Latest Ruling of AAAR on GST on intermediary services

The Appellate Authority of Advance Ruling (AAAR), Karnataka,in its recent ruling in the case of Rajendran Santhosh while upholding the ruling of the Authority of Advance Ruling (AAR) ruled that services for facilitating the supply of products by a non employee without a supply on own account are intermediary services.

Facts of the case:

The Appellant, Rajendran Santhosh is an individual stated to be an employee of an overseas company engaged in the business of manufacturing and selling various categories of distribution transformer components and accessories. The Appellant states that he is employed as the Regional Sales Manager for the Middle East and Indian markets by H-J Family of Companies having its office in the United States.

The Appellant is required to report the status of the sales development (with customers in the Middle East and Indian Markets) to the Sales Manager based in the European Office on a weekly basis. The customers approached by the Appellant place their orders for the products with the Company and make payments to the Company’s account. The Appellant does not raise any invoice for the products ordered by the said customers.

The Appellant is paid a lump-sum compensation monthly for the aforementioned services. The Appellant does not raise any invoice to the Company for the said services. In addition to the aforementioned compensation, the Company provides a credit card (that has been issued in the name of the company) for the purpose of reimbursing reasonable travel expenses, office needs, and other business expenses incurred by the applicant in performing the said services.

Arguments of the Appellant:

• The applicant performs his services in exchange of a lump sum monthly compensation in a manner specfified by the employer (H-J family of companies) and his activities are performed under direction , control and supervision of the employer, the services must be classified under Entry I of Schedule III of the CGST Act, 2017.

• Applicant does provide such services for a seperate consideration and only receives a salary as well as reimbursement of expenses incurred during his activities performed for his employer, the services are not subject to charge of GST under the Act.

• Since the applicant is not making a taxable supply he is not liable to be registered in terms of Section 22 of the CGST Act,2017.

Order of Karnataka AAAR: Deliberation and Ruling

• No evidence is provided by the applicant proving that he is an employee of the company but the returns filed to Income Tax Department clearly shows above income as Income from Business and Profession. Further even the designation says “Independent Sales Manager” which clearly shows he is not an employee of the company.

• The applicant is making presentation before the prospective clients and facilitates the supply of goods by the company for whom he is providing services and he does not supply such goods on his own account and hence squarely falls under the category ‘intermediary” as per section 2(13) of the IGST Act,2017.

• The services provided by the applicant to M/s H-J Family of Companies would result in the supply of services within the meaning of that term; the services provided would be classifiable under HSN 9983.11 under the description “Other professional, technical and business services”; the applicant is required to be registered under the CGST Act, 2017 and the rates of tax applicable for the service provided are, in case of intra-State Supply under CGST at 9%;  Under KGST at 9% and in case of inter-State supply at 18% under the IGST Act.

In view of above deliberations the Karnataka AAAR ruled that the services provided by the applicant to M/s H-J family of Companies would result in the supply of services classifiable under HSN 9983.11 under the description ‘other professional , technical and business services’ and same shall be taxable @ 18%. It was further held that applicant is required to be registered under the CGST Act, 2017.

The Appellate Authority further held that the time of supply of such services will be determined as per Section 13(2) of the CGST Act,2017 and value of taxable supply will include the reimbursement amounts.

Our Comments:

It is really amusing to note that the applicant is showing the income received towards facilitating the supply as business income under its income Tax returns and yet was arguing that he is an employee. Further no evidence was also submitted before AAAR that he is an employee which proves that he was fighting the case to lose.

It may be noted here that CBIC vide its Circular No. 140/10/2020-GST dated 10.06.2020 had issued clarification in regard to applicability of GST on Director remuneration wherein it was clarified that part of Director remuneration which are declared as Salaries in the books of accounts and subjected to TDS under GST under Section 192 are not taxable. Thus in order to prove that a person is an employee these twin conditions needs to be fulfilled. Further the salary income received should be disclosed under income form salary in the Income Tax return by the employee.

Further in order to be treated as ‘Intermediary’ it is of utmost importance that besides arranging or facilitating the supply of goods or services or both , or securities between two or more persons, such person should not supply such goods or services or both or securities on his own account. As in the instant case the supply was not on the own account of applicant he was adjudged as ‘intermediary’ earlier by AAR and now by AAAR which in our view is just and proper.

READ ORDER:

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Frah Saeed

Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.