2019 (2) TMI 126 – APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA – TMI – Intermediary services – pure and mere promotion and marketing services – after sale support services – place of supply of services – naturally bundled services – section 12 of the Integrated Goods and Services Tax Act, 2017 – composite supply of services – principal supply – client is overseas entity – exports or not – zero-rated supply – challenge to AAR decision.
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Whether the promotion and marketing activities undertaken by the Appellant for the overseas Principal, are to be classified as ‘intermediary services’? – Held that:- There does not seem to be any difference between the meaning of the term “intermediary” under the GST regime and pre-GST regime. In the pre-GST regime, an intermediary referred to a person who facilitates the provision of a main service between two or more person but did not include a person who provided the main service on his account. Similarly, in the GST regime, an intermedia
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ing such goods on his own account.
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The argument of the Appellant that the promotion and marketing services are supplied to the Principal on their own account and hence they fall within the exclusion clause of the definition of intermediary is not a correct interpretation of the law – the Appellant is clearly facilitating the supply of the products of the overseas client directly to the client’s customers in the territory of India and is not supplying such goods on his own account. Therefore, the Appellant does not fill within the ambit of the exclusion.
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The decision of the AAR is upheld that the service of promotion and marketing of the products of the overseas client is in the nature of facilitating the supply of the products of the overseas client and is appropriately classified as an ‘intermediary service’ as defined under Section 2(13) of the IGST Act – Having concluded that the service supplied by the Appellant is classified as an ‘intermediary service’ as defined unde
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installation support or after sale support is required – the after sales support service, although rendered in a composite manner with the promotion and marketing service is not a composite supply. The price for the after sale support service is clearly identifiable and has been so stated in the contract itself – ruling of AAR upheld.
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Whether the above contracts would qualify as exports in terms of Section 2(6) of the IGST Act and Will be a zero-rated supply as provided under Section 16 of the said Act? – Held that:- One of the important requirements for supply of any service to be treated as ‘export of service’ is that the place of supply of service is outside India. The provisions for determination of place of supply of services where the location of the supplier or the location of the recipient of services is outside India are contained in Section 13 of the IGST Act, 2017. Thus. the entire issue is intrinsically related to determination of ‘place of supply’ of service by the a
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materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore unless a mention is particularly made to such dissimilar provisions, reference to the CGST Act Would also mean reference to the corresponding similar provisions in the KGST Act. The present appeal has been filed under section 100 of the Central Goods and Service Tax Act 2017 and Karnataka Goods and Service Tax Act 2017 (herein after referred to as CGST Act, 2017 and SGST Act, 2017) by M/s. Toshniwal -Brothers (SR) Private Limited, (hereinafter referred to as Appellant ) against the advance Ruling No. KAR ADRG 23/2018 Dated: 19th sept 2018, = 2018 (10) TMI 597 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA Brief Facts of the case: 1. M/s. Toshniwal Brothers (SR) Private Limited is a company located at, No. 11, AECS Layout, 4th Main, 3rd Cross, Sanjay Nagar 1st Stage, Geddalahalli, Bengaluru – 560094, having GSTIN number 29AAACT2881R1ZJ, 2. The Appellant -states that he
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ducts are placed directly by the prospective customers on the overseas entity. The applicant is not engaged in trading of such goods, either on his own account or on the account of the overseas client. The promotion and marketing of the products involves the following activities: i. Applicant advertises the details of the goods to the prospective customers; ii. Provides demonstration of the products to the various prospective customers located in India; iii. Communicates and corresponds about all the relevant information to the prospective customers in connection with the goods; iv. Communicates with the overseas clients about comments and queries of the prospective customers; and v. Reviews the credit rating of the prospective customers of the overseas entity on regular basis; b. After sale support services: The prospective customers who are desirous of importing the said equipment will issue a purchase order to the overseas supplier and agree on the pricing and supply details. On the
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t orders for the products in India, to the overseas entity. These business reports would normally include: i. Short and medium term forecasts detailing prospective customer s name, order value, anticipated placement and expected delivery dates and long term project and prospect lists; ii. Results of regular observation of marketing conditions, information in the public domain relating to the activities of competitors; and iii. Results of participation in trade fairs. 5. The Appellant filed an application for Advance Ruling under section 98 of the CGST Act, 2017 and KGST Act, 2017 on the questions a. Whether pure and mere promotion and marketing services will be intermediary services for the purposes of section 12 of the Integrated Goods and Services Tax Act. 2017 for determining the place of supply of such services? b. If after sale support services are also provided under a composite contract, would it then be composite supply? What will be the principal supply for such contracts? e.
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arding obtaining the purchase order, price negotiations and finally supply the goods. Appellant is involved only in the promotion and marketing of the goods of the overseas entity on his own account. Hence the activity undertaken by the Appellant, by way of promotion and marketing services are not intermediary services, In support of this. Appellant had drawn the attention of the Learned Authority for Advance Ruling (in short LAAR) to the Advance Ruling pronounced under the Service tax provisions in the case of GoDaddy India web Services (P) Ltd. (Ruling No. AAR/ST/08/2016, dated 4th March 2016 Application No. AAR/44/ST/15/2014) = 2016 (3) TMI 355 – AUTHORITY FOR ADVANCE RULINGS wherein the Authority has clearly demarcated the meaning of intermediary services and ruled that pure marketing and promotion services would not be intermediary services. 6.2. The appellant also submitted before the Authority that, Clause 30 of Section 2 of CGST Act, 2017 provides the meaning of composite suppl
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that the principal supply will be promotion and marketing services. 6.3. Appellant further submits that the services i.e., promotion and marketing services and after sale services as a whole, would be the export of services as provided in clause 6 of section 2 of IGST Act, 2017 because, i. The supplier of services, i.e. Appellant, is located in India; ii. The recipient of services, i.e. overseas entity, is located outside India; iii. The place of supply of service, is outside India; iv. The payment for such services will be received by the supplier of services in convertible foreign exchange; and v. The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act, 2017. Thus, they submitted that the supply of said services by the company are export of services and consequently will become a zero-rated supply as provided in Section 16 of IGST Act, 2017. 7. The Karnataka Authority for Advanc
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, 2017 and KGST Act, 2017 on the following grounds. 8.1. The Advance Ruling Authority has erred in holding that the services provided is of the nature of facilitating the supply of goods, and Would amount to intermediary services for the purposes of determination of place of supply of such services. Further, after-sale services provided are not in the nature of a composite contract and they are independent from the services provided and hence there is no question of determination of what will the principal supply is without consideration of the facts of the case and applicant s interpretation of law. 8.2. Appellant submits that, the LAAR has considered the appellant who acts as an agent and an intermediary to the overseas entities based on the certain interpretations made in the agency contract entered into between Brabender GMBH & Co.KG and the appellant. The interpretations of the authority are- Appellant acts as an intermediary on behalf of principal while negotiating business t
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se VI of the agency contract. In view of this the LAAR is of view that since the agent is having the right to receive commission from principal tar the sales contracts negotiated, Appellant can be termed as playing the role of an agent to the overseas entity. 8.3. Appellant submits that, the usage of the words agent or intermediary in the said agency contract should not be interpreted to mean an agent or intermediary as defined under the CGST Act, 2017 and Integrated Goods and Services Tax (IGST) Act, 2017 respectively. 8.4. Section 2(5) of the CGST Act, 2017: Definition of Agent : agent means a person. including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another; The term business of supply or receipt of services must not be literally interpreted since one has to analyse the nature of the transactions carr
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of such goods. Further, the fact that Appellant is not involved in negotiation of the contract and / or supply of goods clearly and unambiguously means that Appellant is not an intermediary . The activities of Appellant are strictly limited to only promotion and marketing of such goods and providing post-sale support at the instruction of the overseas client. Nevertheless, even if Appellant has participated in the negotiation of the prices. the agreement clearly states that the ultimate right to conclude or call-off the contract is with the overseas client itself. In other words, the discussions or mere participation of Appellant in such discussions does not bind either of the parties. 8.5. Appellant further submits that the relationship between the overseas entity and the Appellant that of Principal to Principal as it is narrated in paragraph 2 of the Clause Il (Duties of Agent) of the said agency contract, it states that the agent shall be informing the principal on the market trends
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es, between or more persons, but does not include a person who supplies such goods or services or both or securities on his account. On examination of the aforesaid definition of Intermediary to the instant ease Appellant submits that is not engaged in arranging or facilitating the supply of equipment but is engaged in promotion and marketing services and post-sale support services to the overseas entities which is part of main services. There exists a direct interaction between the customers and overseas entities with regard to price negotiations and delivery of equipment and Appellant has no role with regard to the same since there is no contractual agreement entered into on behalf of overseas entities. This can be substantiated vide the Para 3- Nature of Representative of the copy of the Sales Representation Agreement (which has been reproduced below: – The MANUFACTURERS intends to direct requests received from the territory to the REPRESENTATIVE for further attention and follow up
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tics of an intermediary . It is but essential that the actual scope of work and activities of Appellant should be analysed to classify the same. 8.8. Further, appellant drew the attention of this authority to the judgement pronounced by Authority for Advance Ruling- Maharashtra in the case of IN RE: Five Star Shipping dated 18.04.2018 GST-ARA-18/2017-18/B-26 = 2018 (7) TMI 1182 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA Considering the analogy adopted in the said judgement that to qualify as an intermediary, there should be two supplies at any one time: (i) the supply between the principal and the third party; and (ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged. The validity of the definition of intermediary services in the instant case should be analysed as the pre-sale and marketing services precedes the actual supply of goods, viz., the supply of goods from the overseas principal to the Indian customer and the
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and submits that the facts and circumstances of the said ease and Appellant s business are same and wholly comparable and thus, the ratio of the said Ruling should be squarely applied to Appellant s case. 8.11. Appellant further submits that the words used in the definition of intermediary services viz., arranging or facilitating has apparently not been defined in the GST provisions and there is no reference to these expression in the allied laws, viz., commodity tax laws such as Service Tax, Central Excise or VAT laws. Therefore, the meaning given to such expressions in the legal dictionaries may be relied upon. Arrange means to make preparation or to place in a desired order and facilitate, means to render easier or absence of difficulty or that which promotes the ease of any action. Thus, only such of the services which will impact as above would qualify as services of arranging or facilitating supply of goods . 8.12. The following factors also help in determination of whether or no
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ny such documentation and/or movement of goods; Thus, they submitted that the services provided by them cannot be said to be intermediary services, by any stretch of imagination, 8.14. Appellant further submits that not all marketing activities will be intermediary services . Only such of the marketing activities (and non-marketing services) which result in arranging or facilitating supply of goods would be termed as intermediary services . In this regard, Appellant drew the attention to the following provisions under the erstwhile Service tax provisions: In Explanation to Section 65(19) of the Finance Act, 1994(Service tax provisions), a commission agent was defined to mean a person who causes a sale or purchase of goods . .. for a consideration . It is important to note that this was different, separate and distinct from intermediary services , since both co-existed under different provisions. Applying the above to Appellant s case, it becomes important to note that Appellant is mere
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agency contract entered into by Appellant with Brabender GMBH & Co. KG which was part of the advance ruling application wherein clause IV of the agency contract mentioned about Agent s Right to a Commission in which In sub-clause 6 it is seen that the consideration is payable for the services which include pre-sales, marketing sales, installation and warranty period services. The agreement quotes the principal as declaring to the agent as under; From our experience for business in your territory it would be commensurate to allocate 25% of total commission earned in each fill system case to address installation and warranty period services which are provided by your company on our behalf to the end customers . The LAAR has concluded that Appellant has been offered commission on the amount of goods sold and this is the method adopted for calculating consideration. Further, that the incidence of after sales and warranty services is contingent upon the successful supply of materials an
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indicators, some of which are listed below: The perception of the consumer or the service receiver. If large number of service receivers such bundle of services reasonably expects such services to be provided as a package, (hen such a package could be treated as naturally bundled in the ordinary course of business. Majority of service providers in a particulars area of business provide similar bundle of services. The nature of the various services in a bundle of services will also help in determining whether the services are bundled in the ordinary course of business. If the nature el services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. In other words, in the instant case, the customer being the overseas entity, it is expected that, the person who undertakes marketing and sales promotion also undertake post-sales support; Thi
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ach other: i. In this regard, the Appellant submits that one should not interpret the meaning of conjunction used in the definition of composite supply under GST, as mentioned supra, to the events occurring at the same point of time . The expression conjunction should be understood to mean as offered together as a bundle and not necessarily that they should take place at the same point-in-time. ii. In a business sense, the same has to be understood based on the contractual arrangement entered into between service provider and service recipients. In other words, the activities performed in a contractual arrangement comes under the ambit of conjunction as mentioned in the said definition under GST. And has provided an example of supply of washing machine along with other services like transportation. installation, training and warranty services. 9.3. Further, the appellant has stated that In the instant case, the promotion and marketing services and after sale support services are being
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sales support is ancillary and incidental to the sale, The essential characteristic of the services provided by the Appellant are marketing, sales promotion and brand building; coordination and providing all other support once the product is sold are by products of the sale of the product; In terms of service agreement, promotion and marketing services is the predominant component while installation and warranty services are ancillary to such promotion and marketing services. 10. In respect of Question 3 Appellant submits that Clause 6 of Section 2 of Integrated Goods and Services Tax (IGST) Act, 2017, defines the meaning of export of services. which reads as under: Export of services means the supply of any service when,- i. The supplier of service is located in India; ii. The recipient of service is located outside India; iii. The place of supply of service is outside India; iv. The payment for such service has been received by the supplier of service in convertible foreign exchange;
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ant case, consideration is payable for the supply of services and the overseas entity is liable to pay that consideration for both promotion and marketing services & after sale support services. Therefore, the recipient of both the services, under a bundled contract will be the overseas entity, which is located outside India. 10.2. Determination of place of supply of services: The Appellant submits that place of supply shall be determined as provided in Section 13 of IGST Act, 2017 because location of supplier is in India and location of recipient is outside India. As per section 13(2) of IGST Act, 2017, the place of supply of services shall be the location of the recipient of services. Further, the location of the recipient of services is a place outside India. Therefore, the place of supply for promotion and marketing services shall be the place outside India. 10.3. Further the appellant has reiterated the grounds filed before the AAR the provisions of clause 6 of sec 2 of IGST A
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ales promotion and marketing services and after sale Support services are being provided on a single contractual arrangement entered into with the customer and hence such services are naturally bundled and supplied in the conjunction with each other and thus qualifies the condition of Composite supply under GST. The principal supply Will be promotion and marketing services. 12.1. The Appellant argued to substantiate that the services provided by the Appellant like sales promotion, marketing and after sales service to the overseas entity is export of services and consequently will become a zero-rated supply as provided in Section 16 of IGST Act, 2017. FINDINGS AND DISCUSSIONS 13. We have taken into consideration all the submissions made by the Appellant in writing as well as the detailed arguments made by their representative during the personal hearing. Briefly stated the facts are that M/s. Toshniwal Brothers (SR) Private Limited, is a company engaged in the business of providing mark
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d marketing services provided is in the nature of facilitating the supply of goods and hence would amount to intermediary service , Further, the AAR held that the after-sale support service is independent from the promotion and marketing service and is not a composite supply, 16. The Appellant also sought a ruling on a third question i. e whether the contracts in question would qualify as exports in terms of Section 2(6) of the IGST Act and whether they will be treated as zero-rated supply in terms of Section 16 of the said Act. On this question, the AAR refrained from giving a ruling on the grounds that the question warrants determination of place of supply, which aspect is outside the purview of the AAR. 17. Aggrieved by the above ruling of the AAR, the Appellant is before us in appeal on all the three questions. The Appellant has placed before us the Agency Contract entered into with Brabender GmbH & Co.KG, Germany. We have gone through the contract in detail and the discussions
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e customers about the goods, informing the Principal about the queries and comments of the prospective customers and reviewing the credit rating of the prospective customers. Once the order is finalized between the Principal and the customer and the goods are imported by the customer, the Appellant provides support services by way of installation, initial start-up of the products and demonstration of its satisfactory performance. 18. In the above scheme of activities, the first point for determination is whether the promotion and marketing activities undertaken by the Appellant for the overseas Principal, are to be classified as intermediary services . Let us look at the definition of intermediary service under GST law, Section 2(13) of the IGST Act defines the term intermediary as – a broker. an agent or any other person, by whatever name called, who arranges or facilitates the supply goods or services or both, or securities, between two or more persons. hut does not include a person
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sion or any other person, by whatever name called tends to delimit the scope of the intermediary to apply only to broker or an agent. The words agent, and broker (used in definition of the word intermediary in the IGST act) are only in the broad construct of being an intermediary or a representative, but are not substitutes for each other. In addition. the third part of the definition expands rather than limits the meaning of who an intermediary is to one who is only an agent or a broker. 18.2. Furthers the phrase who arranges or facilitates the supply goods or services or both, or securities, between two or more persons in the clause defining intermediary gives a clear indication of intendment in as much as it ascribes a quality to the person who is to be construed as an intermediary. In Grasim Industries Limited v, Collector of Customs, Bombay [CASE NO.: Appeal (civil) 1951 of 1998, DATE OF JUDGMENT; 04/04/2002] = 2002 (4) TMI 52 – SUPREME COURT OF INDIA, the Supreme Court held that
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supply for a commission. The terms arrange and facilitate have not been defined in the Act. Merriam Webster Dictionary defines the two words as: Facilitate: to make (something) easier; to help Cause (something); to help (Something) run smoothly and effectively. Arrange: to bring about an agreement or understanding concerning; to make preparations: to move and organise (things) into a particular order or position; to organise the details of something before it happens; to plan (something). Therefore. a general understanding of the term arranging or facilitation would cover a very wide range of activities ranging from marketing or sales promotion of the goods or services of the clients locating prospective buyers for the client s products or locating sources of supply of the goods or services required by the Clients price negotiation with the prospective buyer/ prospective supplier, procuring sales orders in respect of the goods or services of the client and like activities. 18.4. When
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Principal; for the sale of the product of the overseas entity. However the Principal shall be free to conclude, or to refuse the conclusion of a contract negotiated by the Appellant and it is binding on the Principal to inform the Appellant about the acceptance, rejection, non-performance or otherwise of a contract, and shall state the decisive reasons underlying his decision unless such statement is prejudicial to his own essential interests. For all contracts of sale of goods which the Principal enters into with customers residing in the Appellant s territory and which have been negotiated by the Appellant, the Appellant shall receive a commission of twelve percent (12%) of the value of goods and in respect of contracts which have not been negotiated by the Appellant, the commission of 6% of the value of the goods will be paid. 18.5. The entire gamut of the above activities viz. the act of identifying the prospective customers in India, promoting the products of the Principal to the
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presentative for all proper purposes. He may be prohibited by the contract from entering into binding contracts but at the same time is authorised by it to act as the go- between the Principal s customers and prospects in India and the Principal itself. 18.6. The Appellant located in India, handles this function- broadly of marketing/business development and customer Support for the foreign entity. Clearly, the engagement of the Appellant in the entire chain of sequence is with reference to the taxable territory and with reference only to such goods that are intended to be sold in India. Devoid of the product and the taxable territory, there is no appreciation which can be had of the supply or the engagement which the Appellant creates. In effect, the basic contention of the Appellant is that the services supplied by him in the form of marketing, market penetration, consolidation, market building and support activity for the goods supplied by a foreign entity in the domestic territory
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keting are being provided to Brabender. Germany on their own account and they are not engaged in buying or selling or supplying goods on behalf of the Principal. It would be worthy to analyze the definition of the term intermediary services under the GST regime and pre-GST regime. Both the definitions have been mentioned below: Under pre-GST regime Under GST regime Rule 2 of the Place of Provision of Services Rules 12 intermediary means a broker, an agent or any other persons by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the main service) between two or more persons, but does not include a person who provides the main service on his account Section 2 13 of Integrated Goods and Services Tax Act, 2017 (IGST Act) intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person w
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of Brabender between the Principal in Germany and the Principal s customer in India. He is not supplying the products of Brabender on behalf of the Principal. He is only arranging the contact between the Principal and the Principal s customer and the actual supply of the products is done by the Principal directly to the customer. The service of facilitating a supply of goods between the Principal and the customers is provided by the Appellant to the overseas client. The Appellant is not supplying such goods on his own account. 18.9. The argument of the Appellant that the promotion and marketing services are supplied to the Principal on their own account and hence they fall within the exclusion clause of the definition of intermediary is not a correct interpretation of the law. The language of the exclusion clause is such that it is applicable to those persons who supply such goods or service (or both) on their own account. If a person either facilitates or alternately arranges any supp
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client GoDaddy US and provides support services to assist GoDaddy US to develop its brand in India, A ruling was sought whether the various support services provided by GoDaddy India are naturally bundled as a single service being Business support service. The contention of the Revenue was that the various support services provided by GoDaddy India was not a bundle of services but more appropriately covered under intermediary services. The Authority in the said case, after taking note of the fact that the applicant (GoDaddy India) will not be engaged in arranging or facilitating provision of services by GoDaddy US to customers in India, will not secure orders from customers in India or arrange or facilitate the provision of any service by any third party service provider to GoDaddy US, held that the applicant is providing support services in relation to marketing, branding, offline marketing, etc on principal-to-principal basis to GoDaddy US which are a bundle of services naturally bu
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e as defined under Section 2(13) of the IGST Act, it automatically flows that the place of supply of such service will be in terms of Section 13(8) of the IGST Act. 19. Coming to the second question – whether the after-sales service provided under a composite contract would amount to a composite supply and if so what would be the principal supply? Before proceeding any further, let us understand Composite supply as defined in sub section 30 of section 2 of the CGST Act, 2017 which is as under; Composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. 19.1. The following parameters are to be applied to the facts of the case to determine whether the supply is a composite Supply or not: two or more taxable supplies of goods or service
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ce and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction. 19.3. The Appellant has contended that the marketing services and the post sales support services (installation and warranty support) are normally undertaken as a bundle of services; that their principals do not have any presence in India and the Appellant is the Sole representative in the Indian territory for the contracted products; that installation and warranty support services are ancillary to the predominant Service of promotion and marketing and there is a single price for both the services. We have gone through the Agency contract with Brabender, Germany in detail. We find that the Appellant has been engaged to promote and market the products of Brabender, Germany in India. For this purposes the Appellant will advertise the Brabender products to the prospective customers, demonstrate the use of the products, address the queri
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h are typically in the nature of plug-and-play. Further, there are equipments which do not require installation but need to be configured remotely and the same is done by the manufacturers themselves, Therefore, the provision of after sales support by way of installation does not arise in each and every case. It is for this reason that the service recipient has earmarked only 25% of the commission payable as being towards the after sales support service since the same does not arise in every sale made to the customer. Therefore the question of being naturally bundled does not arise for the reason that every promotional activity with prospective customer does not result in a sale. Further, every sale does not necessarily mean that installation support or after sale support is required. Therefore, we are of the view that the after sales support service, although rendered in a composite manner with the promotion and marketing service is not a composite supply. The price for the after sale
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ervice to be treated as export of service is that the place of supply of service is outside India. The provisions for determination of place of supply of services where the location of the supplier or the location of the recipient of services is outside India are contained in Section 13 of the IGST Act, 2017. Thus. the entire issue is intrinsically related to determination of place of supply of service by the applicant. 20.2. The CGST Act limits the Advance Ruling Authority to decide the issues earmarked for it under Section 97(2). In terms of sub-section (2) of Section 97 of the CGST/KGST Act, the question on which the advance ruling can be sought shall be in respect of the following: (i) Classification of any goods or services or both; (ii) Applicability of a notification issued under the provisions of the Act; (iii) Determination of time and value of supply of goods or services or both; (iv) Admissibility of input tax credit of tax paid or deemed to have been paid; (v) Determination
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