2019 (10) TMI 564 - AAR - GST

Volvo truck dealer's warranty services reimbursed by Sweden parent company ruled domestic supply, not export eligible for zero-rating under IGST

AAR Karnataka ruled that an applicant selling Volvo branded trucks and providing warranty services to customers, with reimbursement from Volvo Sweden ... Composite supply - principal supply - place of supply of services - export of services - zero-rated supply - consideration - supplyComposite supply - principal supply - supply - consideration - Whether the applicant's activity constitutes a composite supply and the nature of the principal supply. - HELD THAT: - The Authority found that the applicant sells products bundled with warranty services and performs warranty repairs or replacement of parts for customers. The warranty obligation is part of the sale of the product and the applicant carries out services (repair, fitting or replacement) upon claim. The payments for such parts and services are reimbursed by Volvo Sweden by issue of credit notes, which nonetheless constitute consideration for the supply. On this basis the transaction is a composite supply of goods and services, with the principal supply being determined case-by-case by the predominant element (goods or services) in the individual transaction. [Paras 13, 14]The transaction is a composite supply of goods and services and the principal supply (goods or services) depends on the nature of the individual case.Place of supply of services - export of services - zero-rated supply - Whether the place of supply of the warranty-related services is outside India and whether the supplies qualify as export of services. - HELD THAT: - The applicant argued that Section 13(2) of the IGST Act (default rule) makes the location of the recipient the place of supply, and that Volvo Sweden is located outside India; it further contended that other export conditions (payment in convertible foreign exchange and distinct persons requirement) are satisfied. The Authority examined the contractual and operational reality and observed that the customers interact with and receive services from the applicant in India, that Volvo Sweden does not itself receive the services, and that Volvo Sweden merely reimburses the amounts to whoever provides the service. Consequently, the place where services are performed and consumed is in India and Volvo Sweden is not the recipient of the services for place-of-supply/export purposes. [Paras 7, 8, 9, 13, 14]The place of supply is within India for the warranty services as rendered to customers by the applicant, and the supplies do not qualify as export of services.Export of services - zero-rated supply - Whether the transaction is a zero-rated supply under the IGST Act. - HELD THAT: - Having concluded that the services are provided to customers in India and that Volvo Sweden merely reimburses the consideration (including by issuing credit notes) rather than being the recipient of the services, the Authority held that the transaction is not an export of services. Since the export conditions are not met in substance, the transaction cannot be treated as a zero-rated supply under the IGST Act. [Paras 13, 14, 15]The transaction is not an export of services and therefore is not a zero-rated supply under the IGST Act.Final Conclusion: The Authority ruled that the applicant's warranty-related activity constitutes a composite supply (principal supply determined by the facts of each case), that the services are rendered within India to customers and not exported to Volvo Sweden, and consequently the transaction is not an export of services and is not zero-rated under the IGST Act. Issues Involved:1. Whether the supplies made by the Applicant to Volvo Sweden constitute a supply of services.2. Whether the supplies by the Applicant amount to export of services to Volvo Sweden and are hence zero-rated under GST law.Issue-wise Detailed Analysis:1. Supply of Services:- The Applicant, a joint venture between the Volvo Group and Eicher Motors Limited, is involved in selling Volvo branded trucks and buses in India and providing after-sale support services, including warranty services.- The Applicant sells products with a standard warranty of 1 to 2 years, included in the sale price, and is responsible for servicing warranty claims in India on behalf of Volvo Sweden.- The Applicant processes warranty claims, performs necessary repairs or replacements, and invoices Volvo Sweden for reimbursement.- The Applicant argues that the transaction is a composite supply of services, with the principal supply being the warranty service, and the supply of replacement parts being ancillary.2. Export of Services and Zero-Rating:- The Applicant contends that the transaction qualifies as an export of services under Section 2(6) of the IGST Act, 2017, which defines export of services based on five conditions:1. Supplier located in India.2. Recipient located outside India.3. Place of supply outside India.4. Payment received in convertible foreign exchange.5. Supplier and recipient are distinct entities.- The Applicant asserts that all these conditions are satisfied, making the transaction zero-rated under Section 16(1) of the IGST Act.Findings and Discussion:- The Authority examined the transaction and found that:- The Applicant sells products inclusive of a standard warranty, which constitutes a supply of goods.- Warranty services are provided to customers on behalf of Volvo Sweden, with reimbursement from Volvo Sweden.- The customer interacts only with the Applicant for warranty claims, not with Volvo Sweden.- The Applicant performs repairs or replacements and invoices Volvo Sweden for reimbursement.- The transaction involves a supply of goods or services to customers, with the consideration paid by Volvo Sweden.- The Authority concluded that the transaction is a composite supply of goods and services to customers within India, not an export of services.Ruling:1. The Applicant is providing a composite supply of goods and services to customers, with the principal supply depending on the nature of each case.2. The transaction is an intra-State or inter-State transaction, not an export transaction.3. Since the transaction is not an export of services, it is not a 'Zero-rated Supply' under the IGST Act.