2021 (12) TMI 117 - AAAR - GST

Appellate Authority's Decision on Export of Service and Composite Supply

The appellate authority confirmed the ruling that the specified transaction does not qualify as an export of service due to the place of supply being in ... Composite supply - Recipient of service (payor-test) - Intermediary (including subcontracting exclusion) - Export of services - five condition test - Place of supply - performance based v. recipient based serviceComposite supply - Whether the specified transactions constitute a composite supply. - HELD THAT: - The Authority examined the contract which provides for installation/up gradation, training and ancillary time based activities (travelling, working hours, overtime) billed on agreed hourly rates. The components are multiple taxable supplies which, in the ordinary course of business, are naturally bundled - travelling and overtime being necessary to perform installation/up gradation or training - and one of them (installation/up gradation or training) is the principal supply. The appellant's contention that these are not separate supplies because the hourly breakdown is merely a billing methodology was rejected: the contract and invoices show distinct chargeable components. Applying the definition of composite supply, the transactions are composite supplies. [Paras 12]The specified transactions are composite supplies.Recipient of service (payor-test) - Whether the recipient of the service is SPA (the foreign principal) or the Indian customers. - HELD THAT: - Reading the definition of 'recipient' together with 'consideration', the Authority adopted the payor based test: where consideration is payable the person liable to pay is the recipient. SPA pays consideration to the appellant for services performed at the behest of SPA for its customers. The appellant's argument on punctuation and independent clauses was considered but the factual matrix - payment by SPA and contractual instruction from SPA - supports treating SPA as the recipient in terms of consideration paid. [Paras 13]SPA (the foreign entity paying consideration) is the recipient of the service, not the Indian customer.Intermediary (including subcontracting exclusion) - Whether the appellant qualifies as an 'intermediary' under the statute. - HELD THAT: - The statutory definition of 'intermediary' was analysed and distinguished from agent/broker concepts. The appellant performs the main services on its own account pursuant to a subcontract from SPA and does not merely arrange or facilitate the main supply between two third parties. The Authority took note of the CBIC clarification that subcontracting of services (part or whole) is excluded from the scope of intermediary services. Applying that clarification to the facts, where SPA subcontracts installation/up gradation and training to the appellant who actually performs the services, the appellant falls within the exclusion in the definition and is not an intermediary. [Paras 14]The appellant is not an 'intermediary'; the services fall within the exclusion for supplies made on own account (subcontracted performance).Export of services - five condition test - Place of supply - performance based v. recipient based service - Whether the specified transactions qualify as export of services. - HELD THAT: - Export of services requires satisfaction of all five statutory conditions. The Authority held that the appellant's services are performance based and performed in India at SPA's customers' sites; consequently the place of supply is not outside India under the relevant place of supply rules for performance based services. Although SPA was held to be the recipient (being the payor), the place of supply and other conditions were not met. The entities are separate legal persons and not 'merely establishments of a distinct person' under the explanation, but that alone does not satisfy the place of supply requirement. Reliance on erstwhile Service Tax rules or other AAAR decisions was rejected as not determinative for the statutory tests under IGST. On the facts and governing place of supply provisions, the conditions for export of services were not fulfilled. [Paras 15, 16]The specified transactions do not qualify as export of services.Final Conclusion: The appeal is partly allowed. The Advance Ruling is confirmed on (i) classification as composite supply and (ii) non qualification as export of services; the ruling is modified to hold (iii) SPA (the foreign payor) as the recipient of services, and (iv) the appellant is not an 'intermediary' in view of subcontracted performance and the CBIC clarification. Issues Involved:1. Qualification of the specified transaction as 'composite supply'.2. Identification of the service recipient for the present transaction.3. Qualification of the Applicant as an 'intermediary'.4. Qualification of the specified transaction as 'export of service'.Detailed Analysis:First Ruling: Qualification of the Specified Transaction as 'Composite Supply'The appellant contended that the GAAR's observation that the conditions specified for composite supply in Section 2(30) of the CGST Act, 2017 are fulfilled in respect of the specified transactions is incorrect. The definition of 'Composite Supply' under Section 2(30) of CGST Act, 2017 reads: 'Composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.'The appellant argued that they provide only one service at a time, such as installation/up-gradation of a machine or training, and that charges for traveling, working hours, or overtime are not separate activities but benchmarks for determining consideration. However, the authority found that the appellant is providing more than two services, including installation/up-gradation, training, and other activities like overtime services. The appellant's argument that these activities are not separate was not substantiated, as the contractual agreement specified separate hourly rates for each activity. The authority concluded that the services provided are naturally bundled and supplied in conjunction with each other, thus qualifying as a composite supply.Second Ruling: Identification of the Service Recipient for the Present TransactionThe appellant argued that GAAR failed to understand the definition of 'recipient' as per Section 2(93) of the CGST Act, which states that the recipient of supply of goods or services is the person liable to pay consideration. The appellant contended that SPA, who pays for the services, should be considered the recipient, not the Indian customer. The authority agreed with the appellant's argument, noting that SPA pays the consideration to the appellant for services provided to the Indian customer. Therefore, SPA is the recipient of the supply of services, not the Indian customer.Third Ruling: Qualification of the Applicant as an 'Intermediary'The appellant contended that they do not qualify as an intermediary under Section 2(13) of the IGST Act, 2017, which defines an intermediary as a broker, agent, or any other person who arranges or facilitates the supply of goods or services between two or more persons but does not include a person who supplies such goods or services on his own account. The appellant argued that they provide services on a principal-to-principal basis and not as an agent or broker. The authority referred to Circular No. 159/15/2021-GST dated 20.09.2021, which clarified that sub-contracting of services cannot be included within the purview of intermediary services. The authority agreed with the appellant's contention that their services are not intermediary in nature, as they perform the actual services themselves and not on behalf of SPA.Fourth Ruling: Qualification of the Specified Transaction as 'Export of Service'The appellant contested GAAR's ruling that the specified transaction does not qualify as an export of service because three out of the five conditions specified under Section 2(6) of the IGST Act, 2017 are not fulfilled. The conditions include the supplier being located in India, the recipient being located outside India, the place of supply being outside India, payment received in convertible foreign exchange, and the supplier and recipient not being merely establishments of a distinct person.The authority found that SPA, located outside India, is the recipient of the service, fulfilling the second condition. However, the third condition, that the place of supply should be outside India, was not met as the service is performance-based and performed in India. The fifth condition was fulfilled as SPA and the appellant are separate legal entities and not merely establishments of a distinct person. Therefore, the specified transaction does not qualify as an export of service.Conclusion:The appellate authority confirmed the GAAR's ruling in respect of Ruling No. 1 and 4 and rejected the appeal filed by the appellant to that extent. The authority modified the GAAR's ruling in respect of Ruling No. 2 and 3, agreeing that SPA is the recipient of the service and that the appellant is not an intermediary as per the provisions of Section 2(13) of the IGST Act, 2017.