India’s second-largest information technology (IT) company Infosys’ next move will likely be to approach the Karnataka High Court in the Goods and Services Tax (GST) evasion matter, with the odds stacked in favour of the Bengaluru-based company. There are several laws and precedents that will make it a cakewalk for Infosys to squash all the claims made by the GST department, tax experts say.
On July 31, Infosys received a pre-show cause demand for alleged tax evasion of over Rs 32,000 crore from the Directorate General of GST Intelligence (DGGI). The tax demand made by the Bengaluru GST office generated shockwaves, considering Infosys' track record of being one of India's best-governed firms.
If the department proceeds with the issuance of a showcause notice, Infosys is likely to bypass the usual adjudication process and directly approach the High Court by filing a writ petition under Article 226. This article of the Indian Constitution usually empowers High Courts to issue orders and directions for the enforcement of fundamental rights and for any other purpose within their jurisdiction.
“In all likelihood, instead of going for their adjudication, they (Infosys) will challenge it before the High Court straight away, taking a lead from the circular of June 2024 and other factual aspects,” said Rupender Sinhmar, Partner, BSM Legal.
Sinhmar was referring to a circular issued by the Central Board of Indirect Taxes and Customs (CBIC) on June 26, which states that if the head office (HO) has not raised an invoice in respect of services, then it will be treated as “NIL by HO to BO (branch office).”
Moneycontrol has reached out to Infosys for a comment and the story will be updated as and when the company responds.
“It’s a common practice for IT companies in India to transfer funds to their foreign branches for operational expenses rather than taxable services. Even if a show cause notice is issued subsequently, Infosys is likely to win the case on merits.,” said Lakshmi Ratna Kancherla, an independent tax expert.
Even industry body Nasscom has come out in support of Infosys, elaborating that this is not a new problem and courts have been ruling in favour of the industry in these cases. “The Karnataka High Court had stayed a show cause notice in a similar case for a large IT company,” it said in a statement.
Also read: Tax terrorism at its worst: Former Infosys CFO Mohandas Pai slams Rs 32,000 cr GST demand to IT firm
CBIC’s June 2024 Circular
Experts say the next logical step for Infosys would have been to approach the GST Appellate Tribunal, which is yet to be set up in the country. In September last year, the centre notified the setting up of 31 state benches of the tribunal after a wait of six long years, however, it is still work-in-progress.
Infosys is also likely to challenge the pre-show cause notice based on the June 2024 circular, which stipulates that if services between related parties do not have an invoice, they will be considered “NIL” in value. “So it will be a difficult task for the department to counter that argument and so this entire fiasco of Rs 32,000 crore of GST (evasion), which has made headlines all over, may not work well before the high court,” Sinhmar said.
The said June 26 circular states, “In cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil.”
Kancherla said that this is an industry-wide issue while agreeing that Infosys might challenge the case by way of a writ petition before the Karnataka High Court. She further said that there’ is a risk this incident might open a can of worms for multinational companies operating out of India via branches outside the country, exposing them to notices/investigations from the tax authorities for the period under the GST law.
Moreover, the liability to pay GST on the import of services provisions arises under the Integrated Goods and Services Act (IGST) Act, which requires a 'person' located in the taxable territory to pay GST for any supply of service by a 'person' located in the non-taxable territory. And because a branch is not an 'artificial juridical person', therefore it may not trigger the charging provisions under GST, writes Ritesh Kanodia, Partner at Aurtus Legal, in a blog.
Also read: Infosys says GST authorities closing pre-show cause notice worth Rs 4,000 cr on GST evasion
Other precedents
Nasscom maintains that the issue was addressed under the erstwhile service tax law, where favourable judgments were delivered by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT). The industry body has been in constant touch with the Ministry of Finance to issue a circular to clarify the position to avoid litigation risks and ensure that government circulars are honoured in enforcement mechanisms.
Sinhmar drew a parallel to a similar case under the erstwhile service tax regime judgement. In that case, over a thousand showcause notices were issued to various Indian subsidiaries of foreign companies regarding the salaries of expatriates, but many were quashed by the High Court, providing interim protection to the affected companies.
Sinhmar said that Infosys has consistently said that the expenses incurred for its foreign branches and subsidiaries do not constitute taxable services. Instead, these are operational costs, such as salaries, necessary for running those entities.
Given the absence of any invoiced services and the support of the June 2024 circular, Infosys can argue that there is no taxable event, no consideration, and therefore, no GST liability.
Nonetheless, for now, Infosys will have to respond and co-operate with DGGI’s notice, said Prabhakar K S, Founder and Chief Executive Officer of Shree Tax Chambers.
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