TAXABILITY OF MARINE CONSULTANCY SERVICES

[Dr. Sanjiv Agarwal]

Marine Consultancy Services (MCS), inter alia, include collecting market intelligence and updates which are disbursed to ship owners, services such as providing support service to Indian/foreign ship owners to identify charterers outside India who seeking to optimize revenue for their vessels and monitoring voyage execution, as the ancillary services. Consultancy service and the consequential support service.

There is clarity regarding the GST implication on service provided to Indian ship-owners as both provider and recipient of service are located in India. However, there is inadequate clarity regarding the GST implication on services provided to Foreign Ship-owners (FSO) located outside India. The taxability of MCS was raised for advance ruling wherein applicant sought guidance from Authority of Advance Ruling (AAR), Maharashtra in Re: Five Star Shipping 2018 (7) TMI 1182 - AUTHORITY FOR ADVANCE RULING - MAHARASHTRA .

Advance Ruling

Applicant sought advance ruling on issue as to whether Marine Consultancy Services (MCS) provided to foreign ship owners constitutes 'composite supply' with the principal supply of consultancy service. In the alternate, it claimed that where services are provided to foreign ship owners distinctively as supply of consultancy service and support service with separate and demarcated fees for their consultancy service and for support service, whether consultancy service will qualify as business consultancy service and the place of supply of such consultancy service will be the 'location of recipient of service' in terms of section 13(2)(a). Further, whether support service qualifies as "intermediary service" in terms of section 2(13) of the IGST Act?

A composite supply consists of two or more taxable supplies of goods or services or both, or any combination thereof; these taxable supplies are naturally bundled; these taxable supplies are supplied in conjunction with each other in the ordinary course of business and one of these taxable supplies is a principal supply.

AAR observed that in the present case, it is very apparent that the consultancy services being provided by the applicant are not in the nature of guiding the ship owning company in the management of the ship owning company but are only in the nature of consultancy in respect of opportunities of marine transportation business, which is one of the support services in respect of marine transport and would therefore required to be classified under support services in transport or in case they are providing other professional, technical and business services or other support services nowhere classified, then they would have to classify their services in one of the below categories after taking into consideration the exact nature of service or services that they provide in a specific case.

The applicant would have to identify the category as per the services delivered in terms of scheme of classification of services. Thus, the classification of their service will depend on the exact nature of service/services they would provide in specific case.

On verification and examination of the nature of services as above being provided by the applicant it is very apparent that the claim made by applicants that they are providing services only to the ship-owners and have no interaction with the ship charterers while providing these services would not be maintainable because the nature of Support services, being monitoring of voyage execution for smooth and efficient operations and examination of lay time calculations and arranging for accounts reconciliation for objectives of eventual settlement, are such services which cannot be performed until and unless the applicant interacts and works in coordination with the ship charterers on behalf of the ship-owners.

Thus, from the very nature of support services that are being provided by the applicant, as visible from the terms of agreements as referred above and submitted to this authority, it is clear that the support services being provided by them would be 'intermediary services' and the applicant would be covered in the definition of an intermediary in terms of section 2(13) of the IGST Act, 2017.

The Authority for Advance Ruling held that Marine Consultancy Service (MCS) provided to foreign ship-owners does not constitute 'composite supply' with principal supply of consultancy service.

Appellate Ruling

Being aggrieved by the said Ruling, an appeal was preferred before Appellate Authority for Advance Ruling (AAAR), Maharashtra on the following grounds:

• Supply of MCS constitutes ‘composite supply’ with the principal supply of consultancy services
• AAR order fails to provide ruling on the classification of services provided
• AAR order has failed to answer question permissible u/s 97(2) of CGST Act, 2017, i.e., classification which is necessary to ascertain place of supply and tax liability on supply of MCS.
• Support services would not qualify as ‘intermediary services’ as per section 2(13) of IGST Act, 2017.

The nature of services involve providing the consultancy services and the business support services to the FSO, one after the another i.e. first they are first providing the consultancy services by way of the provision of the list of the potential charterers of the vessels owned by the FSO, after doing all the professionals driven research and analysis of the data procured from the various authentic sources. They are classifying these activities as consultancy services. Out of this list of the potential charterers, when the FSO enters into agreement with any of these charterers for chartering of their vessels subject to the terms and conditions of the said agreement, the FSO again call for the services of the Appellant, this time to monitor the voyage execution and examine the lay time calculations and account reconciliation etc., which the appellant are classifying as support services. Thus, consultancy services are followed by the support services.

While exploring the potential charterers for the vessels owned by the FSO, they have to interact with those potential charterers, to know their requirements and expectations related to the chartering services. They further added that they do not play any role in the eventual agreements entered between the FSO and the charterers for the chartering of the vessels. They also do not have any obligation towards or agreement/contracts with these charterers. The agreement reveals that primary activity of the consultant is to introduce the FSO to their potential clients who may be interested in chartering the vessels of FSO.

As per definition of ‘intermediary’ in section 2(13) of IGST Act, 2017, necessary conditions for any activity to be an intermediary service are asunder:-

1. There should be supply of goods or services or both;
2. There should be the involvement of three persons - (i) the supplier of the goods or services or both (ii) the receiver of the supply of the goods or services or both and (iii) the intermediary who arranges or facilitates the said supply of goods or services or both subject to the condition the said supply is not made by the intermediary himself on his own account.

The AAAR observed that there is a case for ‘intermediary’ services’ provided to FSOs in view of the following:

(i)   There has been a supply of services, called Rental services of water vessels including passenger vessels, freight vessels and the like with or without operator as classified under SAC 996602, by FSO to the vessel charterer.

(ii)   There are involvement of three entities only, first one is supplier of the chartering services, i.e. The FSO, second one is the receiver of this chartering service i.e. the charterer and the third one is the Appellant, who have made the supply of service, i.e. chartering of the vessels service, possible by introducing FSO to the charterer by way of the short listing of various potential charterers for the vessels of FSO. Besides this, as a matter of fact, the Appellant is not supplying this service i.e. chartering of vessel service, as the vessels are not owned by them but the by the FSO. Thus, all the conditions or parameters for the intermediary services have been fulfilled by the services being provided by the Appellant to the FSO.

The agreement covered practices in vessel chartering industry which, inter alia, included:

1. the arrangement for the employment of the principals’ ships/vessels by way of the study and analysis of the various market reports/trends and intelligence gathered from the other reliable data resulting into the short listing of the potential charterers;
2. facilitating the main supply of services i.e. the Renting of the water vessels with or without operator agreed between the FSO, the provider and their clients i.e. the vessels charterers by undertaking the activity in the form of monitoring of the voyage execution,
3. undertaking various other administrative services like examination of lay time calculation and reconciliation of the voyage related accounts for eventual settlement with the vessel charterers; which are the essential requirements for receiving the payment from the FSO. This brokerage or commission amount is a fixed percentage of the gross amount received from the charterers as consideration for this vessel chartering services.

 The Appellant was actually facilitating the supply of the main services i.e. chartering of the vessels by the FSO to their clients i.e. charterers, thereby clearly acting as an intermediary, as the chartering of the vessels is not the main service of the Appellant, but their principal i.e. the FSO. Appellant are performing all these services on behalf of their principal i.e. the FSO, thus acting as an intermediary. The above said intermediary services can be classified under the Service Accounting Code 999799, which is ‘Other Miscellaneous Service’.

Further, in addition to the above intermediary activities, they are obliged to perform the other administrative activities like examination of lay time calculation, voyage account reconciliation for eventual settlement with the charterers, which can be classified under the service head /group ‘accounting services’ bearing the SAC 998222.

In view of these facts and findings, the AAAR came to conclusion that services of marine consultancy can be treated as composite supply of the intermediary services and accounting services, of which the intermediary supply is the principal supply , as the appellant, at the first stage, is arranging for the supply of the main service i.e. Rental services of water vessels including passenger vessels, freight vessels and the like with or without operator as classified under SAC 996602, between the service provider i.e. the FSO and the service receiver i.e. the vessels charterer and at the later stage, when the contract for the supply of the main services are finalised between the FSO and the vessel charterers, the Appellant is called upon to facilitate the provision of the main services i.e. monitoring of the voyage execution etc. Remaining administrative activities like examination of the lay time calculation, voyage accounts reconciliation and settlement thereafter etc. which is in the nature of ‘accounting services’ provided to the FSO, can be covered under the incidental services to the main services of the Appellant, which is the intermediary services, as the Appellant are obliged to provide all these services to the FSO. Thus, the entire gamut of the activities of the appellant can be considered as composite supply of the intermediary services and accounting services, of which the intermediary service is the principal service.

The AAAR also commented that the question before the AAR and before AAAR have lost its context and relevance and activities are not being looked at as consultancy / support services. Instead, AAAR has treated the entire gamut of services as a composite supply of intermediary services and Accounting services of which the intermediary services is the principal supply. [In Re: Five Star Shipping  2018 (10) TMI 1517 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA ].