Circular No 232/26/2024 for Place of supply for Data Hosting Services

Summary of Clarification on Place of supply for Data Hosting Services

Trade and industry groups have asked for Clarification on Place of supply for Data Hosting Services. Specifically, when service provider is located in india and provide service to cloud computing companies located outside india.Therefore, government has issued Circular No 232/26/2024 regarding Place of supply on dated 10-09-2024.

Issues covered under this Circular

Tax department believe that when data hosting services are provided by the companies in india to cloud computing companies outside india, the place of supply is considered to be in india. As a result, they think that these services are not eligible to get the benefits of export services.

Key Questions of the Circular

1. Whether data hosting service provider qualifies as ‘Intermediary’ between the cloud computing service provider and their end customers/users/subscribers as per Section 2(13) of the Integrated Goods and Services Tax Act, 2017 (herein after referred to as the “IGST Act”) and whether the services provided by data hosting service provider to cloud computing service providers are covered as intermediary services and whether the place of supply of the same is to be determined as per section 13(8)(b) of IGST Act.

2. Whether the data hosting services are provided in relation to goods “made available” by recipient of services to service provider for supply of such services and whether the place of supply of the same is to be determined as per section 13(3)(a) of the IGST Act.

3. Whether the data hosting services are provided directly in relation to “immovable property” and whether the place of supply of the same is to be determined as per section 13(4) of the IGST Act.

Question 1: Whether data hosting service provider qualifies as ‘Intermediary’ between the cloud computing service provider and their end customers/users/subscribers as per Section 2(13) of the Integrated Goods and Services Tax Act, 2017 (herein after referred to as the “IGST Act”) and whether the services provided by data hosting service provider to cloud computing service providers are covered as intermediary services and whether the place of supply of the same is to be determined as per section 13(8)(b) of IGST Act.

Clarification:

Intermediary means a broker agent or any other person who arranges or facilitates the main supply of goods or services or both or securities and not involved in the main supply on his own account as per section 2(13) of IGST Act,2017 with circular No159/15/2021.
Person who supplies goods or services or both on their own account are not covered under the definition of Intermediary.
Generally, Cloud computing service providers often make agreement with data hosting service provider to use their data centers for hosting cloud services. The data hosting service provider either owns or rents the physical location of the data center and is responsible for setting up the necessary infrastructure and hiring staff.
In this setup data hosting service provider manages everything related to data center such as rent, hardware, software, power, internet connectivity, security and staffing. However, they do not interact with or even know who the end user of the cloud services.
End users can access these cloud services smoothly due to internet and the technology hosted in the data centers. The data hosting service provider work directly with the cloud computing service provider on a business to business basis, hence as they are not acting as Intermediaries, the place of supply of the same can not be determined as per section 13(8)(b) of IGST Act.

Question 2: Whether the data hosting services are provided in relation to goods “made available” by recipient of services to service provider for supply of such services and whether the place of supply of the same is to be determined as per section 13(3)(a) of the IGST Act, 2017.

Clarification:

As per section 13(3) (a) of the IGST Act, if the service involves the handling of physical goods given by the customer to the service provider, the place of supply in such case is the location of the service provider.
The cloud computing service providers pay the data hosting provider for using of their premises, hardware and other necessary infrastructures like cooling system , power supply , software, network connectivity and security measures based on their agreement.
Since the cloud computing service providers are not making any physical goods or infrastructure available to the data hosting provider, the service provided here do not fall under the rule where the customer provides goods to the service provider.
The data hosting provider is using its own infrastructure like premises, hardware, software, power supply and security to provide services. Even in some case where the cloud computing provider might supply some hardware to the data hosting provider, the overall responsibility for the data hosting is lies with data hosting provider.
When service involves goods physically made available by the customer the place of supply will be decided on the basis of section 13(3) (a) of the IGST Act, but in this scenario it is not the case of physical involvement of goods hence the section 13(3) (a) will not applicable to determine the place of supply.

Question 3: Whether the data hosting services are provided directly in relation to “immovable property” and whether the place of supply of the same is to be determined as per section 13(4) of the IGST Act.

Clarification:

Section 13(4) of the IGST Act deals with services that are directly related to the immovable property, determining where those services are considered to be supplied.
Data hosting service providers use their own or rented premises to house the IT infrastructure and other equipment necessary for providing data hosting services. These services includes procurement of hardware, uninterrupted power supplies, backup generators, ventilation and cooling equipment, network connectivity, fire suppression systems, security, human resource, etc. including server monitoring and repair and replacement.
Data hosting services are a complex service which involves various tasks and are not directly related to the immovable property or physical location. However, it involves much more than just providing physical space. Hence Place of supply for these data hosting services cannot be determined as per section 13(4) of IGST Act which deals with services directly related to immovable property.
The data hosting services provided by an indian data hosting service provider to overseas cloud computing service providers do not fall under specific rule listed in section 13(3) to 13(13) of the IGST Act. the general rule in section 13(2) of the IGST Act will be applicable.
If cloud computing service provider is located outside india, then the place of supply for these data hosting services is considered to be outside india.
If the data hosting service provided to foreign cloud computing company meets all the requirement specified in section 2(6) of the IGST Act then it can be treated as export of services and which has specific tax implication.

Download –Circular No 232/26/2024