Foreign supplier's online testing services to Indian recipients exempt from IGST under specific conditions

AAR Karnataka ruled on taxability of online testing services provided by foreign supplier to Indian recipients. Type 2 self-administered tests qualified as OIDAR services but were exempt from IGST when supplied to non-taxable online recipients. Type 3 tests with multiple choice and essay components did not qualify as OIDAR services and were exempt under Notification 09/2017-IGST covering services from non-taxable territories to governmental authorities and individuals for non-commercial purposes.

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Issues Involved:
1. Classification of Type 2 test services as 'Online Information and Database Retrieval Services' (OIDAR).
2. Tax liability on Type 2 test services if not classified as OIDAR.
3. Classification of Type 3 test services as OIDAR.
4. Tax liability on Type 3 test services if not classified as OIDAR.

Detailed Analysis:

Issue 1: Classification of Type 2 Test Services as OIDAR
The applicant provides various test administration solutions, including Type 2 tests where candidates must appear at test centers for invigilation. The applicant argued that Type 2 tests do not qualify as OIDAR services because they involve more than minimal human intervention, such as identity verification and monitoring by invigilators. The applicant relied on guidelines from the VAT Committee of the European Commission and a CBEC Circular to support their argument. However, the authority found that the human intervention in Type 2 tests is focused on the whole environment rather than individual needs, making it minimal. Thus, Type 2 tests are classified as OIDAR services under Section 2(17) of the IGST Act, 2017.

Issue 2: Tax Liability on Type 2 Test Services
Since Type 2 tests are classified as OIDAR services, the applicant is liable to pay integrated tax on these services supplied to non-taxable online recipients in India. The ruling confirms that the applicant must discharge IGST on these services.

Issue 3: Classification of Type 3 Test Services as OIDAR
Type 3 tests involve a mixture of multiple-choice and essay-based questions, with the latter being evaluated by human evaluators in the USA. The applicant argued that this human evaluation constitutes more than minimal human intervention, thus excluding Type 3 tests from being classified as OIDAR services. The authority agreed with the applicant, noting that the final scoring of essay-based questions involves significant human intervention, which disqualifies Type 3 tests from being classified as OIDAR services.

Issue 4: Tax Liability on Type 3 Test Services
Since Type 3 tests are not classified as OIDAR services, the authority examined the tax implications under Notification No. 09/2017-IGST (Rate) dated 28.06.2017. The ruling noted that services (excluding OIDAR) provided by a non-taxable territory supplier to an individual for non-commercial purposes are exempt from IGST. Thus, the supply of Type 3 test services to non-taxable online recipients in India is exempt from IGST.

Ruling:
a. The service provided for Type 2 tests classifies as OIDAR services.
b. The applicant is liable to pay integrated tax on Type 2 test services.
c. The service provided for Type 3 tests does not classify as OIDAR services.
d. IGST on Type 3 test services is exempt by virtue of Sl. No. 10 of Notification No. 09/2017-IGST (Rate) dated 28.06.2017.

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