2023 (1) TMI 1093 - AAAR - GST

Classification of supply of service - composite supply or not - activity of design and development of patterns used for manufacturing of camshaft for a customer - intermediary service or not - non-speaking order - violation of principles of natural justice. Whether activity of appellant is an intermediary service as held by the MAAR or as contended by the appellant, an activity of design and development of patterns/tools used for manufacturing of camshafts, for a overseas customer is a composite supply where the principal supply is supply of services? HELD THAT - It is appellant who prepares the drawing and designs of tool / pattern and also check feasibility of its manufacturing. The techno commercial offer is being made by the appellant to overseas OEM / Machinist. Overseas OEM / Machinist releases the purchase order, for specific number of units of tools, after approval of techno commercial offer. The appellant undertakes in-house drawing, design, modelling, simulation and documentation for manufacture of the tools. Whereas, it hires third party vendor for machining (manufacturing) the tool as per specification provided by the appellant. The third party vendors charge for the manufacture of tools, which is paid by the appellant. The third party vendor delivers the tool to appellant, of which appellant further raises supply invoice to overseas OEMs / Machinist specifying therein the description of goods (tools), quantity, rate per unit, etc. However, as industry practice in this sector appellant keeps such tools with it for further use in manufacture of camshaft. The invoice raised by the appellant also exhibits that the tools of specific designs as per the specifications of overseas customer are supplied to them. Thus, from perusal of the purchase order placed by the overseas customers and supply invoice raised by appellant, it is clear that dominant intention of overseas customer is to get the supply of manufactured pattern/tools from the appellant as per specification provided by them. Thus, it is clear that the appellant is making such supply of tools on his own against the consideration which is price for tools and hence, there is no issue of receiving commission from overseas customers. Appellant is not facilitating any supply between overseas entity and third party vendor. The impugned transaction is supply of goods i.e. tools from appellant to customer on principal to principal basis. Considering these facts of and definition of intermediary provided under section 2(13) of the IGST Act, 2017, it is very much clear that appellant is not an intermediary . Hence, the findings of the MAAR that the impugned activity is an intermediary service is erroneous and not acceptable. On careful perusal of the definition of the term composite supply and the essential conditions enumerated in the definition, it is seen that the composite supply comprising two or more taxable supplies of goods or services or both, or any combination thereof should be made by a taxable person to a recipient - However, in the instant case, considering the facts of the case, it is amply clear that impugned transaction between appellant and overseas customer is of supply of goods i.e. pattern/tool of specified specifications. Hence, contentions of the appellant that impugned transaction is composite supply where the principal supply is supply of services is not valid. In view of the above discussion, we hold that the impugned transaction is supply of goods i.e. pattern/tool of specified specifications. Thus, the impugned transaction between appellant and overseas customer is supply of goods.

Issues Involved:

1. Whether the activity of "assistance in design and development of patterns used for manufacture of camshaft" qualifies as a composite supply of services.
2. Whether the activity qualifies as intermediary services.
3. Whether the order issued by the Maharashtra Authority for Advance Ruling (MAAR) is a non-speaking order and violates principles of natural justice.
4. Whether the MAAR has exceeded its jurisdiction in issuing the impugned order.

Issue-wise Detailed Analysis:

1. Composite Supply of Services:

The Appellant argued that their activities constitute a composite supply with the principal supply being the supply of services. They contended that the activities involved in designing and developing tools, identifying third-party vendors, and coordinating with them constitute a naturally bundled supply of services. The Appellant emphasized that the predominant element is the design and development services, which account for 55-60% of the total cost, while the manufacturing by third-party vendors is ancillary. The Appellate Authority agreed with the Appellant that the activities are not intermediary services but did not accept that it is a composite supply of services. Instead, they held that the transaction is a supply of goods (tools) to the overseas customer.

2. Intermediary Services:

The Appellant contended that their activities do not qualify as intermediary services as defined under Section 2(13) of the IGST Act, 2017. They argued that they provide services on their own account and do not facilitate any supply between the overseas OEMs/machinists and third-party vendors. The Appellant also pointed out that they do not charge any commission for engaging third-party vendors. The Appellate Authority agreed with the Appellant's contention, stating that the Appellant is not an intermediary as they are not facilitating any supply between two parties and are providing services on a principal-to-principal basis.

3. Non-Speaking Order and Principles of Natural Justice:

The Appellant argued that the MAAR's order was a non-speaking order as it did not consider the submissions made by the Appellant and did not provide reasons for classifying the transaction as intermediary services. The Appellant cited various judicial precedents emphasizing the importance of reasoned orders. The Appellate Authority did not explicitly address this issue but implicitly acknowledged the Appellant's contention by modifying the MAAR's order.

4. Jurisdiction of MAAR:

The Appellant contended that the MAAR exceeded its jurisdiction by deciding on matters not raised in the application. They argued that the MAAR should have referred the matter to the Appellate Authority if there was any difference of opinion. The Appellate Authority did not explicitly address this issue but implicitly acknowledged the Appellant's contention by modifying the MAAR's order.

Conclusion:

The Appellate Authority modified the MAAR's order, holding that the impugned transaction between the Appellant and the overseas customer is a supply of goods (tools) and not intermediary services. The Appellate Authority agreed with the Appellant that the activities do not qualify as intermediary services and are provided on a principal-to-principal basis. However, they did not accept the contention that the activities constitute a composite supply of services. Instead, they held that the transaction is a supply of goods (tools) to the overseas customer.

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