In re Five Star Shipping (GST AAAR Maharashtra)
In view of the above discussion, we hold that the entire gamut of services performed by the Appellant are in fact of the composite supply of the intermediary services, classified under the Service Accounting Code 999799, which is other miscellaneous services, and the accounting services under the SAC 998222, of which the intermediary service is the principal supply.
Therefore, the issues raised by the Appellant with regard to their activities in this appeal stands disposed in terms of the above discussion and findings. The individual questions, asked by the Appellant vide their application filed before the Authority for the Advance Ruling as well as vide their appeal filed before us have lost the context as well as relevance in light of all the above discussion and findings, as we do not look the activities of the Appellant, specified in the Annexure to the Agreement in question, as grouping of consultancy service and support service, rather we treat the entire gamut of services as a composite supply of intermediary services and Accounting services of which the intermediary services is the principal supply.
Also Read AAR Ruling- Marine Consultancy Service provided to foreign ship owners do not constitutes composite supply with principal supply of consultancy service
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING, MAHARASHTRA
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.
The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Five Star Shipping (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-18/2017-18/B-26 dated 18.04.2018.
BRIEF FACTS OF THE CASE
A. Five Star Shipping (hereinafter referred to as “Appellant”) is a partnership firm in terms of (Indian) Partnership Act, 1932. Its office is located in Mumbai (State of Maharashtra). Its partnership deed inter alia records that the partnership business shall be that of consultants.
B. The service by the Appellant essentially includes collecting market intelligence information and updates which is directed to the ship owners engaging the Appellant.
This is the principal service of the Appellant and is known as Consultancy Service. Separately, service provided by the Appellant also includes providing Support Service to Indian/ foreign ship owners so as to identify charterers who are seeking to optimise revenue for their vessels and monitoring voyage execution, which is the ancillary service offering of the Appellant. Consultancy Service and the consequential Support Service provided by the Appellant are generically referred to as Marine Consultancy Service (“MCS”) together by the Appellant.
C. MCS is provided by the Appellant in terms of a typical Consultancy Agreement executed by and between the Appellant and the ship owners. Details of service provided by the Appellants are provided in the Annexure attached to the agreement entered with FSO.
D. This appeal (as also the Application for Advance Ruling) concerns only supplies made to overseas clients known as Foreign Ship Owners (“FSO’) and is accordingly limited and worded.
E. MCS service of the Appellant is provided to the FSOs who wish to have and therefore seek out potential employment (charterers) for their vessels. Entire engagement between the Appellant and FSO is on principal to principal (“P2P”) basis and has the essential nature of consultancy, that is, provision of market intelligence/ information.
F. For the provision of MCS (which is always comprehensively rendered, that is, the Appellant renders Consultancy Service and Support Service bundled together) Appellant has employed resources which inter alia include management professionals, master mariners and chartered accountants. These professionals analyse market data available to them through the internet and other reliable trade resources or by projections. Such data is then converted into meaningful reports which help FSO in business decisions i.e. to maximize revenue and employment of its vessels.
G. Fees for provision of MCS become payable to Appellant upon conclusion of agreement between the FSO and successful employment with the potential charterers identified by Appellant or otherwise, and completion of support activities. Only then has all contractual obligations of Appellant been completed.
H. As per the ever evolving and highly competitive industry, fees are payable upon conclusion of the contract i.e., it is paid upon the agreed additional support services, lay time calculations, etc. being provided to FSO by the Appellant.
I. As an industry and market practice, fee is a percentage of revenue, which has been contractually agreed between the FSO and the charterer. This arrangement is premised on concept of value added service i.e., ‘no contract’ will result in ‘no fee’.
J. No state level taxes were applicable on the service offerings of MCS by the Appellant. The Appellant had obtained Service Tax registration as per the erstwhile indirect tax regime in the State of Maharashtra. MCS service provided by the Appellant to FSO and Indian ship owners qualifies as Business Auxiliary service (“BAS”) in terms of Chapter V of the Finance Act, 1994 (“the Act”).Hitherto, MCS provided by the Appellant was treated as “bundled service” comprising of Consultancy Service and Support Service, wherein Consultancy Service was the principal service giving essential characteristics to MCS. These services not covered under a specific rule of the Place of Provision of Service Rules, 2012 (“PPSR”) .Therefore, Rule 3 of the PPSR that is, default rule under the PPSR was applicable. As per Rule 3 of PPSR, the place of provision of service was ‘the place of recipient of service’. Therefore, the place of provision of service was the place of FSO, which was outside India.
Tax treatment under GST
K. The Appellant is providing MCS to both Indian and FSO. There is clarity regarding the GST implication on service provided to Indian ship owner as both provider and recipient of service are located in India however, there is inadequate clarity regarding the GST implication on services provided to FSO (located outside India). Therefore, the Appellant approached the Authority for Advance Ruling (‘the Authority”) by filing an application requesting Advance Ruling on January 19, 2018 regarding MCS provided by the Appellant to FSO. The Appellant sought an Advance Ruling from this Hon’ble Authority in respect of the composite supplies of MCS by the Appellant to FSO. Specifically, the advance ruling is sought on the following questions:
A.1 Whether MCS provided to FSO constitutes “composite supply” with the principal supply of consultancy service?
A.2 Whether MCS provided to FSO will qualify as an export of service in terms of Section 2(6) of the IGST Act as the place of supply of MCS (as a composite supply) will be determined in terms of Section 13(2)(a) of the IGST Act, i.e. the ‘location of recipient of service’?
B.1 In the alternate, where services are provided to FSO distinctively as supply of consultancy service and support service with separate and demarcated fees for their consultancy service and for support service:
a. Whether consultancy service will qualify as business consultancy service in terms of the scheme of classification of services [Annexure to Notification 11/ 2017 – Central Tax (Rate), dated 28th June, 2017(“the Notification”)]?
b. Whether the place of supply of such consultancy service will be the ‘location of recipient of service’ in the terms of Section 13(2)(a) of the IGST Act?
c. Whether support service qualifies as “intermediary service” in terms of Section 2(13) of the IGST Act? And, if ruled that the support service qualifies as intermediary service, the place of supply of support service as intermediary service will be the ‘location of supplier of service’ in terms of Section 13(8)(b) of the IGST Act?
L. Vide its Order dated April 18, 2018 (‘Impugned Order’), issued under Section 98 of the CGST Act and Maharashtra Goods and Service tax Act, 2017 (‘MGST Act’), the Authority has, basis the findings recorded in the Impugned Order, answered Question 1 and Question 2 in the negative and declared that the MCS service provided by the Appellant does not constitute “composite supply” and the Consultancy Service provided by the Appellant does not qualify as “business consultancy service” in terms of the scheme of classification of services provided in Notification No. 11/ 2017 -Central Tax (Rate) dated 28th June, 2017. As regards Question 3, the Authority has held that the Support Service provided by the Appellant qualifies as “intermediary service”.
M. Aggrieved by the Impugned Order, the Appellant is filing the present Appeal, on the following grounds which are without prejudice to one another.
GROUNDS OF APPEAL
1. The grounds of appeal are set out in detail herein after, which are taken in the alternative and are without prejudice to one another.
The supply of MCS by the Appellant constitutes ‘composite supply’ with the principal supply of Consultancy Service
2. The Appellant is an Indian service provider who provides supply of MCS service to foreign parties known as FSOs. The offering of MCS service by the Appellant is in the form of composite supply of services with the principal supply being Consultancy Service. The Support Service provided by the Appellant is in conjunction with the Consultancy Service rendered by it. Therefore, the offering of MCS service by the Appellant can be said to be the offering of two services in conjunction with each other, which are naturally bundled together.
3. It is submitted that in the facts and circumstances of the present case, the impugned findings that the supply of MCS by the Appellant would not constitute a “composite supply” with the principal supply being the supply of Consultancy Service, is completely erroneous and unsustainable. From 01st July, 2017 (GST regime), all forms of supply of service made for a consideration by a person in the course of furtherance of business qualifies as supply which is liable to GST in terms of Section 7(1)(a) of the CGST Act unless exported or exempted. Where two or more services are provided by a supplier in conjunction, GST law has continued the concept of composite supply and mixed supply as was given in Service tax law. A composite supply in terms of Section 2(30) of the CGST Act is defined as a supply of two or more services which are ‘naturally bundled’ and supplied in conjunction with each other in the ordinary course of business, one of which is the ‘principal supply’.
4. A composite supply is defined in Section 2(30) of the CGST Act as below:
“Section 2(30) – “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”
5. The concept of composite supply is similar to the concept of ‘naturally bundled service’ under the erstwhile negative list regime. Appellant is supplying MCS to the FSO which is a composite supply of Consultancy Services and Support Services (may include services for or completing employment) which are inherently tied up (bundled) and integrally enjoined, as a commercial offering. Consultancy Service rendered by the Appellant to FSO consists of the following services:
i. As Specialists in freight market movement, the consultant will analyse commodity, shipping and freight markets, track movement of ships and cargoes and disseminate such information to the company.
ii. Track, collate, analyse and monitor port development and logistics data originating from reliable source and update future trends
iii. Monitor world-wide economic development, bulk commodity trade pattern development
iv. Identify and provide information on port costs, bunker (fuel), trend, cost estimation and analysis
v. Preliminary evaluation of cargo volume, trade patterns, trend in commodity movement, port congestion, global and regional economic development and analysis
vi. Techno commercial assessment of vehicle type utilization opportunities, infrastructure development in various regions, geographical impact on global trade in bulk commodities arising from weather, piracy, war, conflict, any other causes which have prospects to impact trade
6. The foregoing services are provided as a single offering of Consultancy Service, failing which the provision of service will not be meaningful. Consultancy Service helps the client (i.e. FSO) with market intelligence and trade analysis, etc. which helps them in identifying potential charterers and thereafter zeroing on one or more such potential charterers. Thus, the Consultancy Service provided by FSO in tune helps the FSO to augment its business and expand its client base and all these services are provided as one service.
7. Support Services, on the other hand, provided by the Appellant to FSO (client) is a relatively newer offering, and a requirement emerging in recent times as markets became more competitive. This offering is usually at the end of the employment of vessel and involves Appellant merely monitoring voyage execution, examining the lay time calculations and arranging for reconciliation of accounts to crystalize receivables of FSO. Occasionally, support may involve postal or ministerial acts of transmitting messages between FSO and charterer. Yet at all times services are directed at, at insistence of and for benefit of FSO alone.
8. The Appellant can thus be considered as a service provider who supports FSOs in identifying, sourcing and procuring business and thereafter, smoothly concluding it. Therefore, the service provided by the Appellant is on an ‘end to end’ basis.
9. The Appellants are engaged by the FSOs to provide MCS service by which they gain valuable information which will be beneficial to their business and, will also be helpful in identifying potential charterers. MCS service, consisting of Consultancy Service and Support Service is supplied together to the FSO, in conjunction as one bundle of service. Conjunction means “condition of being joined”. MCS supplied by the Appellant is joined together where Consultancy Service is provided at the time of initiation of service by the Appellant to the FSO and Support Service is provided at the end of supply at the time of completion of employment of the FSO by the charterer. The Appellant has appointed numerous research analysts to undertake market research, track, collate, analyse the geo-political situation, suggest a suitable rate for the transaction and monitor port development. No FSO separately ever seeks provision of Support Service although academically it is possible. It has not been appreciated that MCS has evolved over a period of time and Support Service is typically provided as value addition to the FSO. Consultancy Service, in the ordinary course of business is provided in tandem with Support Service as a value addition and this is the industry practice.
10. One of the service provided by the Appellant amidst the gamut of service is the principal supply or the main/ primary supply. In case of the Appellant, the principal or the primary supply by the Appellant is the Consultancy Service which helps the FSO to initiate business by finding business and the Support Service is ancillary service which is provided at the time of closure of service when the Appellant is called upon to calculate lay time, etc. and help FSO to close its service provided to the Charterer. Both Consultancy Service and Support Service is provided to and for FSO on P2P basis and the Appellant has no wherewithal with the Charterer or paid by the Charterer.
11. Therefore, supply of MCS by the Appellant consisting of Consultancy Service and Support Service will have to be construed as a supply of composite service made by the Appellant as these services (i.e. Consultancy Service and Support Service) are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which (i.e. Consultancy Service) is the principal supply.
12. The term ‘naturally bundled and supplied in conjunction with each other in the ordinary course of business’ is not defined in CGST Act or IGST Act but this concept has been carried forward from the Service tax law. Reference is therefore made to taxation of Services: An Education Guide (June 20, 2012), which provides that to demonstrate that a service is supplied in conjunction with each other in the ordinary course of business, the supply of services should meet some of the following criterion which are indicative, not conclusive and in fact satisfied by the Appellant:
