AAR Maharashtra in case of Vservglobal Private Limited (2018)

Ruling in case of Vservglobal Private Limited (‘Vserv’) - AAR Maharashtra  [(2018) 99 taxmann.com 253)]

Summary: Vserv being held as intermediary on the grounds that services provided were only to facilitate the prior agreement entered between Client (Vikudha) and its Customers, services cannot be termed as those provided on principal to principal basis and is therefore, considered as Intermediary taxable @18% as per IGST law.

Effect of Judgement: Basis prior rulings, it was held that the though advance rulings are binding in the case of one transaction only and the parties involved in respect of that transaction and for other parties, the ruling will be of persuasive nature. Also, it has clarified that this is not to say that a principle of law laid down in a case will not be followed in future.

Businesses impacted:

1. Multinational Companies (MNCs) having back office support services in India
2. Companies set up only to provide limited risk functions to their overseas companies
3. Companies working on cost plus arrangements etc.

 

Full Analysis of Judgement

1. Brief Facts of the case:

Vserv is engaged in the business of providing services to its overseas clients. Vikudha Overseas Corporation Limited, having registered office at in Hong Kong, China (Vikudha) is one of the client of Verve which operated in India through a Branch with its office in Mumbai (‘Vikudha India’).

Vikudha India sources and trades varieties chemical products from India and subcontinent countries.The products include food & agriculture, pain & coating, water treatment, consumer care products raw materials. India is now a home ground for our well trained and experienced traders having close relationships with manufacturers. The local India team knows the season, production cycle, market fluctuations, rules and regulations changes in advance which helps them to put ahead to the competitors.

As per the agreement entered fo services between Verve and Vikudha, the work of Vserv comes into picture after finalisation of Purchase / Sale order by Vikudha. Vserv will undertake following activities for and on behalf of Vikudha:

a) Get Sales and Purchase details Form, generate order no, create PO;

b) Sending Sales order, Purchase Order, liaise with supplier for Cargo Readiness;

c) Process payment request in VOSS;

d) and other back end support services related to accounting, maintaining payroll processing and employees records etc.

Vserv is compensated for its services either on fixed monthly basis or as per the volume of transactions, on mutually agreed terms, in convertible foreign Exchange.

2. Submissions and judgement:

Vserv submitted, basis service agreement, that services proposed to be rendered such as back office administrative and accounting support services, a payroll processing and maintenance of records of employees of the client satisfy all the elements of “export of services as defined under the GST Act and therefore qualify as zero rated supply as per section 16 of the IGST Act.

During the final hearing AAR asked Vserv as to how they are not covered in the definition of ‘intermediary’ defined u/s.2(26) of the IGST Act.

In response, it was submitted that Vserv would maintain accounts of its client, liaison with buyers and sellers of clients with respect to delivery, transportation of goods and payment etc. All the said services are proposed to be provided as a package and are bundled in natural course of business which qualify as Composite Supply as per Sec 2(30) ofCGST Act, 2017 which would be taxable as per Section 8 of the Act.

Further, the service of supply of “Business Support Service’ comprising of ‘Back Office Support’ and “Accounting’ is a Principle Supply and in case, these services also facilitate supply of goods then it is only an incidental supply to the Principle Supply. Since, Vserv will provide services only after finalisation of Purchase / Sale deals by the clients, services would be on Principle to Principle basis which falls under exclusion clause of ‘Intermediary’.

AAR mentioned that on considering rival submissions and scrutinising in detail different clauses of service agreement, Invoices and the bank statement it is inferred that Vserv provide back office support services to overseas companies i.e. clients and after finalisation of purchase /sale between the Vikudha (in current case) and its customer.

It was observed that basis all activities mentioned above, Vserv arranges or facilitate supply of goods or services or both between the overseas client and customers of the overseas client, and therefore applicant is clearly covered and falls in the definition of an intermediary as defined under the IGST Act. As the applicant is held as Intermediary the provisions pertaining to place of supply in case of intermediary services as provided in sub-section 8 of section 13 are relevant. In the instant case and as per Vserv admission of fact that it is supplier of Services and has registered office in Mumbai, AAR highlighted that the place of supply would be location of the supplier of services i.e. location of the applicant which is located in the state of Maharashtra, India. 

Further, it was mentioned that in order to qualify a transaction of supply of services as export of services that transaction has to satisfy all five ingredients of the definition of export of services simultaneously. In the present case we find that the condition of place of supply being outside of India is not satisfied and hence without examining and getting into the contention of the jurisdictional officer with regards to other condition w.r.t entities being distinct entities it was held that the services proposed to be rendered by Vserv do not qualify as ‘export of services’ as defined u/s.2(6) and thus not a ‘zero rated supply’ as per sec,16(1) of the IGST Act, 2017.

3. Order:

Difference between current case and Godaddy’s [2016(46) STR806(AAR)] case: It was also mentioned by AAR that current case is different and not similar to facts of M/s. Godaddy. In case of Godaddy the provision of support services was admittedly on principal to principal basis and were provided with sole intention of promoting the brand Godaddy US in India for augmenting its business. In the present case, activities undertaken by the Vserv are for and on behalf of clients to facilitate supply of goods and services between the clients their customers. In view of this we are of the opinion that the judgement cited by the applicant is not applicable to the facts of the present case.

Accordingly, Vserv being an intermediary would be liable to pay GST @18% on back-end and support services provided.

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