SKP Tax Alert
23 March 2016 | Volume 8 Issue 32
Advance Ruling on classification of services as business support services or intermediary services, under service tax

This alert talks about a recent Advance Ruling issued in the case of M/s GoDaddy India Web Services Private Limited (GoDaddy India). The Authority for Advance Ruling (AAR addressed the question whether services provided to LLC (GoDaddy US), in form of a complete package on a principal to principal basis should be classified as business support services, or based on the individual classification of services, should be classified as an intermediary service. The ruling held that since supporting the business of GoDaddy US in India is the main service and other services are incidental, the entire bundle of services including marketing and promotion should be classified as business support services and not as intermediary services.

The inferences from this Ruling would have a major impact on entities that provide marketing and promotion services to an overseas entity on a principal to principal basis. This alert discusses the facts of the case, the AAR's ruling and our views on this subject.

Facts of the case
  • GoDaddy US is engaged in the business of providing services relating to domain name registration and transfer, website hosting, email designing and the sale of on-demand products services to customers in India.
  • Accordingly, GoDaddy India proposed to enter into an agreement with GoDaddy US to provide the following services: 
    • Marketing and promotion services: These would consist of direct marketing, branding activities and offline marketing which include providing information, advice and support to their market situation in India, deciding a suitable time to roll out advertising campaigns and the location for broadcasting advertisements, participating in events to increase brand awareness, conducting road shows, seting up stalls at fairs or exhibitions, holding webcasts, sponsoring events, etc.
    • Supervising and overseeing the quality of third party customer care centres/services and issuing reports regarding the nature of complaints received. 
    • Payment processing services for the collection of money from the customers of GoDaddy US in India and its remittance to GoDaddy US.
  • GoDaddy US will directly engage relevant service providers in India including advertising and brand promotion agencies and call centres and GoDaddy India would be responsible for the identification and communication of information of such service providers to GoDaddy US. Godaddy India would also be responsible for the coordination between GoDaddy US and service providers, and the quality checks of call centres for which the company would receive a fee in foreign exchange equal to operating costs incurred plus 13% mark up.
  •  Further, GoDaddy US will directly contract and render services to customers in India and there would be no involvement of GoDaddy India in providing these services.

AAR’s Ruling
In light of the above facts, the AAR evaluated the proposed business transactions in detail. The following issues were brought before the AAR.

Whether services provided by GoDaddy India to GoDaddy US could be considered as being naturally bundled in the ordinary course of business

The AAR Ruling held that the services are naturally bundled, as:
  1. The main service offering of GoDaddy India supports the business of GoDaddy US and processing payments and overseeing of services of third party call centres are ancillary and incidental to the main service.
  2. The services to be provided by GoDaddy India satisfy the illustrative tests laid down under Paragraph 9.2.4 of the Taxation of Services: An Education Guide (Education Guide), 20 June 2012.
  3. Services provided by GoDaddy India are not peculiar to their case but are provided by various Indian entities to their overseas customers as a single package and the payment for the entire package would be consolidated/lumpsum payment, on cost plus mark-up basis.

Are the services are in the nature of business support service or intermediary services

Ruling held that the services cannot be classified as an intermediary service and are in the nature of business support service, as:
  1. Services would be provided by GoDaddy India with the sole intention of promoting the brand GoDaddy US in India, and increasing its business in India. 
  2. GoDaddy India would provide a bundle of support services in an integrated manner on a principal to principal basis and thus it cannot be considered an intermediary service according to Paragraph 5.9.6 of the Education Guide. 
  3. The services cannot be considered to be availed by customers of GoDaddy US in India, since the benefits of the services accrue to the recipient i.e. GoDaddy US, which is outside India.
  4. GoDaddy India would not be responsible for servicing Indian customers and thus, no consideration would flow from Indian customers to GoDaddy India. 
  5. Since GoDaddy India is not arranging or facilitating the supply of services from GoDaddy US to customers in India, the services are not in the nature of intermediary services and would be classified as business support services.

Would services be classified under Rule 3 of the Place of Provision of Services, 2012 (POPS) and would they qualify as export of service?

Services provided by GoDaddy India to GoDaddy US would be classified as business support services and in the absence of a specific rule in the POPS, it falls under the general rule i.e. Rule 3 of POPS. Accordingly, the place of provision would be the location of the service receiver, i.e. outside the taxable territory of India. Further, services would qualify as an export if the conditions mentioned in the Rules to qualify as an ‘export of service’ are fulfilled.

SKP's comments
The abovementioned ruling would have an impact on entities engaged in providing marketing and promotion services in India to their overseas entity on a principal to principal basis. The classification of such services whether fall under business support service or intermediary service needs to be ascertained. It should be noted that the principles laid down in the Advance Ruling cannot be uniformly applied to every case, and should be examined in light of the facts of the case. Accordingly, it would not hold good if the services are provided by an agent or where the services are not naturally bundled in the ordinary course of business. Further, the decision is in relation to the facilitation of intermediary supply of services and may not apply to an intermediary for supply of goods.

In light of the above, companies should evaluate the applicability of the AAR to marketing and promotion services provided by them by applying the rationale laid down in AAR. Though the decision of the AAR is legally binding only on the parties involved in a particular case and with respect to a particular transaction for which it is sought, the ruling may have a persuasive value in similar matters.

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