2022 (3) TMI 1367 - AAR - GST

Classification of supply of services - composite supply - principal supply is supply of services or not - activity of design and development of patterns used for manufacturing of camshafts for a customer - naturally bundled services or not - intermediary services or not - HELD THAT - The applicant, on instructions of the OEMs / Machinists and on the basis of the specifications agreed between itself and the OEM / Machinist identifies and engages a third party Indian manufacturer to manufacture the pattern and tools which are then delivered to the applicant on behalf of the overseas OEMs/Machinists (since the ownership of tools lie with OEMs/ Machinists), for use in manufacture of camshaft prototype. Therefore, the applicant on behalf of the overseas OEMs/Machinists, not only identifies third party vendors who can manufacture the pattern and tools as per the design/drawings, but also explains and closely works with third party manufacturer to develop the patterns and tools thereby engaging with the third party manufacturers for supply of tools. The applicant is not only providing services to the overseas OEMs/Machinists, but they also actively identify and closely engage with third party vendors on behalf of the overseas OEMs/Machinists. The supply in the instant case consists only of service and there is no supply of goods. Such supply of services appears to be that of an intermediary service - the Applicant is located in India and in the subject case, in respect of patterns and tools, the applicant represents it's overseas OEMs/Machinist as their representative. The applicant actively identifies and closely engages with third party vendors, for manufacture of patterns and tools; by such third party vendors (on behalf of the overseas OEMs/Machinist). Thus, the applicant is effectively connecting the third party vendors in India with the requirements of its overseas OEMs/Machinist. In the subject case the main supply would be supply of tools and patterns to the overseas customers by the third party vendors, which is not actually happening physically since the tools and patterns are moving from the third party vendors directly to the applicant. Such movement of goods to the applicant appears to be on behalf of the overseas vendors because the ownership of the tools and patterns is with such overseas vendors as submitted by the applicant. Secondly the ancillary supply would be the supply of designs and drawings of the patterns and tools by the applicant, on behalf of the overseas customers to third party vendor/s and also the activity of identifying the third party vendors who can manufacture the pattern and tools as per the design/drawings (requirements) and explaining and closely working and engaging with such third party manufacturer to develop the patterns and tools. It is very clear from the applicant's submissions that they are not providing any services on its own account. The designs are provided to the third party vendors on behalf of the overseas customers of the applicant. The service provided by them is to their overseas customers and as per the requirements and directions of its overseas principals - thus the applicant is satisfying all the conditions of an intermediary and we have no hesitation in holding that, the applicant is supplying intermediary services as per the relevant provisions of the IGST Act, 2017.

Summary

Issues Involved:
1. Classification of the activity of design and development of patterns used for manufacturing camshafts.
2. Determination of whether the activity constitutes a composite supply with the principal supply being services.
3. Examination of intermediary services under GST laws.

Detailed Analysis:

Issue 1: Classification of the Activity
The applicant, a manufacturer of camshafts, engages in transactions with overseas OEMs/Machinists for designing and developing patterns and tools required for manufacturing camshafts. The OEMs/Machinists outsource tasks such as assistance in designing, identifying third-party vendors, and coordinating with these vendors to the applicant. The applicant charges a fee for these services. The primary question is whether this activity constitutes a composite supply with the principal supply being services.

Issue 2: Composite Supply and Principal Supply Determination
According to Section 2(30) of the CGST Act, a composite supply consists of two or more taxable supplies of goods or services naturally bundled and supplied in conjunction with each other, where one is the principal supply. The applicant contends that the activity is a composite supply with the principal supply being services, as the value derived from the activity is driven by the assistance rendered in manufacturing process planning rather than the value of the material used for manufacturing the tools.

Issue 3: Examination of Intermediary Services
The applicant's role involves identifying and engaging third-party vendors on behalf of the overseas OEMs/Machinists for manufacturing patterns and tools. This activity involves coordinating and facilitating the supply of goods (patterns and tools) between the third-party vendors and the overseas OEMs/Machinists. Under Section 2(13) of the IGST Act, an intermediary is defined as a person who arranges or facilitates the supply of goods or services between two or more persons but does not supply such goods or services on their own account.

Findings and Conclusion:
1. Nature of Supply: The applicant's activities are classified as the supply of services, specifically intermediary services, as they facilitate the supply of patterns and tools between third-party vendors and the overseas OEMs/Machinists.
2. Intermediary Services: The applicant meets the criteria for intermediary services as they are involved in arranging the supply of goods (patterns and tools) and providing ancillary services of designing and development on behalf of the overseas OEMs/Machinists. The applicant does not supply these goods or services on their own account.
3. Order: The Authority for Advance Ruling concluded that the activity of design and development of patterns used for manufacturing camshafts for a customer is a supply of service in the form of intermediary services.

Summary:
The Authority for Advance Ruling, Maharashtra, held that the activity of designing and developing patterns for manufacturing camshafts, performed by the applicant for overseas OEMs/Machinists, constitutes a supply of services in the form of intermediary services. This classification is based on the applicant's role in facilitating the supply of patterns and tools between third-party vendors and the overseas customers, thus meeting the criteria for intermediary services under the GST laws.