NO ADVANCE RULING ON PLACE OF SUPPLY

[Dr. Sanjiv Agarwal]

In Re: Toshniwal Brothers (SR) Pvt. Ltd. 2019 (2) TMI 126 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA;  appellant was a supplier of services to overseas clients and is engaged in the business of marketing, sales promotion and post-sale support services. Appellant entered into an agreement with their customers (Service Recipients), who are located outside India (which is a non-taxable territory in terms of clause (79) of section 2 of the CGST Act. 2017) for providing marketing, sales promotion and certain post-sales support services. Consideration for these services would be received in convertible foreign exchange. The services were provided in respect of scientific instruments used in research and development/quality control primarily in fields of nano science, material science, bio pharma and polymer sciences.

It sought advance ruling on the following :

1. whether the 'promotion and marketing services' will be termed as 'intermediary service'?
2. whether the 'after sale support service' which is provided under a composite contract will be termed as a composite supply, if so, what will be the principal supply?
3. whether the contracts in question would qualify as exports in terms of Section 2(6) of the IGST Act and whether they will be treated as 'zero-rated supply' in terms of Section 16?

The AAR, Karnataka provided the ruling vide Order dated 19.09.2018. Accordingly, the 'promotion and marketing services' provided is in the nature of facilitating the supply of goods and hence would amount to 'intermediary service'. The 'after sale support service' is independent from the promotion and marketing service and is not a composite supply. The AAR refrained from giving a ruling on the third question on the ground that the question warrants determination of place of supply, which aspect is outside the purview of the AAR. Being aggrieved, appeal was preferred before AAAR, Karnataka.

The AAAR upheld the AAR that the service of promotion and marketing of the products of the overseas client is in the nature of facilitating the supply of the products of the overseas client and is appropriately classified as an 'intermediary service' as defined under Section 2(13) of the IGST Act. Having concluded that the service supplied by the Appellant is classified as an 'intermediary service' as defined under Section 2(13) of the IGST Act, it automatically flows that the place of supply of such service will be in terms of Section 13(8) of the IGST Act. Further,  the provision of after sales support by way of installation does not arise in each and every case. It is for this reason that the service recipient has earmarked only 25% of the commission payable as being towards the after sales support service since the same does not arise in every sale made to the customer. Therefore the question of being naturally bundled does not arise for the reason that every promotional activity with a prospective customer does not result in a sale. Further, every sale does not necessarily mean that installation support or after sale support is required. Therefore, after sales support service, although rendered in a composite manner with the promotion and marketing service is not a composite supply. The price for the after sale support service is clearly identifiable and has been so stated in the contract itself.

It was observed that in combined services of sales promotion, marketing and after sale support services which included installation and warranty support provided to overseas client, since commission received for after sale support was directly identifiable @ 25% of  total commission payable and installation not required in all cases, services could not be regarded as naturally bundled.  Though the services i.e. sales promotion, marketing and after sales support services were provided in a composite manner, same can not be termed as composite supply. Concept of composite supply under GST regime is similar to concept of ‘naturally bundled services’ in pre-GST regime which covered those transactions involving element of service and transfer of title of goods, both inextricably linked to each other forming one composite transaction.

One of the important requirements for supply of any service to be treated as 'export of service' is that the place of supply of service is outside India. The provisions for determination of place of supply of services where the location of the supplier or the location of the recipient of services is outside India are contained in Section 13 of the IGST Act. 2017. Thus, the entire issue is intrinsically related to 'determination of 'place of supply' of service by the applicant.

The CGST Act limits the Advance Ruling Authority to decide the issues earmarked for it under Section 97(2).  As the 'place of supply' is not covered by Section 97(2) of the Acts, the AAR was right in refraining from answering this question on the grounds of lack of jurisdiction. Thus, ruling can not be sought on question of determination of place of supply. Therefore, the AAAR upheld the ruling pronounced by AAR dated 19.09.2018.