Karnataka AAR classifies promotion and marketing services as intermediary services when agent negotiates prices and terms between overseas suppliers and customers

Karnataka AAR ruled that promotion and marketing services facilitating supply of goods between overseas supplier and customer constitute intermediary services, not pure marketing services, as the applicant negotiated prices and terms while acting as agent. The contract included pre-sales, marketing, sales, installation and warranty services with commission based on invoiced amounts. The Authority held after-sale services were independent supplies, not composite supply, as warranty services were contingent on successful material supply rather than marketing services. Each supply required separate valuation under Section 15 CGST Act. The Authority declined to rule on export qualification and zero-rated supply status, stating place of supply determination fell outside its jurisdiction.

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Issues Involved
1. Classification of promotion and marketing services as "intermediary services."
2. Determination of composite supply and principal supply in contracts including after-sale support services.
3. Qualification of the contracts as exports under the IGST Act, 2017.

Detailed Analysis

1. Classification of Promotion and Marketing Services as "Intermediary Services"
The applicant, a supplier of services to overseas clients, sought a ruling on whether promotion and marketing services qualify as "intermediary services" under Section 12 of the IGST Act, 2017. The applicant argued that their services are provided on a principal-to-principal basis and not on behalf of the service recipients. They cited a previous Advance Ruling in the case of GoDaddy India Web Services (P.) Ltd, where it was held that pure marketing and promotion services do not constitute intermediary services.

However, upon review of the agency contract, it was noted that the applicant acts as an agent who negotiates business transactions on behalf of the principal but does not conclude contracts. The applicant receives a commission based on sales value, indicating an agency relationship. Therefore, the services provided by the applicant were deemed to facilitate the supply of goods between the overseas supplier and the customer, classifying them as "intermediary services" under Section 2(13) of the IGST Act, 2017.

2. Determination of Composite Supply and Principal Supply
The applicant also sought clarity on whether after-sale support services provided under a composite contract with promotion and marketing services would constitute a composite supply, and if so, what the principal supply would be. The applicant argued that these services are naturally bundled and integral to each other, with promotion and marketing services being the principal supply.

The Authority found that the contract terms indicated a clear distinction between marketing services and after-sale support services. The after-sale services, including installation and warranty, are contingent upon the successful supply of goods and are not naturally bundled with the marketing services. As such, these services are treated as independent supplies rather than a composite supply. Consequently, there is no need to determine a principal supply within this context.

3. Qualification of Contracts as Exports
The applicant queried whether the contracts would qualify as exports if the client is an overseas entity, making the supply zero-rated under Section 16 of the IGST Act, 2017. The Authority noted that the determination of the place of supply is crucial for this classification. However, the Authority for Advance Rulings does not have the jurisdiction to determine the place of supply. Therefore, this question was not addressed.

Ruling
1. The services provided are not pure promotion and marketing services but are intermediary services for the purpose of determining the place of supply.
2. The after-sale services do not constitute a composite supply and are independent of the promotion and marketing services.
3. The question regarding the qualification of contracts as exports was not addressed due to jurisdictional limitations.

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