Taxation of marketing and promotional services continues to be a vexed issue under GST Regulations. A welcome breather in this context is a recent ruling by Maharashtra AAR in the case of In re Asahi Kasei India Pvt. Ltd.
The general rule is that provision of services to a recipient located outside India would qualify as export (subject to certain other conditions being satisfied such as receipt of foreign exchange etc.) and constitute a 'zero rated supply'. However, there are certain exceptions to the general rule. One such exception is provisions of services by an 'intermediary' located in India.
'Intermediary' means a broker, an agent or any other person, by whatever name called who arranges or facilitates supply of goods or services or both between two or more persons. However, intermediary does not include a person who supplies goods and services on his own account.
Whether or not a supplier of service qualifies as an 'intermediary' has to be examined on the facts of each case.
AAR Ruling in Asahi Kasei India Pvt. Ltd
Asahi Kasei India provides sales promotion and marketing services to Asahi Japan on the basis of Service Agreement and Marketing Service Agreement.
Whether sales promotion and marketing services qualify as "intermediary services"?
AAR Maharashtra noted that concept of 'intermediary' under GST Regulations is identical to concept of 'intermediary' under erstwhile service tax regime. The Authority even referred to Education Guide issued by CBEC in 2012 and observed that below mentioned factors are relevant for deciding whether the services are 'intermediary' or not:-
- Nature and Value:- An intermediary cannot alter the nature or value of the service, although the principal may authorize intermediary to negotiate a different price. Principal must know the exact value at which service is supplied and discounts must be passed back to principal.
- Separation of Value:- Value of intermediary's service is invariably identifiable from the main supply.
- Identity and Title:- Service of intermediary on behalf of principal is clearly identifiable.
- Generally, it is expected that intermediary and agent would have documentary evidence authorizing the latter to act on behalf of the provider of 'main service'
In light of the above and on the facts of the case,AAR held:-
- The Service Agreement defined relationship between parties as of "independent contractors".
- Applicant did not have any authority to conclude or negotiate contracts or secure any orders or maintain any stock of goods on behalf of Asahi Japan.
- Similarly, applicant did not carry out activities such as conclusion of contract, acceptance of sales order, invoicing, determination of sales prices, rebate, discounts, resolution of customers complaints or settlement of disputes with customers.
Keeping in view above facts, the AAR held that
Services provided by Applicant do not qualify as "intermediary services" and would be covered under "other support services" and "market research services".
Terms of the agreement are critical for determining the relationship.
AAR Karnataka in In re M/s Toshniwal Brothers (SR) Private Limited examined and held that the applicant provides "intermediary services" to Principal. In its findings, AAR noted that the price was negotiated by the applicant for the supplies and intimated to the overseas supplier. Moreover, agreement entered into by the applicant with the Principal itself addressed applicant as 'agent'. Therefore, from the terms of the agreement it could be inferred that the applicant was acting as 'agent' of overseas supplier.
On the other hand, In Asahi's case, AAR noted that applicant did not have any authority to conclude or negotiate contracts and as per agreement the relationship between parties was that of independent contractors. There was no evidence to suggest that applicant constituted an 'agent' in the legal sense of the overseas supplier.
The first and foremost caution for manifesting "principal to principal" relationship is the correct choice of words and expressions in the agreement. If an agreement clearly defines relationship as "agent", it would be difficult to make a case of "principal to principal" relationship.
Taxpayers are advised to carefully document inter-company agreements for research/ back office support services avoiding terms or expressions that may give rise to 'intermediary' implications.
Secondly, the substance of the relationship must be brought out unambiguously in the contract. Merely providing support services or acting as an information gatherer would not attract the 'intermediary' clause. Indian service provider must have the characteristics of an 'agent' to constitute 'intermediary' and attract GST liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.