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TMI Blog2023 (1) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... 55. ("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 engine. Transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 that the Appellant's scope of work also includes contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manufacture prototype / serial production camshafts d. Engaging the third party manufacturers for supply of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 part of Appellant. Further, it is highlighted that the OEMs and the Appellant clearly understand that after the life span of the tools the same would be scrapped by the Appellant, as the tools will be of no use to the Appellant due to uniqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple 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 High Court] which has held:- "27. From the Rules stated above, when the language used in a document is unambiguous conveying clear meaning, the Court has to interpret the document or any condition therein taking into consideration of the literal meaning of the words in the document. When there is ambiguity, the intention of the parties has to be looked into. Ordinarily the parties use apt words to express their intention but often they do not. The cardinal rule again is that, clear and unambiguous words prevail over the intention. But if the words used are not clear or ambiguous, intention will prevail. The most essential thing is to collect the intention of the parties from the expressions they have used in the deed itself. What if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies 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 securities, between two or more persons, which are arranged or facilitated by the intermediary. It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal to principal basis, the said supply cannot be covered under the scope of "intermediary". e) Sub-contracting for a service is not an intermediary service: Where the supplier of main service sub-contracts either fully or partly the supply of such service; the sub-contractor dealing in main supply would not be considered as an intermediary. The circular further clarifies that the concept of 'intermediary' was borrowed in GST from the Service Tax Regime, as given in Rule 2(f) of Place of Provision of Services Rules, 2012 and it may be relevant to make reference to the Education Guide d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in-house drawing, design, modelling, simulation and documentation for manufacture of the tools, which constitutes for majority i.e. 55-60% of the cost of production of tools, i.e. the service element involved in the development of tools. The actual manufacturing of the tool is outsourced by the Appellant to the third party vendors who charge for the manufacture of tools. Therefore, it is clear that the entire activity in relation to the development of the tools is provided by the Appellant himself, in the process of which, some portion of the activity is outsourced to third party vendors. The Appellant on instructions of the OEM's/Machinist (after undertaking the feasibility analysis) identifies and engages a third patty Indian manufacturer for machining the tools as per the specification provided by the Appellant. This is done on their own accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for providing main service to the service receiver are not intermediary services." 5.23 Further reliance is placed on the case of Principal Commissioner CGST Delhi South Commissionerate Versus M/s. Comparex India Pvt Ltd. [2020 (1) TMI 429 - CESTAT NEW DELHI], wherein the Hon'ble Tribunal has held as follows:- "24. In the present case, not only does the agreement specifically mentions that there is no relationship of principal and an agent between Microsoft and the respondent but it is also clear from the agreement that the respondent is free to sell the product at any price to the customer, though the price to be paid by the respondent to Microsoft is fixed. The agreement also provides that payment has to be made to Microsoft even if the customer does not pay the respondent. This is, therefore, a case where the respondent provides the service or supplies the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, 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 intermediary and is not a facilitation service between BMTC and the commuters. The service of transporting the employees of the corporate clients of the International Tech Park is rendered by the Appellant on his own account on a principal to principal basis for a consideration." 5.26 Further reliance is placed on the case of In re Vserv global Private Limited (GST-AR4-03/201819/B-59 dated 07.07.18- AAR Maharashtra) wherein this authority has held as follows:- "4. In the instant case, the applicant proposes to supply "Business Support Service" comprising of 'Back Office Support ' and "Accounting ' which is its Principle Supply. If these services also facilitate supply of goods, then it is only an incidental supply to the Principle Supply. As already submitted, the applicant would come into picture only after finalization of Purchase / Sale deals by the clients. They said 'Business Support Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Appellant and without stating any reason whatsoever, the Impugned Order has classified the Subject Transaction under the scope of intermediary, rendering the Impugned Order non speaking and non-reasoned. 5.32 It is a well known legal position that the cryptic and non speaking orders are not valid orders and are liable to be quashed, such as followed in the case of Tata Engineering & Locomotive co. Ltd. vs Collector Ofc. EX., Pune [2006 (9) TMI 185 - Supreme court] and C.C.E. vs. Amul Industries Pvt. Ltd. [2010 (12) TMI 98- Supreme Court]. 5.33 The non-speaking order are also equated as a violation of principles of natural justice as per the Apex Court. The case of State of Punjab vs. Bhag Singh, 2004(164) ELT 137 (SC) by relying upon Alexander Machinery (Dudley) Ltd. Vs. Crabtree [1974 LCR 120] with regard to non reasoned order, has been observed as follows:- "Failure to give reasons amounts to denial of justice" Reasons are live links between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i-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 TRAVELED BEYOND POWERS CONFERRED IN THE AUTHORITY BY THE ENABLING ACT 5.36 The Impugned Order has been passed within the provisions of Section 98 of CGST Act, 2017 which under sub section 4 and 5 provides as follows:- "(4) Where an application is admitted under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by - the Authority and after providing an opportunity of being heard to the applicant or his authorised representative as well as to the concerned officer or his authorised representative, pronounce its advance ruling on the question specified in the application. (5) Where the /members of the Authority differ on any question on which the advance ruling is sought, they shall state the point or points on w/lich they differ and make a reference 10 lhe Appellate Authority for hearing and decision on such question." 5.37 On reading of the above it is clear that the MAAR as per the provisions laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. They cannot be separated (in conjunction with each other) 4. One supply shall be a principal supply. The definition of "Principal Supply" is given in section 2(90) of GST Act, which reads as below:- (90) "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. The term "naturally bundled" in the ordinary course of business would depend upon the normal or frequent practices followed in the area of business to which services relate. Such normal and frequent practices adopted in a business can be ascertained from several indicators some of which are listed below - * The perception of the consumer or the service receiver. If large number of service receivers of such bundle of services reasonably expect such services to be provided as a package, then such a package could be treated as naturally bundled in the ordinary course of business. * Majority of service providers in a particular area of business provide similar bundle of services. For example, bundle of catering on board and transport by air is a bundle offered by a major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and design and development charges (Service) are ancillary supply. Therefore, in this transaction goods is principal supply, hence the tax rate be treated as goods, 6.3 Also, in this regard Advance Ruling Authority, Karnataka has passed advance ruling No. KAR ADRG 35/2020 dated - 20-05-2020, in case of M/s. Dolphine Die cast (P) Ltd, Bengaluru (GSTIN - 29AAACD5294L1Z6). (Advance Ruling order is attached herewith. (Page No, 51 to 59) as below:- "In the case of manufacture of Die by the applicant and invoiced to the recipient, without moving the goods, the applicant has to raise the tax invoice addressed to the foreign buyer. Since it is an intrastate supply, he has to collect the CGST and SGST and discharge the liability. The applicant is not eligible to claim the said payment as input tax credit on the invoice raised by him as he is not the recipient. Further if the said steel die is scrapped at applicant's end as per the instruction of the overseas customer without moving out of the country, while supplying the die scrap to the third party, the applicant has to issue intra/interstate tax invoice depending upon the nature of the transaction and collect and pay the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns used for manufacturing of camshaft for a customer is a supply of service in the form of intermediary service. MAAR observed that the M/S PCL is not providing any services to customers on its own account. The designs are provided to the third party vendors on behalf of the overseas customers of M/s PCL. The services provided by them is to their overseas customers and as per the requirements and directions of its overseas principals. Thus, MAAR held that M/S PCL is satisfying all the conditions of an intermediary and M/S PCL is supplying intermediary services as per the provisions of the IGST Act, 2017. 9.1 As regards the aforesaid observations of the MAAR, the Appellant have contended that the Appellant is providing services of design and development of tools and patterns used for manufacture of camshaft on their own account and on a principal to principal basis. Appellant contended that he is not facilitating any services between the overseas OEMs machinists and third party vendors. Appellant is not charging any commission from the overseas customers. Appellant further contended that his services cannot be categorized as intermediary services and accordingly, MAAR order stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n his own against the consideration which is price for tools and hence, there is no issue of receiving commission from overseas customers. Appellant is not facilitating any supply between overseas entity and third party vendor. The impugned transaction is supply of goods i.e. tools from appellant to customer on principal to principal basis. Considering these facts of and definition of "intermediary" provided under section 2(13) of the IGST Act, 2017, it is very much clear that appellant is not an "intermediary". Hence, the findings of the MAAR that the impugned activity is an intermediary service is erroneous and not acceptable. 14. The appellant first manufactures the tool as per the requirements and specification given by the customer. This tool is retained by the appellant and used for the manufacture and supply of camshafts. The appellant raises the tax invoice for this tool in the name of overseas customer in convertible foreign exchange though the tool is not physically exported to the customer. The ownership of the tools remains with the overseas customers. Thus, it is amply clear that impugned transaction between appellant and overseas customer is of supply of goods i.e. p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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