2019 (2) TMI 126 - AAAR - GST

Promotion and marketing services for overseas principal classified as intermediary services under Section 2(13) IGST Act

The AAAR Karnataka upheld the AAR's classification of promotion and marketing services provided by the appellant for an overseas principal as intermediary ... Intermediary service - composite supply - place of supply - export of services - zero-rated supply - supplies on his own account (exclusion) - principal-agent relationshipIntermediary service - supplies on his own account (exclusion) - principal-agent relationship - Whether the promotion and marketing services rendered by the appellant amount to an 'intermediary service' as defined in Section 2(13) of the IGST Act. - HELD THAT: - The definition of 'intermediary' in Section 2(13) requires a person who 'arranges or facilitates' the supply of goods or services between two or more persons and excludes a person who supplies such goods or services on his own account. The Authority analysed the agency agreement with Brabender GmbH & Co. KG and found that the appellant was engaged to identify prospective customers, promote the principal's products, demonstrate products, address customer queries, review creditworthiness and negotiate or follow up quotations, and to inform the principal of orders and negotiations. Those activities were held to amount to arranging or facilitating the supply of the principal's products to customers in India. The appellant did not supply the goods on its own account; the actual supply remained between the principal and the customer. The appellate authority rejected the appellant's reliance on the GoDaddy AAR and similar precedents as factually distinguishable and held that the exclusion clause (person supplying on his own account) did not apply. The determinative conclusion was that the appellant's pre sale and related liaison activities fall within the ordinary meaning of 'arrange' and 'facilitate' and thus constitute an intermediary service under Section 2(13) of the IGST Act. [Paras 18]Promotion and marketing services provided by the appellant are intermediary services as defined in Section 2(13) IGST Act; the exclusion for persons supplying on their own account is not attracted.Composite supply - principal-agent relationship - Whether the after sale support services supplied under the same contract together with promotion and marketing services constitute a composite supply and, if so, what is the principal supply. - HELD THAT: - A composite supply requires two or more taxable supplies that are 'naturally bundled' and 'supplied in conjunction' with one being the principal supply. The appellate authority examined the agency contract and noted that although the contract contemplates both pre sale promotional activities and post sale installation/warranty support, installation and warranty services do not arise in every sale (some equipment are plug and play or remotely configured). The contract itself allocates a separate identifiable portion of commission (25%) to installation and warranty services, indicating that the after sale service is separable and its price is ascertainable. Because promotional activity does not invariably lead to a sale and because after sale services are not rendered in every transaction, the supplies are not 'naturally bundled' in the required sense; the after sale support is independently identifiable. Accordingly the authority concluded that the arrangement does not constitute a composite supply and that principal supply determination is not applicable. [Paras 19]After sale support services are independent and not part of a composite supply with promotion and marketing; there is no principal supply determination in favour of treating both as a composite supply.Place of supply - export of services - zero-rated supply - Whether the contracts qualify as exports of services / zero rated supplies (i.e., whether the place of supply is outside India) and whether the AAR could decide that question. - HELD THAT: - The definition of 'export of services' under Section 2(6) IGST Act requires, inter alia, that the place of supply be outside India. Determination of place of supply where location of supplier or recipient is outside India falls under Section 13 of the IGST Act. The Advance Ruling Authority's jurisdiction under Section 97(2) of the CGST/KGST Acts does not include determination of place of supply. Consequently the AAR correctly refrained from answering the appellant's question on export/zero rating as it would require determining place of supply, a matter outside the statutory scope of advance rulings. The appellate authority upheld that jurisdictional limitation. [Paras 20]AAR correctly declined to rule on whether the contracts are exports/zero rated because determination of the place of supply (necessary to decide export status) is not within the AAR's jurisdiction.Final Conclusion: The AAAR upholds the AAR order: the appellant's promotion and marketing activities constitute intermediary services; the after sale support is not a composite supply with the promotional services; and the AAR rightly refused to rule on export/zero rating for lack of jurisdiction. The appeal is dismissed and the AAR order is affirmed. Issues Involved:1. Classification of promotion and marketing services as 'intermediary services'.2. Determination of whether after-sale support services under a composite contract qualify as a composite supply.3. Qualification of the contracts as exports and zero-rated supply under Section 16 of IGST Act, 2017.Detailed Analysis:1. Classification of Promotion and Marketing Services as 'Intermediary Services':The Appellant argued that their promotion and marketing services provided to an overseas entity should not be classified as 'intermediary services' under Section 2(13) of the IGST Act, 2017. They claimed these services were provided on a principal-to-principal basis and did not involve facilitating the supply of goods between two parties.Findings:The Authority determined that the Appellant's activities, which included identifying prospective customers, promoting products, addressing queries, and communicating with the Principal (overseas entity), facilitated the supply of goods from the Principal to the customers in India. These activities fit the definition of 'intermediary services' as they arranged or facilitated the supply of goods between the Principal and the customers. The Appellant was not supplying these goods on their own account but was facilitating the supply, thereby falling within the definition of an intermediary.2. Determination of Composite Supply:The Appellant contended that their after-sale support services, provided under a composite contract with promotion and marketing services, should be treated as a composite supply, with promotion and marketing services as the principal supply.Findings:The Authority examined the contract and found that the after-sale support services were not naturally bundled with the promotion and marketing services. The after-sale support services, such as installation and warranty services, were not required in every case of sale and were contingent upon the successful supply of goods. Therefore, these services were not supplied in conjunction with each other in the ordinary course of business and did not qualify as a composite supply. The price for after-sale support services was separately identifiable, reinforcing their independent nature.3. Qualification of Contracts as Exports and Zero-rated Supply:The Appellant sought a ruling on whether the contracts in question would qualify as exports under Section 2(6) of the IGST Act and be treated as zero-rated supply under Section 16 of the said Act.Findings:The Authority for Advance Ruling (AAR) refrained from answering this question, stating that the determination of the place of supply was outside their jurisdiction as per Section 97(2) of the CGST/KGST Act. The Appellate Authority upheld this decision, noting that the AAR's jurisdiction does not extend to determining the place of supply.Conclusion:The Appellate Authority upheld the original ruling by the AAR, confirming that:1. The promotion and marketing services provided by the Appellant are classified as 'intermediary services'.2. The after-sale support services are not part of a composite supply with promotion and marketing services.3. The question regarding the qualification of contracts as exports and zero-rated supply was outside the jurisdiction of the AAR.The appeal filed by the Appellant was dismissed on all accounts.