Facts: M/s Toshniwal Brothers (SR) Private Limited is a supplier of services to overseas clients and is engaged in the business of promotion and marketing and after sale support services as a composite supply. He has 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. The said 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. The applicant further submits that in his view the activity undertaken by him by way of promotion and marketing services is not intermediary services. The applicant refers to the Advance Ruling pronounced by the Authority on Advance Rulings under the 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 had clearly demarcated the meaning of intermediary services and ruled that pure marketing and promotion services would not be intermediary services.
Issues Involved: The petitioner is before the Karnataka Authority for Advance Ruling (“the AAR”) for getting ruling in respect to following:
- 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?
- 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?
- 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?
Held: The Hon’ble AAR of Karnataka vide Advance Ruling No. KAR/ADRG/23/2018 dated September 19, 2018 stated as follows:
- The agreement copy provided by the applicant shows clearly that the price is negotiated by the applicant for the machinery or equipment’s and intimated to the overseas supplier. It is also seen that the Principal who is the overseas supplier reserves the right to conclude or reject or change the contract, but he shall inform the decisive reasons to the applicant. Also, the commission payable to the applicant is tied to the amount of sales that the applicant solicits and is typically an agency transaction. Even the agreement entered by the applicant with the Principal, call the applicant an agent and since he is facilitating the supply of goods between the overseas supplier who is the principal, and the customer, by soliciting the customers and also by negotiating the prices, terms etc., the predominant nature of the transaction is of “intermediary” nature. As per sub-section (13) of section 2 of the IGST Act, 2017 defines an “intermediary” means a broker, an agent 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.”
- When the applicant solicits the prospective purchaser, he is not aware of whether the transaction would ultimately result in a supply of goods. The terms of the contract also make it very clear that the amount of consideration towards after-sale services and warranty services would not cross 25% of the value and hence there is an element of classification of the value of marketing “intermediary” services and the “after-sale and warranty services”. The incidence of after-sale and warranty services is contingent upon the successful supply of materials and is not contingent upon the marketing “intermediary” services provided by the applicant to the principal and hence cannot be called as a naturally bundled service. Hence this does not amount to a composite supply and the same are treated as two supplies independent of each other and the valuation of each has to be computed as per Section 15 of the Central Goods and Services Tax Act.
In view of supra observation, the following rulings were issued:
1. The contract of services supplied are not pure and mere promotion and marketing services and the services provided is of the nature of facilitating the supply of goods, and hence would amount to “intermediary services” for the reasons enumerated in the aforesaid paragraphs for the purposes of determination of place of supply of such services.
2. The after-sale services provided are not in the nature of a composite contract and they are independent from the services provided.
3. The third question cannot be answered as it is not in the purview of jurisdiction of this Authority as it amounts to determination of the place of supply.
Citation: [2018] 98 taxmann.com 175 (AAR-KARNATAKA)