In re M/s. Toshniwal Brothers (SR) Private Limited (GST AAAR Karnataka)
In the instant case there is no dispute that the Agency contract in question involves two taxable supplies of services i.e promotion and marketing service and after-sales support service. However in order for the supply to be termed as a ‘composite supply’, what is required is that the supply of the said services should at least be bundled, more specifically be ‘naturally bundled’, and supplied in conjugation with each other. The term ‘naturally bundled’ has not been defined in the GST Act. We note that the concept of composite supply under the GST law is similar to the concept of naturally bundled services that prevailed under the service tax regime, and the same was understood to refer to those transactions involving an element of provision of service and an element of transfer of title in goods in which various elements are so inextricably linked that they essentially form one composite transaction.
The Appellant has contended that the marketing services and the post sales support services (installation and warranty support) are normally undertaken as a bundle of services; that their principals do not have any presence in India and the Appellant is the sole representative in the Indian territory for the contracted products; that installation and warranty support services are ancillary to the predominant service of promotion and marketing and there is a single price for both the services. We have gone through the Agency contract with Brabender, Germany in detail. We find that the Appellant has been engaged to promote and market the products of Brabender, Germany in India. For this purpose, the Appellant will advertise the Brabender products to the prospective customers, demonstrate the use of the products, address the queries of the prospective customers and communicate with the overseas client regarding the comments of the prospective customers. Based on the inputs supplied by the Appellant, the Principal will decided whether to conclude a contract with the customer in India. The decision of the Principal regarding the conclusion of the contract with a customer or its rejection will be informed to the Appellant. In case the Principal agrees to a contract with a customer, the Appellant get a commission which is agreed upon as 12% of the value of the goods sold. While the Agency contract states that the commission is for all the services provided by the Appellant which includes pre-sales, marketing, installation and warranty period services, it has been stated therein that 25% of the commission is attributable to the installation and warranty period services. By the Appellants own admission, the after-sales support installation service are not required in every case of sale since there are equipments which are typically in the nature of plug-and-play. Further, there are equipments which do not require installation but need to be configured remotely and the same is done by the manufacturers themselves. Therefore, the provision of after sales support by way of installation does not arise in each and every case. It is for this reason that the service recipient has earmarked only 25% of the commission payable as being towards the after sales support service since the same does not arise in every sale made to the customer. Therefore the question of being naturally bundled does not arise for the reason that every promotional activity with a prospective customer does not result in a sale. Further, every sale does not necessarily mean that installation support or after sale support is required. Therefore, we are of the view that the after sales support service, although rendered in a composite manner with the promotion and marketing service is not a composite supply. The price for the after sale support service is clearly identifiable and has been so stated in the contract itself. We accordingly uphold the AAR ruling on this question.
Also Read AAR Ruling- After sale support services cannot be treated as composite supply: AAR
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING KARNATAKA
At the outset we would like to make it clear that the provisions of CGST, Act 2017 and SGST, Act 2017 are in pari materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act.
The present appeal has been filed under section 100 of the Central Goods and Service Tax Act 2017 and Karnataka Goods and Service Tax Act 2017 (herein after referred to as CGST Act, 2017 and SGST Act, 2017) by M/s Toshniwal Brothers (SR) Private Limited, (herein after referred to as ‘Appellant’) against the advance Ruling No. KAR/ADRG 23/2018 Dated: 19th Sept 2018.
Brief Facts of the case:
1. M/s Toshniwal Brothers (SR) Private Limited is a company located at, No.11. AECS Layout, 4th Main, 3rd Cross, Sanjay Nagar 1st Stage, Geddalahalli, Bengaluru – 560094, having GSTIN number 29AAACT2881R1ZJ.
2. The Appellant states that he is a supplier of services to overseas clients and is engaged in the business of marketing, sales promotion and post sale support services. Appellant entered into an agreement with their customers (service Recipients), who are located outside India (which is a non-taxable territory in terms of clause (79) of section 2 of the CGST Act, 2017) for providing marketing, sales promotion and certain post-sales support services. Consideration for these services would be received in convertible foreign exchange.
3. The services are provided in respect of scientific instruments used in research and development / quality control primarily in fields of Nano Science, Material Science, Bio Pharma and Polymer Sciences.
4. The details of the service provided by them are as follows:
a. Promotion and marketing of the products of the Service Recipients in India:
The applicant solicits orders tor the goods of the overseas customer in India by marketing and promoting the goods in India. The orders for the products are placed directly by the prospective customers on the overseas entity. The applicant is not engaged in trading of such goods, either on his own account or on the account of the overseas client. The promotion and marketing of the products involves the following activities:
i. Applicant advertises the details of the goods to the prospective customers;
ii. Provides demonstration of the products to the various prospective customers located in India;
iii. Communicates and corresponds about all the relevant information to the prospective customers in connection with the goods;
iv. Communicates with the overseas clients about comments and queries of the prospective customers; and
v. Reviews the credit rating of the prospective customers of the overseas entity on regular basis;
b. After sale support services:
The prospective customers who are desirous of importing the said equipment will issue a purchase order to the overseas supplier and agree on the pricing and supply details. On the basis of the order issued by the prospective customer to the overseas entity, the overseas entity supplies the products to their customer in India. The appellant submits that the company is not involving in any of these processes but will provide the following support services:
i. Advice and assist the customers of the overseas entity in installation, initial start-up of products and demonstration of its satisfactory operation to such customers;
ii. For few product lines, provide complete installation services to the customers of the overseas entity along with necessary advisory and assistance to the customers of the overseas entity in initial start up of the products and demonstration of its satisfactory operation to such customers;
iii. Assistance in operation adjustments, on-site services and general customer assistance including warranty services;
c. Submission of Reports:
The Applicant shall prepare and submit regular reports within agreed time on its activities to promote and solicit orders for the products in India, to the overseas entity. These business reports would normally include:
i. Short and medium term forecasts detailing prospective customer’s name, order value, anticipated placement and expected delivery dates and long term project and prospect lists:
ii. Results of regular observation of marketing conditions, information in the public domain relating to the activities of competitors; and
iii. Results of participation in trade fairs.
5. The Appellant filed an application tor Advance Ruling under section 98 of the CGST Act, 2017 and KGST Act, 2017 on the questions
a. Whether pure and mere promotion and marketing services will be “intermediary services” for the purposes of section 12 of the Integrated Goods and Services Tax Act, 2017 for determining the place of supply of such services?
b. If after sale support services are also provided under a composite contract, would it then be composite supply? What will be the principal supply for such contracts?
c. Whether the above contracts would qualify as exports if the client is overseas entity, in terms of clause (6) of section 2 of the Integrated Goods and Services Tax Act, 2017 and will be a zero-rated supply as provided in section 16 of IGST Act, 2017?
6. Before the Authority for Advance Ruling, the appellant enumerated the following facts:
6.1. Appellant submits that as envisaged under Rule 2(f) of Place of Provision Rules, 2012, ‘intermediary’ means any person who arranges or facilitates the supply of goods or services or both, between two or more persons, but does not include a person who supplies such goods or services or both on his own account. Contrary to this, Appellant submits that he had provided the Services directly to the overseas entity (Service recipients) on principai-to-principal basis. Appellant will not enter into any agreement with the Indian customer for the supply of products of the overseas entity whereas overseas entity himself will directly deal with Indian customer regarding obtaining the purchase order, price negotiations and finally supply the goods. Appellant is involved only in the promotion and marketing of the goods of the overseas entity on his own account. Hence the activity undertaken by the Appellant, by way of promotion and marketing services are not intermediary services. In support of this. Appellant had drawn the attention of the Learned Authority for Advance Ruling (in short LAAR) to the Advance Ruling pronounced under the Service tax provisions in the case of GoDaddy India Web Services (P.) Ltd. (Ruling No. AAR/ST/08/2016, dated 4th March 2016 Application No. AAR/44/ST/15/2014) wherein the Authority has clearly-demarcated the meaning of intermediary services and ruled that pure marketing and promotion services would not be intermediary services.
6.2. The appellant also submitted before the Authority that, Clause 30 of Section 2 of CGST Act, 2017 provides the meaning of composite supply which reads as under:
“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.
Appellant submits that after sale support services are provided by them along with promotion and marketing services under a composite contract, and it will be in the nature of composite supply because two taxable supplies are being made under a single service agreement for a single price and these two different elements of the services are not available separately. These services are naturally bundled and supplied in conjunction with each other in the ordinary course of business. Therefore, after sale support services are provided along with promotion and marketing services and being a composite supply, one should be the principal supply. Appellant submits that the principal supply will be promotion and marketing services.
6.3. Appellant further submits that the services i.e.. promotion and marketing services and after sale services as a whole, would be the export of services as provided in clause 6 of section 2 of IGST Act, 2017 because,
i. The supplier of services, i.e. Appellant, is located in India;
ii. The recipient of services, i.e. overseas entity, is located outside India;
iii. The place of supply of service, is outside India:
iv. The payment for such services will be received by the supplier of services in convertible foreign exchange; and
v. The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act, 2017.
Thus, they submitted that the supply of said services by the company are ‘export of services’ and consequently will become a zero-rated supply as provided in Section 16 of IGST Act, 2017.
7. The Karnataka Authority for Advance Ruling, vide Advance Ruling No. KAR/ADRG 23/ 2018 dated 19th Sept, 2018 held that-
7.1. The contract of services supplied are not pure and mere promotion and marketing services and the services provided are of the nature of facilitating the supply of goods, and hence would amount to “intermediary services” for the purposes of determination of place of supply of such services.
7.2. The after-sale services provided are not in the nature of a composite contract and they are independent from the services of promotion and marketing and hence there is no question of determination of what will the principal supply.
7.3. The third question cannot be answered as it is not in the purview of jurisdiction of the Authority as it amounts to determination of the place of supply.
8. Aggrieved by the said Ruling of the Authority (herein after referred to as ‘impugned order’), the appellant has filed an appeal under section 100 of the CGST Act, 2017 and KGST Act, 2017 on the following grounds.
8.1. The Advance Ruling Authority has erred in holding that the services provided is of the nature of facilitating the supply of goods, and would amount to “intermediary services” tor the purposes of determination of place of supply of such services. Further, after-sale services provided are not in the nature of a composite contract and they are independent from the services provided and hence there is no question of determination of what will the principal supply is without consideration of the facts of the case and applicant’s interpretation of law.
8.2. Appellant submits that, the LAAR has considered the appellant who acts as an agent and an intermediary to the overseas entities based on the certain interpretations made in the agency contract entered into between Brabender GMBH & Co.KG and the appellant. The interpretations of the authority are- Appellant acts as an ‘intermediary’ on behalf of principal while negotiating business transactions with prospective customers in his territory excluding the right to conclude the contracts on behalf of the principal. Principal shall be free to conclude or to refuse the conclusion of a contract negotiated by the Agent and it is binding on the Principal to inform Appellant who is acting as ‘Agent’ on acceptance, rejection, nonperformance or different performance of a contract and shall state decisive reasons underlying his decision, unless prejudicial to his own essential interests”. Appellant should take care of interests of principal by regularly visiting the customers and prospective customers in his territory. On all contracts for the sale of goods which the Principal enters into with customers residing in the Agent’s territory the Agent shall receive a commission of 12% on the value of goods as far as sales contracts are concerned that have been negotiated by the Agent and a commission of 6% tor all other sales contracts. This commission is calculated based on the clause VI of the agency contract. In view of this the LAAR is of view that since the agent is having the right to receive commission from principal for the sales contracts negotiated. Appellant can be termed as playing the role of an agent to the overseas entity.
8.3. Appellant submits that, the usage of the words ‘agent’ or ‘intermediary’ in the said agency contract should not be interpreted to mean an ‘agent’ or ‘intermediary’ as defined under the CGST Act, 2017 and Integrated Goods and Sendees Tax (IGST) Act, 2017 respectively.
8.4. Section 2(5) of the CGST Act, 2017: Definition of’Agent’:
“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;
The term ‘business of supply or receipt of services’ must not be literally interpreted since one has to analyse the nature of the transactions carried out by an agent on a case to case basis. In other words, for a person to qualify as an ‘agent’ under GST, the person has to render the services on behalf of the principal and not on its own account. If the agent render a service on behalf of the principal it does not require distinguish skill set to render such services, suppose if the agent render service on its own account it require distinguish skill set to render the same since it will be an extension to the activities undertaken by the service recipients. In the instant case. Brabender GMBH & Co. KG is one of the Original Equipment Manufacturer (OEM) of scientific equipment and is engaged in the said services, which as a supply chain process, is nothing but an extension of the manufacturing activity, viz., promotion of goods, sale of goods and finally post-sale support for the goods so sold. It must be noted that Appellant is merely a provider or supplier of said services and is not involved in buying and selling or supplying of such goods. Further, the fact that Appellant is not involved in negotiation of the contract and / or supply of goods clearly and unambiguously means that Appellant is not an ‘intermediary’. The activities of Appellant are strictly limited to only promotion and marketing of such goods and providing post-sale support at the instruction of the overseas client. Nevertheless, even if Appellant has participated in the negotiation of the prices, the agreement clearly states that the ultimate right to conclude or call-off the contract is with the overseas client itself. In other words, the discussions or mere participation of Appellant in such discussions does not bind either of the parties.
8.5. Appellant further submits that the relationship between the overseas entity and the Appellant that of Principal to Principal as it is narrated in paragraph 2 of the Clause II (Duties of Agent) of the said agency contract, it states that the agent shall be informing the principal on the market trends, customer feedback in relation to such equipments. Further in paragraph 4 of the Sales Representation Agreement, the Appellant as a ‘Representative’ of the ‘Manufacturer’ has agreed to render Sales promotion, giving technical information, quotation follow-up. technical/ commercial negotiations. Installation and final commissioning and free services to customer during the warranty period.
8.6. Hence, in the instant case. Appellant acts does not qualify as an ‘agent’ as defined under CGST Act, 2017. The aforesaid services are provided on a Principal to Principal basis by the Appellant to the overseas entities. Further, there does not exist any Principal-Agent relationship during the course of rendering the aforesaid services based on the submissions made above.
8.7. Section 2(13) of the IGSTAct. 2017; Definition of ‘intermediary’
“intermediary” means a broker, an ugent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.
On examination of the aforesaid definition of ‘Intermediary’ to the instant case Appellant submits that is not engaged in arranging or facilitating the supply of equipment but is engaged in promotion and marketing services and post-sale support services to the overseas entities which is part of main services. There exists a direct interaction between the customers and overseas entities with regard to price negotiations and delivery of equipment and Appellant has no role with regard to the same since there is no contractual agreement entered into on behalf of overseas entities. This can be substantiated vide the Para 3- ‘Nature of Representative’ of the copy of the Sales Representation Agreement (which has been reproduced below: –
“The MANUFACTURERS intends to direct requests received from the territory to the REPRESENTATIVE for further attention and follow up and keeps the REPRESENTATIVE informed of the orders received directly from the customers in the Territory……….”
On successful negotiation of prices with the overseas entities, the customers place the orders directly with the overseas entities which can be substantiated with the sample copies of Purchase orders. Further, majority of the customers of Appellant are research institutes or R&D centres. Under the Customs law, such customers are eligible for exemptions/concessions with respect to customs duties on import of goods. Accordingly, they would always directly import the said goods and would not procure (such imported goods) from any supplier in India (who has imported the same earlier). Such a proposition would disentitle them from availing the customs duty exemptions/concessions. Further. Appellant submits that merely and only for the reason that the consideration is termed a ‘commission’ in the agreement, the services provided by Appellant takes the colour and characteristics of an ‘intermediary’. It is but essential that the actual scope of work and activities of Appellant should be analysed to classify the same.
8.8. Further, appellant drew the attention of this authority to the judgement pronounced by Authority for Advance Ruling- Maharashtra in the case of IN RE: Five Star Shipping dated 18.04.2018 GST-ARA-18/2017-18/B-26. Considering the analogy adopted in the said judgement that to qualify as an intermediary, there should be two supplies at any one time: (i) the supply between the principal and the third party: and (ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged. The validity of the definition of intermediary services in the instant case should be analysed as the pre-sale and marketing services precedes the actual supply of goods, viz., the supply of goods from the overseas principal to the Indian customer and the supply of services by Appellant to the overseas supplier do not and never take place at the same point in time, as envisaged and required under the law – as outlined in the education guide. Therefore, one supply of service i.e. promotion and marketing services precedes the other i.e. supply of equipment and at no point of time, the two services are supplied at the same time as explained in the Education Guide.
8.9. Appellant has also drawn the attention of this authority to the Advance ruling pronounced by the Authority of Advance rulings under Service Tax provisions in the case of Godaddy India Web services (P.) Ltd. Ruling No. AAR/ST/08/2016, Application No. AAR/44/ST/15/2014) wherein the Authority has clearly demarcated the meaning of intermediary services and ruled that pure marketing and promotion services would not be intermediary services.
8.10. The Appellant stated that the LAAR has completely failed to consider the above judgement and submits that the facts and circumstances of the said case and Appellant’s business are same and wholly comparable and thus, the ratio of the said Ruling should be squarely applied to Appellant’s case.
8.11. Appellant further submits that the words used in the definition of ‘intermediary services’ viz., ‘arranging or facilitating’ has apparently not been defined in the GST provisions and there is no reference to these expression in the allied laws, viz., commodity tax laws such as Service Tax, Central Excise or VAT laws. Therefore, the meaning given to such expressions in the legal dictionaries may be relied upon. Arrange, means to make preparation or to place in a desired order and facilitate, means to render easier or absence of difficulty or that which promotes the ease of any action. Thus, only such of the services which will impact as above would qualify as ‘services of arranging or facilitating supply of goods’.
8.12. The following factors also help in determination of whether or not; the services provided would be intermediary services:
> Intermediary cannot alter the nature of value of the service, supply of which he facilitates, although he may negotiate on behalf of the principal.
> The value of Intermediary service will be invariably be identifiable from the main supply of service.
> Services provided by intermediary on behalf of principal are clearly identifiable.
8.13. Insofar as it relates to activities of Appellant. Appellant submits that it does not result in ‘arranging or facilitating supply of goods’ on account of the following reasons:
> the Appellant merely provides marketing and sales promotion activities which may or may not result in a concluded sales for the overseas suppliers;
> The Indian customer directly places an order on the overseas suppliers (recipients of Appellant’s services) and the opening of LC and exchange of other documents directly takes place between the overseas supplier and the Indian customer;
> Appellant is not engaged in preparation of any such documentation and/or movement of goods;
Thus, they submitted that the services provided by them cannot be said to be intermediary services, by any stretch of imagination.
8.14. Appellant further submits that not all marketing activities will be ‘intermediary services’. Only such of the marketing activities (and non-marketing services) which result in ‘arranging or facilitating supply of goods’ would be termed as ‘intermediary services’. In this regard. Appellant drew the attention to the following provisions under the erstwhile Service tax provisions:
In Explanation to Section 65(19) of the Finance Act, 1994(Service tax provisions), a commission agent was defined to mean ‘a person who causes a sale or purchase of goods … for a consideration’.
It is important to note that this was different, separate and distinct from ‘intermediary services’, since both co-existed under different provisions. Applying the above to Appellant’s case, it becomes important to note that Appellant is merely causing a buying or selling (supplying) of goods from the overseas principal to the customer in India. Appellant is most certainly not engaged in ‘arranging or facilitating supply of goods by the overseas principal to the Indian customer’, as indicated supra.
8.15. The appellant submits that the analogy adopted in the definition of ‘business support services’ under Service tax law will be akin to the instant case that the services rendered by him under the ambit of “Business Support services” under the HSN Code: 9983 based on the analogy adopted in the case of Advance ruling of GoDaddy India Web services (P.) Ltd. Ruling No. AAR/ST/08/2016, Application No. AAR/44/ST/15/2014) and the definition of “Support services of Business or Commerce”.
9. In respect of the question No. 2 the appellant submits that the LAAR has completely failed to consider the submissions made by Appellant. In contrary to the above, the LAAR has considered the copy of the agency contract entered into by Appellant with Brabender GMBH & Co. KG which was part of the advance ruling application wherein clause IV of the agency contract mentioned about Agent’s Right to a Commission in which In sub- clause 6 it is seen that the consideration is payable for the services which include pre-sales, marketing sales, installation and warranty period services. The agreement quotes the principal as declaring to the agent as under:
“From our experience for business in your territory it would be commensurate to allocate 25% of total commission earned in each fill system case to address installation and warranty period services which are provided by your company on our behalf to the end customers”
The LAAR has concluded that Appellant has been offered commission on the amount of goods sold and this is the method adopted for calculating consideration. Further, that the incidence of after sales and warranty services is contingent upon the successful supply of materials and is not contingent upon the marketing “intermediary” services provided by Appellant to the overseas entities. In addition to this Appellant submits that the promotion and marketing activities along with the after-sale support qualifies the conditions mentioned in the definition of ‘composite supply’ as mentioned supra, based on the following grounds:
9.1. The two taxable services are naturally bundled:
Appellant submits that in accordance with the E-Flyer published by the CBEC on 15.03.2018 with respect to composite supplies and mixed supplies submits, enlists the indicators based on business practices to ascertain whether the two or more supplies of goods/ services are naturally bundled or not. The relevant extract is as follows:
“Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators, some of which are listed below:
