Promoting disputes

Ever since the Export of Service Rules was introduced in 2005, there has been a volley of litigations over whether marketing and sales support services for recipients outside India qualify as “exports”. Many service providers promote the goods and services of their principals and affiliates located outside India, for which a fee is charged without levying service tax under the EOS Rules.

The revenue authorities have denied export benefit for such services in many instances and demanded service tax, holding that such business promotion took place in India.

The Central Board of Excise and Customs (CBEC) in a February 24, 2009, circular supported the exporters by clarifying that the relevant factor is the location of the service receiver and not the place of performance, and the services shall qualify as ‘exports’ so long as the benefits accrue outside India.

However, on May 13, 2011, it clarified that the circular should be read as services have not been used outside India in cases where only the payment has been received from abroad and the services are used in India.

Though this ambiguity was settled by an amendment to the EOS Rules on February 27, 2010, by omitting the words ‘place of provision of service/ use of such service’, service providers remained unsure about the fate of such services provided before the amendment date.

Recently, a three-member bench of CESTAT (Customs, Excise and Service Tax Appellate Tribunal), New Delhi, in the case of Paul Merchants Ltd (and others) held that the person who requested for the service and is liable to pay for it and is satisfied by it should be treated as the recipient and not the person/ persons affected by the performance of the service.

This and other CESTAT decisions that followed came as a huge relief to those agitating on the issue.

However, with the introduction of the Negative List-based taxation regime from July 1, things have taken a new turn. The qualifying criteria for exports for certain market promotion services has been modified by introducing a category called “Intermediary Service”. ‘Intermediary’ has been defined as any person who arranges or facilitates the provision of service (called ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account.

Under Rule 9 of the Place of Provision of Service Rules (POPS Rules), which has replaced the EOS Rules, the location of the service provider is deemed as the place of provision of service in the case of an Intermediary Service. Accordingly, the services are taxable as long as the location of the service provider is in India, in spite of receiving the consideration for services in foreign exchange.

From the definition of ‘Intermediary’, it appears that only service providers who provide market promotion service on agency arrangement are covered. Those providing general market promotion services on a principal-to-principal basis are not considered as long as they do not facilitate the provision of service through activities like submitting proposals, booking orders, and assisting in concluding the business on behalf of the principal.

It is hoped that the Government will soon come out with a clarification on the extent of coverage under ‘Intermediary Service’.

Fortunately, market promotion services for goods of a foreign principal has been spared by maintaining status quo. However, there could be potential disputes even with respect to promotion activities predominantly provided with respect to goods but involving some amount of services.

For example, companies providing sales support by facilitating their foreign principals’ bid for turnkey projects in India, which may involve supply of goods and services like design, erection or installation. The question is whether the service element in the bid makes the marketing service provider an ‘Intermediary’ and, if so, how to value the taxable portion of service if the bid is unsuccessful? A similar issue may arise with respect to market promotion of principal’s activities that are composite in nature, such as works contract, annual maintenance contract bundled with supply, wherein the authorities may view a part or the whole of the service as ‘Intermediary’ and demand service tax.

It is high time the Government revisits this amendment and restores the position that existed prior to July 1, 2012, to avoid a fresh round of controversies.

Pratyusha Maneppalli, Assistant Manager, contributed to the article.

The author is Director, Tax and Regulatory Services, PwC India

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