GST UPDATE No 189 ON DETERMINATION OF TRANSACTION AS EXPORT

The scope, coverage and taxability of intermediary services has been a subject matter of discussion since erstwhile GST regime. It is worth mentioning here that the constitutional validity of section 13(8)(b) of the IGST Act, 2017 pertaining to determination of place of supply for intermediary services was challenged before hon’ble Bombay High Court in the case of DHARMENDRA M. JANI VERSUS UNION OF INDIA AND OTHERS [W.P. NO. 2031 OF 2018] wherein there was difference of opinion between the judges which depicts the litigation involved therein. Recently, an issue was raised before Maharashtra AAR in the case of M/S GULF TURBO SOLUTIONS LLP wherein applicability of the provision of intermediary and determination of transaction as export of service was under consideration. The decision imparted in this regard is the subject matter of discussion of our present update. The applicant is registered as a LLP (GTSLLP), engaged in business of service and repairs of various types of turbochargers. There is one more company which is incorporated outside India, named Gulf Turbo Repairs and Services FZC (GTRS). The applicant has agreed to provide marketing services to GTRS FZC as per the marketing agreement including conducting market surveys, providing information of Indian and International market trends, assisting GSTRS in adaption and implementation of advertising policy etc. The appointment of applicant for the said services is on P2P basis and the parties do not intend to create a principal and agent relationship. Furthermore, the applicant will be providing services to GTRS on own account and bear the concerned expenses thereof. Advance ruling on following is sought by the applicant: 1. Whether the marketing services constitute supply of “support services” or an “intermediary service”? 2. Whether the service by the applicant comes under the ambit CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??5 of Export of Services under Section 2(6) of IGST Act, 2017? The applicant contended that marketing service agreement defines the service as principal to principal. Furthermore, there is no authority on the part of applicant to carry out any investigation or settlement of customer’s disputes. On the contrary, all the expenses were borne by the applicant himself. Therefore, it was argued that the proposed service does not comes under the ambit of “Intermediary Services”. It was further argued that the said service is a composite supply wherein the marketing supply is a principal supply. Furthermore, as per the definition of Export Service, the supply of marketing services is an export of service. The applicant provided various services having different SAC codes such as market research, events and trade shows, advertising services etc. The counsel of department argued that both the parties are deemed as distinct persons. Further, the supplier of service is in India and the recipient and place of supply is outside India. Hence, the said transaction can qualify as export of services and therefore, the nature of transaction does not support that it is intermediary services. However, as per the sub clauses of the agreement, it is evident that the concerned service can be treated as intermediary in nature. The AAR stated that the applicant will be connecting with customers on behalf of GTRS for the purpose of obtaining orders and maintaining a close commercial relationships. Therefore, the applicant will be acting as a conduit and providing feedback to GTRS. Furthermore, on studying the agreement between both parties, it was concluded that there is a separate Transfer Pricing Agreement which is an accounting practice representing the fact that the price of one division in a company charges another division. Consequently, the AAR analysed that the agreement between the parties is not on principal to principal basis. After analysing the definition of intermediary as in IGST Act, it was held that the applicant satisfies the prescribed conditions of arranging and facilitating supply on behalf of the two persons. Therefore, it is an intermediary service. Answering the second question raised, it was stated that in case of supply of intermediary service to GTRS, location of applicant is in India and therefore, CA. PRADEEP JAIN ??www.capradeepjain.com??pradeep@capradeepjain.com??6 condition of export of service is not fulfilled. The above decision indicates that extra care and caution is to be exercised while the contract is drafted so as to ensure that the transaction does not cover under the ambit of intermediary service, specially, when the location of service provider is in India. The place of supply provisions in case of intermediaries tend to levy tax on the services provided by intermediaries located in India as against the intermediaries located outside India which creates disparity and discrimination. The constitutional validity of the provision of place of supply of intermediary services has already been challenged before hon’ble Bombay High Court in the case of DHARMENDRA M. JANI VERSUS UNION OF INDIA AND OTHERS [W.P. NO. 2031 OF 2018] and as there was difference in opinion amongst the judges, the matter was referred to the Larger Bench with decision pending. It is hoped that the disparity in the place of supply provision for intermediary is being resolved by the larger bench so that no tax is levied on intermediaries located in India and exporting their services thereby generating foreign exchange for the country.

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GST UPDATE No 189 ON DETERMINATION OF TRANSACTION AS EXPORT

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