2020 (11) TMI 956 - AAAR - GST

Type-3 test administrative solutions with human essay scoring qualify as OIDAR services under tax law

The AAAR Karnataka held that Type-3 test administrative solutions qualify as Online Information and Database Retrieval (OIDAR) services despite human ... Online information and database access or retrieval services - OIDAR service - minimal human intervention - essentially automated - delivery mediated by information technologyOnline information and database access or retrieval services - minimal human intervention - Automated Essay Scoring (AES) - Classification of the Type 3 test administrative solution as an OIDAR service - HELD THAT: - The Court examined the four essential ingredients of OIDAR services - delivery over the internet, supply being essentially automated, involvement of minimal human intervention, and impossibility of delivery in the absence of information technology - and found that the Type 3 test met the first, second and fourth requirements. The determinative question was whether the human involvement in essay scoring exceeded the threshold of 'minimal human intervention'. The factual matrix shows essays are evaluated both by an Automated Essay Scoring (AES) program and by human scorers; where AES and human scores are within one point the final score is an average, and where divergence exceeds one point the essay is routed to an expert human scorer whose decision is final. The human scoring therefore functions as a reliability and quality assurance mechanism to validate and ensure the AES produces stable consensus scores, and there is no direct individualistic human interaction between evaluator and candidate. Viewing the Type 3 computer based test as a whole, the human role is ancillary to an essentially automated process and is confined to assuring the reliability of automated scoring. For these reasons the extent of human intervention is within the realm of 'minimal human intervention' required for OIDAR classification, and the lower Authority's contrary conclusion was set aside. [Paras 14, 16, 17, 19, 20]The service provided for the Type 3 test is classifiable as an OIDAR service.Final Conclusion: The appeal is allowed; the Authority for Advance Ruling's finding that the Type 3 test is not an OIDAR service is set aside and the Type 3 test is held to be an OIDAR service. Issues Involved:1. Classification of Type 2 and Type 3 tests as 'Online Information and Database Retrieval Services' (OIDAR).2. Liability to pay integrated tax on Type 2 and Type 3 tests if not classified as OIDAR services.Detailed Analysis:1. Classification of Type 2 and Type 3 Tests as OIDAR Services:Type 2 Test:The Authority for Advance Ruling (AAR) concluded that Type 2 tests, which involve candidates going to a test center, being verified by an administrator, and monitored by an invigilator, qualify as OIDAR services. This is because the scoring is entirely automated, and the results are provided electronically without human intervention.Type 3 Test:The AAR held that Type 3 tests do not qualify as OIDAR services. These tests involve both multiple-choice questions (MCQs) and essay-based questions. While the MCQs are scored automatically, the essay-based questions are evaluated by both an automated system and human evaluators. The AAR determined that the human intervention in scoring the essay-based questions was more than minimal, thus disqualifying Type 3 tests from being classified as OIDAR services.2. Liability to Pay Integrated Tax on Type 2 and Type 3 Tests:For Type 2 and Type 3 tests, the respondent company argued that the place of supply would be India, making it an import of services. As per Notification No. 10/2017-Integrated Tax (Rate), services supplied by a person in a non-taxable territory to a person other than a non-taxable online recipient are taxable under the reverse charge mechanism. However, Notification No. 9/2017-Integrated Tax (Rate) exempts services (other than OIDAR) supplied to individuals for non-commercial purposes. Thus, the respondent contended that Type 2 and Type 3 tests would either be exempt or taxable under the reverse charge mechanism.Appellant's Arguments:The Department contested the AAR's ruling on Type 3 tests, arguing that the human intervention in evaluating essay-based questions is minimal and primarily for quality assurance. They cited the European Commission VAT Committee guidelines, distinguishing between passive and active human intervention, and contended that the human intervention in Type 3 tests is passive and minimal. The Department also referenced the Board's Circular 2016 and the European Commission's opinion on online education services to support their argument that Type 3 tests should be classified as OIDAR services.Respondent's Arguments:The respondent maintained that the human evaluation in Type 3 tests is substantial and critical for the final score, making the human intervention more than minimal. They argued that the human scorer's role is not merely for quality checking but is integral to the scoring process, thus disqualifying Type 3 tests from being classified as OIDAR services.Discussion and Findings:The Appellate Authority examined the nature of Type 3 tests, noting that the process involves both automated and human scoring of essay-based questions. They referred to the European Commission VAT Committee guidelines, which emphasize the supplier's involvement in determining minimal human intervention. The Authority concluded that the human intervention in Type 3 tests is within the realm of minimal human intervention, as the human scorer's role is primarily to ensure the reliability of the automated scoring system. The entire process, from registration to result delivery, is automated, and the human intervention is limited to validating the automated scores.Conclusion:The Appellate Authority allowed the Department's appeal, setting aside the AAR's ruling regarding Type 3 tests. They held that Type 3 tests qualify as OIDAR services, fulfilling all four essential ingredients: delivery over the internet, automated supply, minimal human intervention, and reliance on information technology. The appeal was disposed of on these terms.