In Re: M/s. Toshniwal Brothers (SR) Private Limited,
GST
2018 (10) TMI 597 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – 2018 (18) G. S. T. L. 129 (A. A. R. – GST), [2019] 70 G S.T.R. 383 (AAR)
AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – AAR
Dated:- 19-9-2018
AAR No. KAR ADRG 23/2018
GST
SRI. HARISH DHARNIA, AND DR. RAVI PRASAD M.P. MEMBER
Represented by: Sri Badarinath, Chartered Accountant
ORDER UNDER SUB-SECTION (4) OF SECTION 98 OF CENTRAL GOODS AND SERVICE TAX ACT, 2017 AND UNDER SUB-SECTION (4) OF SECTION 98 OF KARNATAKA GOODS AND SERVICES TAX ACT, 2017
1. M/s Toshniwal Brothers (SR) Private Limited, (called as the 'Applicant' hereinafter), No.11, AECS Layout, 4th Main, 3rd Cross, Sanjay Nagar 1st Stage, Geddalahalli, Bengaluru – 560094, having GSTIN number 29AAACT2881R1ZJ, has filed an application for Advance Ruling under Section 97 of CGST Act,2017, KGST Act, 2017 & IGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST ARA-01
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ant states that he is a supplier of services to overseas clients and is engaged in the business of promotion and marketing and after sale support services as a composite supply. He has entered into an agreement with their customers (Service Recipients), who are located outside India (which is a non-taxable territory in terms of clause (79) of section 2 of the CGST Act, 2017) for providing marketing, sales promotion and certain post-sales support services. Consideration for these services would be received in convertible foreign exchange. The said services are provided in respect of scientific instruments used in research and development / quality control primarily in fields of Nano Science, Material Science, Bio Pharma and Polymer Sciences.
4. The applicant provides the details of the service areas and are as follows:
a. Promotion and marketing of the products of the Service Recipients in India:
The applicant would solicit orders for the goods of the overseas customer in India by ma
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pplies the products to their customer in India. The applicant shall provide the following support services:
i. Advice and assist the customers of the overseas entity in installation, initial start-up of products and demonstration of its satisfactory operation to such customers;
ii. For few product lines, provide complete installation services to the customers of the overseas entity along with necessary advisory and assistance to the customers of the overseas entity in initial start up of the products and demonstration of its satisfactory operation to such customers;
iii. Assistance in operation adjustments, on site services and general customer assistance including warranty services;
c. Submission of Reports
The Applicant shall prepare and submit regular reports within agreed time on its activities to promote and solicit orders for the products in India, to the overseas entity. These business reports would normally include:
i. Short and medium term forecasts detailing prospec
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authorised to enter into any contract or arrangement on behalf of the service recipients;
d. Applicant is not securing any order from the customer in India, but the order would be placed directly by the customer on the Service recipients;
e. Service recipients would directly sell the products to the customers located in India;
f. The customer would import the goods, file the bill of entry and pay the applicable customs duty and GST;
g. Applicant is not engaged in arranging or facilitating the supply of goods, but is engaged for promoting and marketing the goods of the overseas entity in India;
h. The services provided to the service recipients are provided by the applicant on his own account.
In light of the above, the applicant submits that in his view the activity undertaken by him by way of promotion and marketing services is not intermediary services. The applicant refers to the Advance Ruling pronounced by the Authority on Advance Rulings under the Service Tax provisions in
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ilarly, persons such as call centres, who provide services to their clients by dealing with the customers of the client on the client's behalf, but actually provided these services on their own account, will not be categorized as intermediaries.
Applicant relying on above paragraph submitted that all call centres, by dealing with customers of their clients, on client's behalf, are providing service to their client on their own account. Similarly, applicant is providing business support service such as marketing and other allied services like oversight of quality of third party customer care centre operated in India and payment processing services, on behalf of GoDaddy US. Therefore, these services provided by the applicant to GoDaddy US cannot be categorized as intermediary or services, as intermediary services.”
The applicant submits that the facts and surrounding circumstances of the said case and the applicant's business are same and wholly comparable and thus, the ratio of the sa
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tegral to one overall supply – if one or more is removed, the nature of supply would be affected;
(v) These services are naturally bundled and supplied in conjunction with each other in the ordinary course of business; (vi) These services are naturally bundled because:
a. After sale support services can be provided only when product is sold to the customer;
b. Customer would place order to the service recipients on the basis of promotion and marketing services provided by the applicant;
c. Post purchase, customer would be able to use the products only when after-sale support services are provided;
d. Since all these activities are inter-linked with each other, it is naturally bundled in the ordinary course of business.
8. The applicant submits where after-sale support services are also provided along with promotion and marketing services and being a composite supply, one should be the principal supply. The applicant submits that the principal supply would be the promotion and
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edominant component while installation and warranty services are ancillary to such promotion and marketing services.
9. The applicant submits that the clause (6) of section 2 of the IGST Act 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 in 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; and
(v) The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 of section 8 of IGST Act.”
The applicant submits that recipient has been defined in clause (93) of section 2 of the CGST Act, 2017, which reads as under:
“Recipient” of supply of goods or services or both means –
(a) Where a consideration is payable
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at the place of supply shall be determined as provided in section 13 of the IGST Act, 2017 because the location of the supplier is in India and the location of the recipient is outside India.
The applicant submits that as explained in the earlier paragraphs, services provided by him is not intermediary services and hence the place of supply shall not be determined by section 13(8) of IGST Act, 2017 but in terms of section 13(2) of IGST Act, 2017, which is general clause.
As per section 13(2) of IGST Act, 2017, the place of supply of services shall be the location of the recipient of services and since the location of the recipient of services is a place outside India, the place of supply for promotion and marketing services would be the place outside India.
11. The applicant submits that the services as a whole, would be the export of services provided in clause (6) of section 2 of the IGST Act because:
(a) The supplier of services, i.e. the applicant, is located in India;
(b) The
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they are eligible for exemptions / concessions with respect to custom duties on import of goods. Accordingly, they would always directly import the said goods and would not procure (such imported goods) from any supplier in India (who has imported the same earlier). Such a proposition would disentitle them from availing the customs duty exemptions or concessions.
(b) The activities of the applicant is always limited to functioning as an agent promoting the goods od the overseas principals. This is evident from:
a. The fact that the order for such goods are placed by the companies or institutes etc. in India directly on the overseas suppliers;
b. The bill of entry at the time of import is filed by such companies or institutes and the payment is also made directly by such importers to the overseas suppliers and it is not routed through the applicant;
c. Such importers are always the owners of the equipment at all times; the applicant never holds ownership or title to such equipmen
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ately termed as 'configured' remotely through computer or online networks or which requires specialized knowledge, in which cases, the same are undertaken by the manufacturers themselves;
In such cases, the applicant states that the question of providing any installation support does not arise;
14. The applicant also refers to the e-Flyers published by the CBIT on 15.03.2018 on Composite supplies wherein they have given a list of certain indicators for determining when a bundle of supplies should be treated as naturally bundled in the ordinary course of business and consequently as 'composite supplies'. The extract relevant are as under:
“Whether the services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators, some of which are listed below:
* The perception of the consumer or t
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he elements are normally advertised as a package;
o The different elements are not available separately;
o The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.”
The applicant submits that above analogy further substantiates the submissions earlier made and squarely applies to the present case and claims that the combination of pre-sales and installation support is a naturally bundled supply in the ordinary course of business and consequently qualifies as 'composite supply'.
15. Regarding the import of spares by the applicant, he submits that the applicant enters into agreements with the companies or institutes in India (customers) for maintenance of such equipments. This is dehors of and disconnected from the marketing activities that the applicant undertakes. The maintenance of such machinery or equipment is another business activity undertaken by the applicant if desired by the importers and the privi
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e entitled to conclude contracts on behalf of the principal. It is also seen that the applicant acting as an “Agent” shall take care of the interests of the principal and regularly visit the customers and prospective customers in his territory. Further, in the Clause III – relating to the “Duties of the Principal” – it is clearly stated that the Principal shall be free to conclude or to refuse the conclusion of a contract negotiated by the Agent and it is binding on the Principal to inform the applicant who is acting as “Agent” on acceptance, rejection, nonperformance or different performance of a contract and shall state the decisive reasons underlying his decision, unless prejudicial to his own essential interests.
16.2 In Clause IV of the agreement relating to the Agent's right to a Commission, it is clearly stated as under:
“On all contracts for the sale of goods which the Principal enters into with customers residing in the Agent's territory, the Agent shall receive a commission
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ion with a particular business transaction) shall be regarded as covered by commission that the Agent is entitled to, and such expenses excludes travelling expenses. It is also stated that for spare parts, the commission would be paid for values equal or superior to EUR 250 and repairs are not subject to commission.
In sub-clause 6 of Clause IV, it is seen that the consideration is payable for the services which include pre-sales, marketing, sales, installation and warranty period services and the commission payable is for the complete bundle of 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”.
All the above show that the applicant has been offered commission on the amount of goods sold a
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tied to the amount of sales that the applicant solicits and is typically an agency transaction. Even the agreement entered by the applicant with the Principal, call the applicant an agent and since he is facilitating the supply of goods between the overseas supplier who is the principal, and the customer, by soliciting the customers and also by negotiating the prices, terms etc., the predominant nature of the transaction is of “intermediary” nature.
16.4 Further, on the question of whether the contract is a composite supply or not is to be seen from the nature of the contract. When the applicant solicits the prospective purchaser, he is not aware of whether the transaction would ultimately result in a supply of goods. The terms of the contract also makes it very clear that the amount of consideration towards after-sale services and warranty services would not cross 25% of the value and hence there is an element of classification of the value of marketing “intermediary” services and t
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.
16.5 The question relating to the whether the above contracts would amount to export of services has to be decided on the basis of the place of supply applicable to each of the transaction. This Authority is not competent to decide on this issue of determination of place of supply and hence does not answer this question.
17. In view of the foregoing, we rule as follows
R U L I N G
1. The contract of services supplied are not pure and mere promotion and marketing services and the services provided is of the nature of facilitating the supply of goods, and hence would amount to “intermediary services” for the reasons enumerated in the aforesaid paragraphs for the purposes of determination of place of supply of such services.
2. The after-sale services provided are not in the nature of a composite contract and they are independent from the services provided in paragraph 1 above and hence there is no question of determination of what will the principal supply.
3. The third que
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