APPELLATE ADVANCE RULING ON INTERMEDIARY SERVICES - PRE-SALE & MARKETING SERVICES

[Dr. Sanjiv Agarwal]

Pre-Sale & Marketing Services of products of overseas client are in the nature of facilitating the supply of products of foreign clients and as such, marketing services shall be covered under ingermediary services as per section 2(13) of the IGST Act, 2017 and exigible to GST. This has been recently upheld by Appellate Authority for Advance Ruling (AAAR), Karnataka IN RE: M/S. INFINERA INDIA PVT. LTD. 2020 (1) TMI 1125 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA  by order dated 20.01.2020

In the instant case, the applicant was a 100% Export Oriented Unit (EOU) under the Software Technology Park of India (STPI) scheme and is a wholly owned subsidiary of Infinera Corporation, USA (Infinera USA) and  registered under the Companies Act, 1956, with the Corporate Officer located at Bangalore. It is predominantly engaged in software development services, which included embedded and network management, technical documentation, systems verification testing and associated hardware design for the products developed by Infinera Corporation. In addition, the applicant also provides pre-sale marketing services for the optical networking equipment developed by Infinera Corporation.

The primary business activities carried out by Infinera USA pertained to optical networking equipment, software products as well as installation and maintenance services. Infinera USA had engaged the applicant to provide pre-sale marketing services with regard to the optical networking equipments offered by Infinera USA.

According to the applicant, the activities carried out by the applicant do not qualify to be termed as “intermediary services”. The intermediary is defined under Section 2(13) of the IGST Act. He states that it is evident that there are three major aspects of the definition of the term “intermediary” under GST Law:

1. The person should be a broker, an agent or any other person, by whatever name called;
2. The person should arrange or facilitate the supply of either goods or services or both, or securities - between two or more persons; and
3. A person who supplies such goods or services or securities on his own account shall not be covered under the ambit of the term “intermediary”.

The applicant sought advance ruling from the Authority for Advance Ruling on:

“Whether the activities carried out in India by the applicant would render the applicant to qualify as an ‘intermediary’ as defined under Section 2(13) of the Integrated Goods and Services Tax Act, 2017 (IGST Act, 2017) and consequently be subject to the levy of GST?”

The AAR found that the applicant has a direct contact with the customers in India forming a triumvirate, an essential feature of an intermediary services. Needless to emphasise that the applicant has himself accepted that they do not carry out the main supply, the supply of goods. Thus, the AAR ruled that the activities carried out in India by the applicant so far as those activities mentioned in the “Pre-sale and Marketing Services Agreement” would render the applicant to qualify as an “intermediary” as defined under Section 2(13) of the Integrated Goods and Services Tax Act, 2017 and consequently be subject to the levy of GST. [IN RE: M/S. INFINERA INDIA PVT. LTD. - 2019 (10) TMI 565 - AUTHORITY FOR ADVANCE RULING, KARNATAKA  by Order dated 12.09.2019]

Being aggrieved, the assessee preferred an appeal before Appellate Advance Ruling Authority, Karnataka (AAAR) on the following grounds:

1. The marketing support services provided by the Appellant are auxiliary in nature and the Appellant at no point of time has any authority to negotiate prices or to enter into / conclude contracts for or on behalf of Infinera USA. The Appellant is not executing end to end process but only executing specific task as per the agreement entered into with Infinera USA There exists a principal-to- principal relationship between the Appellant and Infinera USA. The performance and remuneration of the Appellant is no way linked to the purchase prices or the prices which the contracts are concluded by Infinera USA. The Appellant receives compensation on “cost plus basis” as per the Agreement.
2. The expression ‘arranges or facilitate supply’ as used in Section 2(13) of the IGST Act means to organize or support or assist in any manner the supply of goods or services or both in such a manner that Such supply between two or more persons becomes easier or more convenient. A literal Interpretation of the definition of ‘intermediary’ appears to require actual arrangement or facilitation of supply of goods and / or services by an intermediary. Mere undertaking of marketing or sales promotion by an entity without any role in the actual arrangement or facilitation (Such as involvement in meetings between customers and suppliers, Stages of purchase order submissions, negotiation of Contractual terms, negotiation of price.
3. Applicant they only conduct preliminary market study/research and provide information of business concern to Infinera USA. Thereafter, Infinera USA team gets in touch with the prospective customers and carries out host of activities, which inter-alia includes the following: Requirement Analysis (assessment of the exact requirements of the customer), Request for Proposal (Infinera USA takes part in the bidding process), Supply of networking equipment (supply of goods to customers in India), Installation (by technical experts), Integration (integration of equipment to make it fully operational). All the above activities are performed by the Infinera USA team. No activities pertaining to installation / post-sales support or servicing of the optical networking equipment, etc would be carried out by the Appellant nor can the Appellant enter into any negotiation of contractual terms and price with respect to the Infinera USA products with any prospective customer.
4. Appellant was engaged in provision of pre-sale and marketing support services as well as software services on their own account. All activities carried out by the Appellant were done on a principal-to-principal basis with respect to Infinera USA.
5. The Authority has erred in holding that the expression “or any other person, by whatever name called” in the definition of “intermediary” broadens the scope of intermediary rather than limiting it; that the phrase “any other person, by whatever name called” in the Said definition shall not bear a wide or generic connotation, Instead, it shall be read in conjunction with the terms “an agent” or “a broker” , Therefore, the scope of the term “intermediary” would include only such persons who act similar to an agent or a broker or such class of individuals They submitted that the nature of services provided by the Appellant does not fall under the definition of the term ‘agent’ as it is not acting on behalf of Infinera. USA;
6. The Authority had erred in holding that the ratio of the rulings given in the case of  GoDaddy India (2016) 3 TMI 355;   Universal Services India Pvt Ltd (2016) 5 TMI 750 (AAR) are not applicable to their Case. They submitted that the services provided by the Appellant are very much similar in nature to the service provided by M/s. GoDaddy India Web Services.

The AAAR observed that the entire gamut of the activities performed by the Appellant viz. the act of identifying the prospective customers in India, promoting the products of the Principal to the prospective customers, addressing the queries of the prospective customers with regard to the Principal’s products, communicating with the Principal about the comments and queries of the prospective customers are all part and parcel of facilitating the supply of products by Infinera USA to the customers in India. It is noticed that the Appellant carries out the activities as per the Pre-sales and Marketing Agreement in a “liaison capacity”, A person acting in a liaison capacity is the person who has to act as the go between. is the emissary, the interceder, the intercessor, the intermediary, the medium, the representative for all proper purposes, He may be prohibited by the contract from entering into binding contracts but at the same time is authorised by it to act as the go- between the Principal ‘s customers and prospects in India and the Principal itself.

The engagement of the Appellant in the entire chain of sequence is with reference to the taxable territory and with reference only to such goods of the foreign entity that are intended to be sold in India. Devoid of the product and the taxable territory, there is no appreciation which can be had of the supply or the engagement which the Appellant creates. When a similar activity is performed by a similarly placed entity in India who is acting to fulfill the same function for another Indian entity, the same would normally be exigible to GST.

Further, there does not seem to be any difference between the meaning of the term “intermediary” under the GST regime and pre-GST regime. In the pre-GST regime, an intermediary referred to a person who facilitates the provision of a main service between two or more person but did not include a person who provided the main service on his account. Similarly, in the GST regime, an intermediary refers to a person who facilitates the supply of goods or services or both between two or more persons but excludes a person who supplies such goods or services or both on his own account. The phrase “such goods or services’ used in the definition of ‘intermediary’ implies that the person should not be supplying on his risk and reward entirely, the very goods or services whose supply he is arranging or facilitating, In the instant case, the Appellant is facilitating the supply of the products of Infinera US between the Principal in USA and the Principal’s customer in India. He is not supplying the products of Infinera on behalf of the Principal. He is only arranging the contact between the Principal and the Principal’s customer and the actual supply of the products is done by the Principal directly to the customer. The service of facilitating a supply of goods between the Principal and the customers is provided by the Appellant to the overseas client. The Appellant is not supplying such goods on his own account.

The argument of the Appellant that the pre-sales promotion and marketing services are supplied to the Principal on their own account and hence they fall within the exclusion clause of the definition of intermediary is not a correct interpretation of the law. The language of the exclusion clause is such that it is applicable to those persons who supply such goods or service (or both) on their own account If a person either ‘facilitates’ or alternately ‘arranges’ any supply of goods or service (or both), between two or more persons, and does not supply such goods or service (or both) on his own account, he would be regarded as an ‘intermediary’. At the risk of being repetitive, the Appellant is clearly facilitating the supply of the products of Infinera US (their overseas client) directly to the client’ s customers in the territory of India and is not supplying such goods on his own account Therefore, the Appellant does not fall within the ambit of the exclusion.

The AAAR thus upheld the ruling pronounced by AAR and dismissed the appeal.