APPELLATE ADVANCE RULING ON INTERMEDIARY / ZERO RATED SERVICES

[Dr. Sanjiv Agarwal]

In one of the recent advance rulings, i.e., In Re: Vservglobal Pvt. Ltd.  2019 (4) TMI 1543 - APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA; , the appellant was an Indian company providing back office support services to overseas companies. Under the arrangement, client is engaged in trading of chemicals and other products in international trade. The client either itself or through some other companies identified potential buyers/suppliers and negotiate with them. The appellant had no role until the purchase/sale order is finalized by the client. The appellant came into picture only after finalization of purchase/sale order by a client to provide back office support.

It sought advance ruling on as to whether the aforesaid services rendered qualify as 'Zero Rated Supply' in terms of Section 16 of the Integrated Goods & Services Tax Act, 2017.

The AAR found that found that the activities undertaken indicate the appellant as a person who arranges or facilitates supply of goods or services or both between the overseas client and customers of the overseas client, and therefore covered under the definition of 'Intermediary' as contained under IGST Act and therefore, the place of supply of services is the location of Appellant which is in India. On this basis, the Hon'ble Authority ruled that the services being provided by Appellant are not 'Zero Rated Supply'.

Being aggrieved, appellant had filed an appeal before the AAAR on the ground that AAR had erred in ruling that the services of appellant were covered under intermediary services.

The AAAR observed that a person is covered under the definition of ‘intermediary’ if following three conditions are satisfied:

1. He must be a 'broker' or an 'agent' or 'any other person by whatever name called, who arranges or facilitates the supply of goods or services or both or securities'.
2. The supply arranged or facilitated must be between two or more persons.
3. He should not be the person who supplies the goods or services or securities on his own account.

The AAR observed that all the criterion applicable to the intermediary, are being satisfied adequately by the appellant. Hence, while performing all the above mentioned activities, the appellant is clearly acting as intermediary.

Further, the argument of the appellant that the impact of AAR ruling will result in subjecting the back office operations to GST which will affect the industry engaged in supplying such services to its overseas clients, is ill-found and misconstrued. The ruling given by AAR is always applicant specific and based on the records available before the Authority. We have also perused the agreement between the Appellant and its Client which was also the subject matter of proceedings before the AAR. The said agreement in no way is restricted to the scope of only the back office operations of the Appellant, rather, it goes beyond the same and is in the nature of intermediary as discussed above. Therefore, there does not appear to be any intention of the AAR to tax the back operation of the Appellant and the Ruling of AAR which is based on a specific agreement can not be generalized.

Also for services to be considered as naturally bundled services, to demonstrate that a service is supplied in conjunction with each other in the ordinary course of business, the supply of services should meet some of the following criterion which are indicative, not conclusive:

1. Perception of recipient of service
2. Majority of similar service providers in industry providing similar bundle services
3. One service being the main service and other services provided in the bundle are incidental or ancillary to the main service.
4. Service recipient pays single price regard less of services within the package.

The AAAR was of the view that by applying the various indicative criteria to the spectrum of services provided by the appellant, it was apparent that the services being offered by the appellant in one package is nothing but the composite supply, of which the intermediary services is the main supply.

Further, on appellant’s view that they are providing services to clients on own account, and therefore cannot be categorized as intermediary, it was observed that appellant have misconstrued the definition of "intermediary" as provided in Section 2(13) of the IGST Act, 2017. The services they were rendering were in relation to the goods in question which belong to either their overseas client or the client's supplier, as the case may be. Hence this contention made by the appellant was held to be not tenable.

Thus, the AAAR did not interfered with the ruling and confirmed the AAR ruling dated 07.07.2018 to the effect that appellant was acting as in intermediary and place of supply is location of appellant which is in India and, thus, services provided by appellant were not zero rated supply.