Are Pre- sales and marketing services by Indian Subsidiary to a Foreign Parent, is intermediary services in GST
Section 2(13) of the IGST Act defines the term “intermediary” as – “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.”
Are services provided by an Indian subsidiary to a foreign parent classifiable as intermediary services leviable under GST?
Let us refer to the Appellate Authority of Advance Ruling, Karnataka in the case of M/s Infineria India Pvt Ltd (2020) to answer the above question.
Facts of the Case
1.Appellant is a 100% Export Oriented Unit under the STPI scheme and is a wholly owned subsidiary of Infinera Corporation, USA.
2. Appellant is predominantly engaged in software development services for the products developed by Infinera Corporation and also provides pre-sale and marketing services for the optical networking equipment developed by Infinera Corporation.
3. The Appellant and Infinera USA have entered into a “Pre-sale and Marketing Services Agreement” whereby the scope of work involves:
i. Assist Infinera USA through the coordination of sales promotion and advertising for its products in India
ii. Conduct market research and keep Infinera USA advised and informed regarding all matters within India, which may be of reasonable business interest or concern to India
iii. Provide informational, educational and service programs in India, as may be requested by Infinera USA from time to time.
Appeal to Authority for Advance Ruling (AAR)
With regard to the pre-sale and marketing services, the Appellant filed an application for advance ruling on the question “Whether the activities carried out in India by the applicant would render the applicant to qualify as an “intermediary” as defined under Section 2(13) of the IGST Act, 2017 and consequently be subject to the levy of GST”
The AAR held that the activities carried out in India by the applicant in terms of the “Pre-sale and Marketing Services Agreement” qualifies the applicant as an “Intermediary” as defined under Section 2(13) of the IGST Act, 2017 and consequently by subject to the levy of GST.
Aggrieved by the order of AAR, the appellant further appealed to the Appellant Authority on Advance Rulings (AAAR)
Proceedings of Appeal to AAAR
Nature of Relationship between Appellant and Infinera according to the Agreement
- As per the “Pre-Sales and Marketing Services Agreement”, Infinera USA appoints the Appellant to provide certain pre-sales and marketing services.
- According to the Agreement it is the responsibility of the Appellant to deploy suitable personnel to render the services listed in the agreement.
- The employees of the Appellant shall not be deemed for any purpose to be employees of Infinera and shall not be entitled to any benefits normally accruing to employees of Infinera.
- Appellant’s relationship with Infinera is one of an independent contractor and that it will not act or represent that it is acting as an agent of Infinera or incur any obligation on behalf of Infinera
- The Appellant shall not have the authority to make any commitments whatsoever on behalf of Infinera as agent or otherwise, nor to bind Infinera in any respect.
- Appellant shall not have the authority to enter into contracts with third party customers on behalf of Infinera, conclude contracts on behalf of Infinera and maintain stock of goods or merchandise of Infinera.
- Appellant will maintain adequate insurance to protect its employees and shall maintain reasonable and sufficient records of time spent on rendering the services under the agreement.
- Infinera USA shall provide the Appellant with all such information and documentation as may be necessary and required by the Appellant to provide the services under the SOW (Statement of work) and shall cooperate with the Appellant to enable the Appellant to render the services under the SOW.
- Infinera USA shall pay the Appellant, a consideration calculated in accordance with and on the basis of all costs of running the Appellant’s unit in India at actuals plus 15% for the services rendered.
- Appellant shall irrevocably assign and transfer and assign all rights, title and interest in, including any ownership of, any patent, copyright, trademark, trade secret, technology, ideas, know-how and other intellectual property rights in any material, information or software developed by the Appellant in the course of the performance of its obligations, to Infinera and the same shall be and remain the sole property of Infinera.
Examination on whether activities performed by Appellant qualify them to be an “intermediary”.
It is evident that in order to be called an ‘intermediary’as defined under Sec 2(13) of the IGST Act, a person must satisfy the following conditions:-
- He must be a ‘broker’ or an ‘agent’ or ‘any other person by whatever name called’
- Supply of goods, services or both has to be ‘arranged or facilitated’ between two or more persons.
- He is not the person who supplies such goods or services or securities on his own account.
Condition 1 – He must be a ‘broker’ or an ‘agent’ or ‘any other person by whatever name called’
- The term ‘broker’ has not been defined under GST. However, the term ‘agent’ has been defined in Section 2(5) of the CGST Act to mean a person including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
- Thus, while an agent includes a broker, it does not mean that every broker is an agent. The fundamental difference being that a broker is a middleman whose job is only to facilitate whereas an agent acts on behalf of the Principal.
- However, the definition of intermediary does not limit its coverage to a ‘broker’ and ‘agent’ but brings within its ambit even ‘any other person, by whatever name called’.
- The words agent and broker, used in definition of the word ‘intermediary’ in the IGST Act are only in the broad construct of being an intermediary or a representative but are not substitutes for each other.
Condition 2 – Supply of goods, services or both has to be ‘arranged or facilitated’ between two or more persons.
1.What can be inferred the second limb of the definition of an intermediary is that, it is not the type of person which determines whether one is an ‘intermediary’ or not, rather it is the action of arranging or facilitating the supply goods, services or both, or securities, between two persons, which qualifies a person as an ‘intermediary’.
2. An intermediary, thus can be a broker or agent or any other person and is only a facilitator for the supply of goods or services or both. The act of arranging or facilitation gives rise to two supplies:-
i. Supply between the Principal and the third party
ii. Supply by the intermediary to the Principal for a commission/fee.
3. In other words, an intermediary is a person between the supplier and the recipient who arranges or facilitates the supply for a commission. The terms ‘arrange’ and ‘facilitate’ have not been defined in the Act.
4. A general understanding of the term ‘arranging’ or ‘facilitation’ would cover a very wide range of activities ranging from marketing or sales promotion of the goods or services of the client, locating prospective buyers for the client’s products or locating sources of supply of the goods or services required by the client, price negotiation with the prospective buyer/ prospective supplier, procuring sales orders in respect of the goods or services of the client and like activities.
5. In the instant case, the activities performed by the Appellant, which have been enumerated in the agreement, shows that they are facilitating the supply of optical networking equipment between Infinera US and the customers in India.
6. The facilitation happens by way of the Appellant meeting the prospective customers in India, demonstrating the products of Infinera US, obtaining the feedback of the customers and passing on the same to Infinera US so that the necessary enhancements and modifications can be made to suit the customer’s requirements.
7.Although the pricing decisions and negotiations with the customers are done by Infinera US, the Appellants acts as a communication and coordination channel between their client (Infinera US) and the customers in India. This clearly amounts to facilitating the supply between the two parties i.e Infinera US and the customers in India.
8. The activities performed by the Appellant are all part and parcel of facilitating the supply of products by Infinera USA to the customers in India.
9. The Appellant carries out the activities as per the Pre-sales and Marketing Agreement in a “liaison capacity”.
10. A person acting in a liaison capacity is the person who has to act as the go between, is the emissary, interceder, intercessor, intermediary, medium or, the representative for all proper purposes.
11. He may be prohibited by the contract from entering into binding contracts but at the same time is authorised by it to act as the go- between the Principal’s customers and prospects in India and the Principal itself.
12. The Appellant located in India, handles the function of sales promotion and advertising and market research for the foreign entity. Clearly, the engagement of the Appellant in the entire chain of sequence is with reference to the taxable territory and with reference only to such goods of the foreign entity that are intended to be sold in India.
13. Devoid of the product and the taxable territory, there is no appreciation which can be had of the supply or the engagement which the Appellant creates.
14. When a similar activity is performed by a similarly placed entity in India who is acting to fulfil the same function for another Indian entity, the same would normally be leviable to GST.
15. To hold otherwise in the case of this Appellant would go against the grain of theexpressed intention of the legislature.
16. This would happen only when we ignore the fundamental idea of GST being a destination based consumption tax and insist on applying the rule of Noscitur a soda (this means that, the meaning of an unclear word or phrase should be determined by the words immediately surrounding it) inappropriately to certain words used in Section 2(13) of the IGST Act.
17. It is an accepted fact that GST is destination based tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer.
Condition 3 – He is not the person who supplies such goods or services or securities on his own account.
- According to the definition of ‘intermediary’ as given in Section 2(13) of the IGST Act an intermediary excludes a person who supplies such goods or services or both on his own account.
- It is the contention of the Appellant that the services of pre-sales promotion and marketing are being provided to lnfinera US on their own account and they are not engaged in buying or selling or supplying goods on behalf of the Principal.
- In the GST regime, an intermediary refers to a person who facilitates the supply of goods or services or both between two or more persons but excludes a person who supplies such goods or services or both on his own account.
- The phrase ‘such goods or services’ used in the definition of ‘intermediary’ implies that the person should not be supplying on his risk and reward entirely, the very goods or services whose supply he is arranging or facilitating.
- The Appellant is facilitating the supply of the products of Infinera US between the Principal in USA and the Principal’s customer in India.
- He is not supplying the products of Infinera on behalf of the Principal. He is only arranging the contact between the Principal and the Principal’s customer and the actual supply of the products is done by the Principal directly to the customer.
- The service of facilitating a supply of goods between the Principal and the customers is provided by the Appellant to the overseas client. The Appellant is not supplying such goods on his own account.
Contention by AAAR
- The argument of the Appellant that the pre-sales promotion and marketing services are supplied to the Principal on their own account and hence they fall within the exclusion clause of the definition of intermediary is not a correct interpretation of the law.
- The language of the exclusion clause is such that it is applicable to those persons who supply such goods or services on their own account.
- If a person either ‘facilitates’ or alternately ‘arranges’ any supply of goods or services between two or more persons, and does not supply such goods or services on his own account, he would be regarded as an ‘intermediary’.
- Here, the Appellant is clearly facilitating the supply of the products of Infinera US (their overseas client) directly to the client’s customers in the territory of India and is not supplying such goods on his own account.
- Therefore, the Appellant does not fall within the ambit of the exclusion.
In view of the foregoing discussions, the AAAR upheld the decision of the AAR that the pre-sale and marketing service provided by the Appellant of the products of the overseas client — Infinera US, is in the nature of facilitating the supply of the products of the overseas client and is appropriately classified as an ‘intermediary service’ as defined under Section 2(13) of the IGST Act.