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21 December 2018
The Advance Ruling Authority (ARA) was constituted under Indian goods and services tax (GST) law and entrusted with the responsibility of answering questions regarding:
While an ARA ruling is binding only on the taxpayer that raises the question, it carries persuasive value in identical situations. Any party aggrieved by an ARA ruling can appeal before the Appellate ARA (AARA).
A recent advanced ruling(1) examined the applicability of GST to back-office support services provided by an Indian company to a foreign client. Interestingly, the ARA held that the back-office support services in question should be treated as intermediary services, which are not eligible to be exempt from the GST applicable to an export of services since, as per GST law, intermediary services provided by Indian companies are treated as services supplied in India.
This ruling will have significant adverse effects on Indian companies that render back-office support services to multinationals located outside India as intermediary services will neither be eligible for a tax exemption nor entitled to a refund of tax incurred on the input side.
M/s Vserve Global Private Limited (the applicant) was an Indian company located in Mumbai. The company was incorporated to provide back-office support services to overseas clients. The company's clients traded chemicals and other products internationally. After one of its clients finalised a purchase or sale order, the applicant would:
In addition, the applicant maintained its clients' payroll processing and payments to third-party suppliers, inspection agencies, shipping lines and employees.
The applicant received consideration for its services on a fixed monthly basis or based on the transaction's volume on a foreign exchange market (FX). The applicant sought an advanced ruling on whether the above services qualified as 'zero-rated' supplies and were thus eligible for an output tax exemption and a refund of input tax under Section 16 of the Integrated GST Act 2017.
According to the applicant, it fulfilled all of the conditions for its services to be treated as zero-rated supply and thus these should be considered an export of services – specifically:
The applicant further argued that the services in question fell within the scope of 'business and production services' under Service Groups 998222, 23 and 24.
Following a specific query from the ARA, the applicant further submitted that it did not fall within the definition of an 'intermediary' (which would make it ineligible for a tax exemption), as intermediary services are construed to have been supplied in India. According to the applicant, it offered a composite supply, as its services consisted of maintaining its clients' accounts and liaising with buyers and sellers in relation to delivery, transport and payment, besides various activities as detailed above.
The applicant relied on a favourable ruling(2) in which the taxpayer had provided support services in relation to marketing, branding, offline marketing, oversight of a third-party care centre and payment processing on a principal-to-principal basis.
The ARA ignored the tax officer's preliminary submission that the ARA lacked jurisdiction to entertain such an application, as the issue in question related to the place of supply, which is outside the purview of the advanced ruling mechanism. The ARA also side-stepped the tax officer's factual observation that the applicant and its clients had a common office and common director.
The ARA relied extensively on the definition of 'intermediary' and the applicant's activities to conclude that the sum of these activities demonstrate that the applicant had arranged and facilitated the supply of goods and services between its overseas clients and their customers. Therefore, the services in question fell within the definition of an 'intermediary', as defined in the Integrated GST Act 2017.
To be defined as an 'export of services', the services in question would have to have met the five criteria listed above simultaneously. In the case at hand, the ARA found that the place of supply was not located outside India. Thus, the ARA ruled that the applicant's services did not qualify as an export.
Throughout the pre and post-GST era, there have always been concerns over the scope of the definition of the term 'intermediary'. Under the definition, the following would qualify as an intermediary:
a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more person, but does not include a person who supplies such goods or services or both or securities on his own account.
If the terms 'arrange' and 'facilitate' are applied liberally, it is conceivable that every activity with even a remote relationship with a supply transaction could fall within the definition of 'intermediary', which would deny parties their right to a tax exemption.
For further information on this topic please contact Amit Kumar Sarkar at BDO in India by telephone (+91 22 3332 1600) or email (firstname.lastname@example.org). The BDO in India website can be accessed at www.bdo.in.
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