pricing and Inter-company Service Contracts
Companies can structure support services, management fees, technical support, and IT services with certainty regarding GST treatment.
4.4 Increased Attractiveness of India as a Service Hub
The clarification strengthens India’s position as a shared service and outsourcing hub for multinational groups.
5. Compliance Steps for Registered Persons
Businesses should follow these steps to ensure smooth compliance.
5.1 Update Inter-company Agreements
Service agreements must clearly show:
- Independent legal identity of both entities
- Scope of services
- Deliverables
- Billing terms
- Foreign exchange receipt terms
5.2 Maintain Documentation for Export of Services
Keep the following documents:
- Signed service agreement
- Invoices issued in foreign currency
- Bank Realisation Certificates (BRC/FIRC)
- Proof of service delivery
- GST LUT (if supplying without IGST payment)
5.3 Validate Place of Supply under GST Rules
Ensure the place of supply is outside India as per:
- Section 13 of the IGST Act
- Nature of service provided
5.4 GST Portal Steps
Registered persons should:
- Report outward supply in GSTR-1 (Table 6A)
- Report export turnover in GSTR-3B (3.1(b))
- Claim refund (if applicable) through the Refund module: RFD-01
5.5 Validation Checks by GST Authorities
Authorities may check:
- Legal status of both entities
- Payment received in foreign exchange
- Correct classification under place of supply rules
- Nature of inter-company relationship
Maintaining clear documentation avoids delays.
6. Illustrations and Scenarios
Scenario 1: Indian Subsidiary Providing Support Services
An Indian-incorporated subsidiary provides back-office services to its foreign parent. Payment is received in USD.
Since both entities are separate persons under GST, the supply qualifies as an export.
Scenario 2: Indian Entity Billing Its Foreign Affiliate
An Indian company provides technical consulting to its group company in Singapore. All export conditions are met.
This is a valid zero-rated supply.
Scenario 3: Indian Branch of a Foreign Company
An Indian branch provides services to the foreign HO.
The HO and branch are the same legal person. This cannot be treated as an export.
Scenario 4: Foreign Branch of an Indian Company
A foreign branch performs services for the Indian HO. This is also not an export because both are the same person.
7. FAQs
1. Does the clarification apply to all group companies?
Yes, as long as the Indian entity and the foreign entity are separately incorporated.
2. Does payment need to be in foreign currency?
Yes, export conditions require payment in convertible foreign exchange.
3. Are IT/ITES services covered?
Yes, the clarification applies to all service categories.
4. Does the place of supply still matter?
Yes, place of supply must be outside India to qualify as export.
5. Can companies claim refund of IGST?
Yes, if services are exported with payment of IGST.
8. Conclusion
The CBIC clarification offers much-needed certainty for Indian subsidiaries and foreign parent companies engaged in cross-border service transactions. By confirming that an Indian-incorporated entity and a foreign-incorporated entity are separate legal persons, the clarification ensures such supplies are not blocked by condition (v) of section 2(6). Businesses can now confidently classify these transactions as exports, enjoy zero-rated benefits, and reduce litigation risks.