Market research for overseas group/parent entity constitutes ‘export’, rules AAR

Back-office services in the form of market research or survey for the parent entity based abroad or for other overseas group entity cannot be considered as intermediary services and hence constitutes export, according to a recent ruling by the Advance Ruling Authority of Maharashtra (AAR-Maha). The ruling brings relief for Asahi Kaesi India Private Ltd, a subsidiary of the Japan-based Asahi Kasei Corporation, as it is now eligible for a relaxation under GST.

The ruling is different from another AAR ruling in the matter of VServe Global which held that back-office services qualify as intermediary and not as exports. Different rulings on similar issues necessitate speedy implementation of the resolution adopted by the GST Council on December 22, 2018 which prescribed ‘creation of a centralised Appellate Authority for Advance Ruling (AAAR) to deal with cases of conflicting decisions by two or more State Appellate Advance Ruling Authorities on the same issue.’

Asahi Kaesi India Private Ltd approached AAR-Maha seeking advance ruling on issues such as treatment of support and marketing as support services through intermediary and also should services provided by the applicant to be treated as an export of services as defined under IGST (Integrated Goods and Services Tax) Act. The applicant had entered into two agreements — for services with Asahi Japan and for marketing services with another overseas group.

Under the service agreement, the applicant will provide research on corporate accounting, finance, personnel and labour relations, research and development etc besides economic, industrial and technical information on the products and market trends. Similarly, under the marketing agreement, the relationship between the parties is that of independent contractors, which means the agreement does not intend to create relationship of principal and agent.

After a detailed hearing, the authority observed that the applicant will provide service on own account to Asahi Japan to improve functioning of holding company and further augment its business vis-à-vis sale of all products manufactured and or sold or to be manufactured and or sold in India territory. Since the applicant is not involved in arranging or facilitating supply of service between two or more persons, it is not involved in provision of intermediary services. Accordingly, the court held that such services will be regarded as export under GST.

On the marketing service agreement with other overseas group entity, the AAR said the applicant in no way carries out activities such as conclusion of contracts, acceptance of sales orders, invoicing, determination of sales prices, rebate, discounts, resolution of customers complaints, or settlement of disputes with customers. On the contrary, the applicant will provide services on his own account to augment the recipient’s business vis-à-vis sale of bio-process consumables in the India territory. And accordingly, the AAR ruled that such services were export under GST.

Allaying fears

According to Harpreet Singh, Partner in KPMG, though the ruling is fact-based and applies to the applicant, on account of it’s persuasive value, the same is likely to allay the fears of many multinationals engaged in providing research and marketing services to their overseas parent. In the past, authorities have issued notices to such companies alleging the said services to be intermediary and hence not exports. Also, “the ruling has appreciated the fact that the authority to conclude or negotiate contracts, arranging or facilitating supply of service between two or more persons, creating relationship of principal and agent etc are sine qua non for services to qualify as ‘intermediary,” he added.

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