2018 (10) TMI 597 - AAR - GST

Classification of supply - Intermediary Services or not - pure and mere promotion and marketing services - determination of place of supply of services - Composite supply - zero rated supply - export of services or not - POPOS Rules. 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 that - In Clause VI of the contract, it is seen that the commission is calculated on the basis of the amount invoiced for the business transaction, free of VAT and rebates are deductible. Additional costs such as freight, cartage, packing insurance, custom duties, and all other charges and dues, costs for installation, expenses resulting from putting into operation and similar services which are essentially work and labour shall be deducted, even if they are not invoiced separately, shall also be deducted. It is also stated in the contract, where the agent orders goods from the principal at his own expense, the commission due can be deducted directly from the value of goods. Further, it is also stated that any expenses and spendings of the Agent resulting from his activities (regardless of whether they arise generally or in connection with a particular business transaction) shall be regarded as covered by commission that the Agent is entitled to, and such expenses excludes travelling expenses. It is also stated that for spare parts, the commission would be paid for values equal or superior to 250 and repairs are not subject to commission. In sub-clause 6 of Clause IV, it is seen that the consideration is payable for the services which include pre-sales, marketing, sales, installation and warranty period services and the commission payable is for the complete bundle of services. Intermediary services - Held that - The agreement copy provided by the applicant shows clearly that the price is negotiated by the applicant for the machinery or equipments 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 - 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. Composite supply or not - Held that - 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 services. 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. Both these independent supplies are only linked to the supply of goods from the ultimate supplier to the consumer and till that happens the transaction of after-sales supplies do not come into existence at all. But the supply of services in the form of intermediary services is related to the supply of goods, as no consideration flows to the applicant without a supply being effected by the Principal and hence it is tightly bound to supply of goods to the Principal. Export of services or not? - Held that - The issue has to be decided on the basis of the place of supply applicable to each of the transaction. This Authority is not competent to decide on this issue of determination of place of supply and hence does not answer this question. Ruling - 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. The after-sale services provided are not in the nature of a composite contract and they are independent from the services provided in paragraph 1 above and hence there is no question of determination of what will the principal supply. 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.

Summary

Issues Involved
1. Classification of promotion and marketing services as "intermediary services."
2. Determination of composite supply and principal supply in contracts including after-sale support services.
3. Qualification of the contracts as exports under the IGST Act, 2017.

Detailed Analysis

1. Classification of Promotion and Marketing Services as "Intermediary Services"
The applicant, a supplier of services to overseas clients, sought a ruling on whether promotion and marketing services qualify as "intermediary services" under Section 12 of the IGST Act, 2017. The applicant argued that their services are provided on a principal-to-principal basis and not on behalf of the service recipients. They cited a previous Advance Ruling in the case of GoDaddy India Web Services (P.) Ltd, where it was held that pure marketing and promotion services do not constitute intermediary services.

However, upon review of the agency contract, it was noted that the applicant acts as an agent who negotiates business transactions on behalf of the principal but does not conclude contracts. The applicant receives a commission based on sales value, indicating an agency relationship. Therefore, the services provided by the applicant were deemed to facilitate the supply of goods between the overseas supplier and the customer, classifying them as "intermediary services" under Section 2(13) of the IGST Act, 2017.

2. Determination of Composite Supply and Principal Supply
The applicant also sought clarity on whether after-sale support services provided under a composite contract with promotion and marketing services would constitute a composite supply, and if so, what the principal supply would be. The applicant argued that these services are naturally bundled and integral to each other, with promotion and marketing services being the principal supply.

The Authority found that the contract terms indicated a clear distinction between marketing services and after-sale support services. The after-sale services, including installation and warranty, are contingent upon the successful supply of goods and are not naturally bundled with the marketing services. As such, these services are treated as independent supplies rather than a composite supply. Consequently, there is no need to determine a principal supply within this context.

3. Qualification of Contracts as Exports
The applicant queried whether the contracts would qualify as exports if the client is an overseas entity, making the supply zero-rated under Section 16 of the IGST Act, 2017. The Authority noted that the determination of the place of supply is crucial for this classification. However, the Authority for Advance Rulings does not have the jurisdiction to determine the place of supply. Therefore, this question was not addressed.

Ruling
1. The services provided are not pure promotion and marketing services but are intermediary services for the purpose of determining the place of supply.
2. The after-sale services do not constitute a composite supply and are independent of the promotion and marketing services.
3. The question regarding the qualification of contracts as exports was not addressed due to jurisdictional limitations.