17 March 2016 EY Tax Alert AAR rules that provision of business support services to US affiliate are naturally bundled and are not intermediary services Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling 1 of Authority for Advance Rulings (AAR) wherein the Applicant has to provide certain services on principal to principal basis to US based entity (US Co.) to develop the brand of the US Co. in India. In this regard, AAR observed that the provision of services by the Applicant to US Co. are export of naturally bundled services and hence, the same would not attract Service tax. 1 2016-TIOL-08-ARA-ST
Background and facts The Applicant proposes to enter into a Service Agreement (Agreement) with US Co. which is engaged in the provision of services of registration of domain name and provision of other web services like web hosting and e-mail, designing, sale of on-demand products and troubleshooting services to its customers across the world. With an intention to expand its presence across India, it has decided to avail the services of the Applicant located in India. Accordingly, the Applicant proposes to provide a gamut of services exclusively to the US Co. on certain terms and conditions. Applicant shall provide below mentioned support services in an integrated manner: Marketing and promotion services The Applicant shall advise about the market situation prevailing in India including upcoming events, festivals, holidays etc. This would enable the US Co. to roll out plans for necessary advertisements and marketing. Applicant will assist US Co. in brand building activities. In this regard, it shall provide information of important events including festivals which will be conducted/ celebrated in India to the marketing team of the US Co. Also, it will provide other services to the US Co. in relation to advertising such as appropriate locations to display billboards, banners etc. US Co. will appoint an advertising agency in India to undertake brand developing activity. Applicant will not provide any service to the advertising agency. Applicant shall take part in seminars, talk shows or any other event to spread awareness regarding the US Co s brand and services offered. It may also conduct road shows, take up a stall in a fair or exhibition and hold webcasts for US Co. in India to update US channel partners or resellers in India on new developments and services provided by the US Co. The Applicant may also sponsor specific events or social gatherings in India to reach out to the public for creating awareness of the brand of the US Co. For this purpose, the Applicant shall appoint on its own a third entity for assistance and for availing the services specified above at its own cost. Supervision of quality of third party customer care centre services To provide a seamless and round the clock service to customers, US Co. shall appoint a third party customer care centre (Centre) in India. Applicant shall monitor and update the US Co. about the quality of service which shall be provided by the Centre. Further, if required by the US Co., the Applicant shall prepare a report based on the classification of complaints of Indian customers so that the US Co. can take necessary steps to provide long term and sustainable solutions to its customers. Payment processing services To enable Indian customers to pay the US Co. in Indian currency for the services availed in India, the Applicant will be required to provide services in the nature of developing payment processing facilities in India, collection of money from customers and remittance of the same to the US Co. For providing payment processing services, the Applicant shall outsource the payment collection activity to a third party service provider in India which will provide the necessary payment collection gateway facility to the customers who may wish to effect payments in Indian currency. Applicant will be required to open a separate bank account and money deposited therein will be required to be transmitted to the US Co. without any mark up. The Applicant shall provide the services described above exclusively to the US Co. Consideration for the above services by the Applicant to the US Co. will be in the
form of cost plus a mark-up of 13% on such cost in US Dollars. Based on the above, issue raised before AAR was whether the activity proposed to be carried out will constitute export of bundled services. Also, AAR had to decide whether the business mechanism results in provision of services to the customers of the US Co. in India or to the US Co. itself. Applicant Contentions Based on the clauses of the Agreement with the US Co., the Applicant contended that the proposed services are in the nature of support of business and commerce and shall collectively fall under the service category of business support service. In support of its contention, the Applicant referred to an Education Guide on Service tax 2 which lays down the manner to determine whether services can be considered as being bundled in the ordinary course of business or not. If the service recipient expects to avail different types of services related to each other in a collective form in the ordinary course of business, then the same shall be treated as naturally bundled services. Further, the service provider providing the services on principal to principal basis will not qualify as intermediary within the meaning of Section 2(f) of the Place of Provision of Services Rules, 2012 (POPS Rules). Additionally, the services agreed to be provided satisfy the conditions specified under Rule 6A(1) of the Service Tax Rules, 1994 to qualify as export of services. Revenue Contentions Revenue contended that the Applicant is not an independent service provider who provides services on his own account but 2 Paragraph 9.2.4 of Education Guide on Service Tax dated 20 June 2012 is an intermediary within the meaning of Rule 2(f) of the POPS Rules. Further, the Revenue referred to the Rule 9 of the POPS Rules and contended that place of provision of service shall be the location of service provider if the services are provided as intermediary. Since, the Applicant is an intermediary, place of provision of service shall be India. Further, it was argued that the services are provided to Indian customers of the US Co. Therefore, the services are also consumed in India. Hence, there shall not be an export of services. In view of the above and by referring to the provisions of Rule 3 of the POPS Rules, the place of provision of service shall be the location of the service recipient i.e. India. Ruling of AAR AAR referred to the clauses of the Agreement proposed to be entered between US Co. and the Applicant and the applicable provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder. AAR with respect to the services proposed to be provided under Agreement concluded that the various services proposed to be provided by the Applicant to the US Co. are a bundle of services being naturally bundled in the ordinary course of business and accordingly is a single service, being business support service, in terms of Section 66F of the Chapter V of the Finance Act, 1994. Also, by referring to the nature of proposed services and the definition of Intermediary under Rule 2(f) of the POPS Rules, concluded that the Applicant cannot be marked as intermediary and is purely an independent service provider to provide services on principal to principal basis. Taking into account provisions of Rule 6A of Service Tax Rules, 1994 dealing with
export of services, AAR concluded that the provision of bundled services would qualify as export of services and would not attract Service tax thereon. Comments Post Negative List regime, it is one of the initial rulings to address the issues around naturally bundled services where services can be otherwise classified under different categories. This decision of AAR, though conclusive in case of applicant to the ruling, will provide a persuasive backing for other service providers involved in the provision of similar services. The contractual terms between the parties will however be the decisive factor for deciding the service tax implication.
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