Supply of service sub-contracted by recipient company cannot be considered as intermediary

The AAAR, Gujarat, in the matter of M/S. Stovec Industries Ltd. [Advance Ruling No. GUJ/GAAAR/APPEAL/2021/32 dated November 2, 2021] modified the ruling passed by the AAR, Gujarat and held that, supply of installation/up-gradation of machines and training services for and on behalf of the Company located outside India, by the supplier in India will not fall under the definition of 'intermediary'.

Facts

M/s. Stovec Industries Ltd. ("the Appellant") is the supplier of products in textile and graphics printing market and engaged in manufacturing rotary screen printing machine, installation and servicing of the machines, and also offers products for conventional and digital engraving methods. The Appellant entered into a contract with SPG Prints Austria GMBH ("SPA") to provide particular services to customers of SPA in India, as per SPA's instruction, that includes installation / up-gradation of machines sold by SPA, training at SPA's customers' site etc., and in return the Appellant receives commission as consideration in convertible foreign currency periodically for service contracts sold in India from SPA. Further, The Appellant would raise invoice on SPA on the basis of number of hours spent on supply of service in terms of the said contract on the agreed rates.

The Appellant has filed this appeal, being aggrieved of the ruling passed by the AAR, Gujarat in Advance Ruling No. GUJ/GAAR/R/70/2020 dated September 17, 2020, wherein it was held that, the transaction of the Appellant is a composite supply of service and categorized as an intermediary and are supplied to the Indian customer and not the SPA and further issues were raised:,

Issues

1. Whether the transaction of the Appellant should be categorized as individual supply or composite supply of service under the Central Goods and Services Tax Act, 2017 ("the CGST Act")?
2. Whether, the transaction of the Appellant is to be reckoned as being provided to SPA or to the customers of SPA located in India?
3. Whether, the transaction of the Appellant could be categorized as that of an "intermediary" under Section 2(13) of the Integrated Goods and Service Tax Act, 2017 ("the IGST Act")?
4. Whether, such transaction qualifies to be "Export of service" as per Section 2(6) of IGST Act?

Held

The AAAR, Gujarat, in Advance Ruling No. GUJ/GAAAR/APPEAL/2021/32 dated November 2, 2021 held as under:

• Noted that, a composite supply would mean a supply 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. Whereas, the consideration agreed with SPA is based on hourly rate for activities such as travelling, regular work or overtime hours and based on the time spent for each of the activities. Accordingly, they are providing more than two services i.e. installation or up-gradation of service, training to the customer for the operation of machine and other activities like overtime service.
• Stated that, the appellant may receive the one consolidated charges for their service provided to customer considering it as one supply and not more than one. However, in the contract held between the Appellant and SPA, hourly rate is fixed for each work i.e. working hours, travelling hours and overtime hours. Therefore, the Appellant is providing more than two services that are naturally bundled service to principal service, and constitutes a 'composite supply'.
• Observed that, Section 2(93) and 2(31) of the CGST Act, indicates that the person who is required to make a payment for getting a job done is the recipient of service. Accordingly, the recipients of the service supplied by the Appellant will be the manufacturer as it is at their behest that the Appellant has undertaken the activity of installation/up-gradation of the machine, service of machines which are under service contract with SPA and machine which are under warranty period to the customer Further, SPA is paying consideration to the Appellant for the service provided to the Indian customer.
• Further noted that, there is no performance of service by SPA and actual services are performed by the Appellant therefore, it is outside the purview of the definition of 'intermediary'. Further, the SPA has sub-contracted such services to the Appellant that would be provided by the appellant as part of sub-contract agreement, by providing services to the customers of the SPA.
• Opined that, the Appellant and the SPA are not branch, representational office or agency of each other and are separate legal entities and even they are not holding & subsidiary companies as well. Accordingly, these two separate persons would not be considered as 'merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act.
• Modified the ruling passed by the AAR, Gujarat, to the extent that recipient of supply of service would be the SPA in terms of the consideration paid to the Appellant and not the Indian customer. Further, the supply of service by the Appellant where it has been subcontracted to it by the recipient will not fall under the definition of 'intermediary' as per the provisions of Section 2(13) of the IGST Act in view of the Circular No. 159/15/2021-GST dated September 20, 2021.

Our comments

It is pertinent to note that, vide the above Circular it has been clarified that, a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under the Companies Act 2013 ("the Companies Act"), are separate persons under CGST Act, and thus are separate legal entities. Accordingly, these two separate persons would not be considered as "merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of the IGST Act".