TMI Blog2023 (1) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of the tools. Whereas, it hires third party vendor for machining (manufacturing) the tool as per specification provided by the appellant. The third party vendors charge for the manufacture of tools, which is paid by the appellant. The third party vendor delivers the tool to appellant, of which appellant further raises supply invoice to overseas OEMs / Machinist specifying therein the description of goods (tools), quantity, rate per unit, etc. However, as industry practice in this sector appellant keeps such tools with it for further use in manufacture of camshaft. The invoice raised by the appellant also exhibits that the tools of specific designs as per the specifications of overseas customer are supplied to them. Thus, from perusal of the purchase order placed by the overseas customers and supply invoice raised by appellant, it is clear that dominant intention of overseas customer is to get the supply of manufactured pattern/tools from the appellant as per specification provided by them. Thus, it is clear that the appellant is making such supply of tools on his own against the consideration which is price for tools and hence, there is no issue of receiving commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ( hereinafter referred to as Appellant or PCL ) against the Advance Ruling No GST-ARA-22/2020-21/B-36 dated 29.03.2022, pronounced by the Maharashtra Authority for Advance Ruling (hereinafter referred to as MAAR ). BRIEF FACTS OF THE CASE 3.1 Precision Camshafts Limited (the 'Appellant' or 'PCL') is engaged in the business of manufacturing camshafts. Camshafts are a rotating shaft mounted in a 4-stroke engine. The Appellant sells these manufactured camshafts to domestic as well as overseas customers. The overseas customers may be original equipment manufacturers ( OEM's ) and use the camshafts for manufacturing engines such as Ford, General Motors do Brasil LTDA etc. or maybe machinist such as Musashi who would further supply the same to OEMs ( machinist ) 3.2 The camshaft is used for manufacturing engines and contributes in controlling engine power, emissions and fuel consumption. The camshafts are critical components as a small amount of error or misalignment will either result in leakage of fuel through the exhaust route or insufficient power stroke. So, each camshaft is unique and made as per precise specification of respective engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eam. The marketing team hands over the drawing to the Appellant's cross functional team which consists of experienced people I head of departments of various departments such as development, production quality, purchase and sales department who have thorough knowledge of camshaft manufacturing and workability of a design. The cross functional team conducts a feasibility study on the design. Based on their study, a feasibility report is prepared to analyse if there is any abnormal requirement of OEM/Machinist in the drawing provided. Once the cross functional team declare the drawing to be feasible for the manufacture of camshaft, marketing team prepares the techno-commercial offer and shares it with the OEM/Machinist. After submission of the techno-commercial offer, detailed discussions take place between the Appellant and OEM/Machinist. Once, consensus is reached, techno commercial agreements are executed and the OEM/Machinist releases the purchase order for tooling, purchase or prototype etc. Post raising of such purchase order, the Appellant undertakes the manufacturing process planning, designing and development of the camshaft. It is noteworthy tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n manufacturing process planning (including designing and development of prototype) in foreign currency to Appellant. The ownership of tools lies with the OEMs / Machinists and, due to unique character of the tools, they can only be used to manufacture the goods of the OEMs / Machinists who are the owner of such tools. 3.11 Therefore, Appellant in the present case, have two output activities (a) Supply of finished goods i.e. camshafts and (b) assistance in designing and development of patterns and tools used for manufacture of camshaft which are being provided by the Appellant to the OEMs/Machinist contractually on principle to principle basis. 3.12 With respect to the second activity i.e. ''Assistance in design and development of patterns used for manufacture of camshaft ( Subject Transaction ), the Appellant is engaged in a composite supply of the following:- a. Provision of the designs/drawing of patterns and tools used for manufacture of camshafts b. Identifying third party who can manufacture the patterns and tools as per the design / drawings. c. Explaining and closely working with third party manufacturer to develop the patterns and tools to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply; 5.3 Therefore, composite supply is a supply where:- (a) The supply consists of two or more taxable supply of goods or services or both, (b) These shall be supplied in conjunction with each other and arc naturally bundled; (c) One of the supplies shall be a principal supply. 5.4 Further, as per section 8 of the CGST Act. in cases of composite supply, the classification of the transaction and the applicable rate of tax is to be determined as per principal supply. I he term principal supply has been defined under section 2(90) of the CGST Act as below:- Principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary 5.5 In this regard, the Central Board of Indirect Taxes ( CBIC ) have explained the concept of 'composite supply' as under:- Whether services are bundled in the ordinary course of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... package which would be available for a single price. 5.7 A review of the definitions suggests that principal supply in an agreement is the one which is the predominant supply. Such predominant supply maybe determined on the basis of (a) value of such supply or (b) something that is necessary for the essential functionality. Where the predominant supply is that of goods the contract would be taxed as a supply of goods and in case the predominant supply is that of services, then the contract would be taxed as a supply of services. 5.8 In the present case, overseas OEM engages Appellant and assigns it the responsibility to (i) assist in manufacturing process planning (ii) designing and developing the tool (iii) identify the third party manufacturers who can manufacture tools based on the drawings/designs/patterns for manufacture of camshafts (iv) engage the third party vendors to manufacture the tools (v) use such tools for manufacture of camshafts. In this regard, the engagement of the vendors for manufacture and supply of camshafts is common industry practice followed by majority of industry players. 5.9 Therefore, all the above activities constitute a composite supply on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of tools, which constitutes for ancillary activities such as procurement of raw material (10-12%), machining (15-16%) and assembly (8-9%). profit margin (10%). Therefore, merely 42-43% of the cost of the tools is attributable to third part}' vendors. Therefore, the predominant activity of designing and developing the tools is undertaken by the Appellant. 5.13 Therefore, in the Appellant's humble view, Appellant is engaged in supply of services to overseas OEMs/Machinists, as already accepted by the MAAR in Impugned Order. However. AAR has erred in understanding the scope of services provided by the Appellant. 5.14 The subject Transaction has the parties contractually agreeing to function on a principle to principle basis and not a facilitator. However, the MAAR has tried to give an essence of intermediary to Subject Transaction on assumptions and conjecture of its own. It is an established position of law that when the parties agree contractually among themselves, nothing can be read into the same. Reliance in this regard is placed on the case of P.Madhusudhan Rao vs Lt.Col. Ravi Manan, And Another on 12 March, 2015 [C.R.P. No. 4515 OF 2014 -Andhra Pradesh Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be three persons i.e. two of them transacting in the supply of goods, services or securities i.e. the main supply and third person arranging or facilitating the supply. b) Two distinct supplies: The supply must contain one 'main supply' between the principals and another is 'ancillary supply' which is the supply of intermediary services. c) Intermediary has the character of an agent, broker or any other similar person : The definition of the intermediary uses the expression arranges or facilitates thus it suggests a subsidiary role for the intermediary. The role of intermediary is supportive i.e. it arranges or facilitates some other supply, which is the main supply and does not provide the main supply himself. d) Does not include a person who supplies such goods or services or both or securities on his own account: The definition of intermediary services specifically mentions that intermediary does not include a person who supplies such goods or services or both or securities on his own account . Use of word such in the definition with reference to supply of goods or services refers to the main supply of goods or services or both, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermediary's service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as commission iii) Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable. 5.19 The Education Guide specifically recognizes and well explains that all situations of provision of services on a someone else's behalf, will not qualify as an intermediary . Where the service is provided on the own account of the service provider, the categorization as an intermediary does not arise. It further recognises the need for charging commission. However, in the present case, the principal service is provided by the Appellant on its own account and no commission is being charged for outsourcing meagre amount of services to third party vendor on behalf of service recipient. Appellant is providing services on its own account 5.20 As already mentioned in the facts above, the Appellant undertakes the entire activity on its own account. The Appellant undertakes i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal to principal basis... ... ... .. 9. In the case before us, applicant would enter into an agreement with the carrier for transportation of cargo i.e. airline/shipping line. This service agreement would be on principal to principal basis and not as agent of said airline/shipping line. Therefore, applicant would be covered by the exclusion clause i.e. provides the main service- inbound and outbound shipment on his own account in terms of Rule 2(J) of POP Rules and thus not covered under Rule 9 (c) ibid as intermediary service. Therefore, place of provision of said service will not be location of service provider. 5.22 Further reliance is placed on the case of M/s. Frame Movie Pvt. Ltd. v. CGST and Excise, Bhiwandi Commissionerate [2020 (9) TMI 259 - CESTAT MUMBAI] as follows:- 12. Therefore, in view of the above, I find that the service provided by the Appellant has been provided on its own account and therefore, does not qualify as intermediary service. The Advance Ruling in the case of M/s. Godaddy India Web Services Pvt. Ltd. [2016-TIOL-08-ARA-ST] also aids the case of the Appellant, wherein it was held that 'support services ' from vendors used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imself provides the service for which separate purchase order and separate invoices are raised by the parties on principle to principle basis. For performance of agreed services, the Appellant engages/ sub-contracts a small portion of the work to a third party and pays them separately. It may be further noted that the Appellant is not charging any commission from the OEMs/ Machinists for engaging the third party vendor. 5.25 Facilitation of service for 'commission' is one of the main conditions required to be fulfilled to fall within the ambit of intermediary service. However, when such services are provided on principle to principle basis, they should not qualify as intermediary services. Such position has been accepted by the Appellate Authority of Advance Ruling. Karnataka in the case of In Re: BLS. Ascendas Services (India) Pvt. Ltd. [2020 (8) TMI 525 - Appellate Authority For Advance Ruling, Karnataka] wherein it has been held:- In the light of the above discussions, we agree with the ruling given by the lower Authority and hold that the service provided by the Appellant in arranging the transportation of the employees is not rendered in the capacity of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adjudicating Authorities are required to examine the submissions made by the taxpayers in order to give the taxpayers a fair chance to defend their case. Further, it is against the very tenets of principles of natural justice that the taxpayer's submissions are not considered, and a speaking order is passed either accepting or rejecting such submissions. Unless the taxpayer's submissions are dealt with, the taxpayer would always be at a handicap before the appellate authorities as he will not be aware of the rationale basis which the submissions were rejected. 5.30 A bare perusal of the Impugned Order would indicate that there is no discussion with respect to any of the submissions made by the Appellant about the nature of services provided. The MAAR had concluded, The Appellant is facilitating the manufacture of goods for OEMs/Machinist by third party vendors and hence shall be categorised as intermediary . The MAAR has ignored the fact, which is also the main crux of the submission made by the Appellant, that entire services involved in the Subject Transaction are provided by the Appellant on their own account. 5.31 However, ignoring all submission made by the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Supreme Court in the case of Siemens Engg. And Mfg. Co. of India Ltd. v. Union of India, (1976) 2 SCC 981 where it was held as under: If courts of law are to be replaced by administrative authorities and tribunals, as indeed, in some kinds of cases, with the proliferation of administrative law, they may have to be so replaced, it is essential that administrative authorities and tribunals should accord fair and proper hearing to the persons sought to be affected by their orders and give sufficiently clear and explicit reasons in support of their orders made by them. Then alone administrative authorities and tribunals exercising quasi-judicial function will alone be able to justify their existence and carry credibility with the people by inspiring confidence in the adjudicatory process. The rule requiring reasons to be given in support of an order is, like the principle of audit alteram partem, a basic principle of natural justice which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law. D. THE MAAR IN ISSUANCE OF IMPUGNED ORDER HAS TRAVEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope of power conferred upon it by the statute. RESPONDENTS SUBMISIONS 6. The Jurisdictional Officer vide their letter dated 25.11.2022 have made the following submissions: 6.1 The definition of composite supply is given in section 2(30) of GST Act, which reads as below:- (30) composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Illustration .- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply From the above, the Composite Supply is,- 1. Supply of two or more goods or services together; 2. It is a natural bundle, i.e., goods or services are usually provided together in the normal course of business. 3. They cannot be separated (in conjunction with each other) 4. One supply shall be a principal supply. The definition of Principal Supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly may be determined on the basis of something that is necessary for the essential functionality. 6.2 The supplies in relation to assists in design and development of tools/patterns used for manufacture of camshaft to overseas customer provided by Appellant is composite supply, because it meets the criteria's mentioned above. Overseas OEM/Machinist have perception of receipt of goods in the form of camshafts, rather than service. In general industrial practice, many products are manufactured from pattern/tools. Design and development cost of pattern is usually incorporated in value of goods. In the supplies provided by Appellant, the pattern/tool is necessary for the essential functionality, Using the same pattern/tool, Appellant produces multiple lots of camshafts. Consideration received against supply of multiple lots of camshafts from the unique pattern is higher than consideration of design and development of same pattern/tool. The pattern/tool is necessary to manufacture of camshafts. Hence, pattern/tool (goods) is Principal supply in this transaction and design and development charges (Service) are ancillary supply. Therefore, in this transaction goods is principal sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PCL's activity of design and development of patterns used for manufacturing of camshafts for a customer is composite supply, But, the principal supply is not supply of service. Principal supply is of goods i.e. supply of pattern/tool. So, tax treatment should be applicable as supply of goods. The view of the M/S PCL that tax treatment should be as applicable to the supply of services is not acceptable. As this supply of goods does not meet to the criteria of export, M/S PCL also needs to raise invoice and discharge the tax liability accordingly. PERSONAL HEARING 7. The personal hearing in the matter was conducted on 25.1 1.2022 which was attended by Shri. Ankit Sachdeva, Advocate on behalf of the Appellant, wherein the Appellant reiterated their earlier submissions made while filing the Appeal under consideration. DISCUSSIONS AND FINDINGS 8. We have carefully gone through the entire appeal memorandum containing the submissions made by the Appellant vis-a-vis the Advance Ruling passed by the MAAR, wherein the MAAR has held that the activity of design and development of patterns used for manufacturing of camshaft for a customer is a supply of service in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for manufacture of the tools. Whereas, it hires third party vendor for machining (manufacturing) the tool as per specification provided by the appellant. The third party vendors charge for the manufacture of tools, which is paid by the appellant. The third party vendor delivers the tool to appellant, of which appellant further raises supply invoice to overseas OEMs / Machinist specifying therein the description of goods (tools), quantity, rate per unit, etc. However, as industry practice in this sector appellant keeps such tools with it for further use in manufacture of camshaft. 12. The invoice raised by the appellant also exhibits that the tools of specific designs as per the specifications of overseas customer are supplied to them. Thus, form perusal of the purchase order placed by the overseas customers and supply invoice raised by appellant, it is clear that dominant intention of overseas customer is to get the supply of manufactured pattern/tools from the appellant as per specification provided by them. 13. From the facts of the case, it is clear that the appellant is making such supply of tools on his own against the consideration which is price for tools and hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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