M/S Infinera INDIA Private Limited vs. The Union Of INDIA

The petitioner M/s Infinera India Private Limited, a wholly subsidiary of M/s Infinera Corporation, USA, constituted under the Indian Companies Act, 2013 and having its registered office at Bengaluru, filed application for advance ruling seeking ruling as to whether the activities carried out by the petitioner in India would qualify as “intermediary” under Section 2(13) of the Integrated Goods and Service Tax Act, 2017 (IGST Act for short). The Authority on Advance Ruling, after providing an opportunity of hearing to the petitioner, issued advance ruling dated 12.9.2019 holding that the activities carried out in India mentioned in “Pre-sale and Marketing Services Agreement” (‘agreement’ for short) would render the petitioner to qualify as an “intermediary” as defined under Section 2(13) of the IGST Act and consequently, has to be subjected to levy of GST. Being aggrieved by the said advance ruling, the petitioner had filed an appeal before the appellate authority, which came to be dismissed upholding the advance ruling dated 12.9.2019. Being aggrieved by the said order of the appellate authority, the petitioner has filed this writ petition.

Learned counsel appearing for the petitioner submitted that to attract the definition of “intermediary” under Section 2(13) of the IGST Act, the following ingredients should be satisfied; (i) the person should be a broker or an agent; (ii) any other person, who arranges or facilitates the supply of either goods or services or both or securities between two or more persons; and (iii) a person who supplies such goods or services or securities but not on his own account on principal to principal basis.

Inviting the attention of the Court to the agreement and the Statement Of Work entered into between the parties dated 1.4.2011, it was argued that the Infinera has to identify the exact scope of services required to be rendered by the petitioner in the format of Statement Of Work. For the Statement Of Work to become enforceable, the petitioner has to communicate its assent to render the services outlined, on the terms and conditions specified therein. After both the parties are agreeable to the terms and conditions of the Statement Of Work, the parties shall affix their signatures and the Statement Of Work shall be considered an independent agreement between Infinera and the petitioner.

Referring to clause 2.3 of the agreement, it was submitted that the relationship of the petitioner and Infinera is one of an independent contractor and not as an agent or otherwise. The petitioner has no authority to enter into contract with the third party customer or conclude contracts on behalf of the Infinera and maintain stock of goods or merchandise of Infinera. The role of the petitioner is, (a) only to assist Infinera through the coordination of sales promotion and advertising for its products in India; (b) conduct market research and keep Infinera advised and informed regarding all matters within India which may be of reasonable business interest or concern to India; and (c) provide informational or educational and service programmes in India as may be requested by Infinera from time to time.

Much emphasis was placed on the CBIC circular bearing F.No.CBIC-20001/8/2021-GST, dated 20.9.2021. Further, reliance was placed on the judgment of the Hon’ble Apex Court in the case of Collector of C.Ex., Vadodara v. Dhiren Chemical Industries, reported in 2002 (139) ELT 3 (SC), to contend that the instructions are binding on the authorities in the department. The judgment of the Hon’ble Apex Court in the case of Canon India Pvt. Ltd., v. Commissioner of Customs, reported in 2021 (376) ELT 3 (SC), was also referred to.

Learned Counsel for the petitioner submitted that the Service Tax Department during the audit of the books in January, 2016, referring to the agreement dated 1.4.2011 with Infinera Corporation, USA, raised certain objections that the service provided to Infinera, USA, cannot be considered as “export of service”, but to be considered as “intermediary” service attracting levy of Service Tax as per Rule 9 of the Place of Provision of Service Rules, 2012. The adjudicating authority, rejecting the reply filed by the petitioner, confirmed the demand of service tax. Against which, the petitioner has preferred an appeal before the first appellate authority relating to the period from 1.7.2012 to 31.3.2015 and the same is pending consideration. The said proceedings under the Finance Act, 1994, has no bearing on the advance ruling sought under IGST Act read with CGST Act. It was further contended that the Authority on Advance Ruling as well as the appellate authority have misconstrued the nature of work of the petitioner with the Infinera, USA and the bilateral agreement between the parties. Thus, it was contended that the mandatory requirement of two or more persons to constitute an intermediary is absent in the present case. These aspects not being properly appreciated by the respondents, the order impugned calls for interference by this Court.

Learned counsel appearing for the revenue supporting the impugned ruling of the Authority on Advance Ruling confirmed by the appellate authority submitted that the petitioner is an ‘intermediary’ in terms of Section 2(13) of the IGST Act. Drawing the attention of the Court to the agreement, more particularly, clauses relating to the consideration and the appeal memorandum filed by the petitioner before the Appellate Authority for Advance Ruling submitted that the petitioner gets compensated for the activities carried out by it on a ‘cost plus’ basis irrespective of whether such activity led to sale of Infinera products or not. The said activities are explained as per Bilateral Advance Pricing Arrangement (BAPA). The products of Infinera India are conceptualized in the US and the marketing related materials for the potential customers are developed in the US and shared globally across the sales offices for marketing activities. Infinera India basically acts as a communicating and coordination channel between potential customers in India and product line marketing team in the US. The Authority on Advance Ruling and the appellate authority having analyzed the agreement and the scope of work, have rightly held the petitioner as an ‘intermediary’. Learned counsel has placed reliance on the following judgments; 1) Material Recycling Association of India v. Union of India and ors., reported in 2020 (81) GST 164 (Gujarat); and 2) M/s Puri Investments v. M/s Young Friends and Co., & Ors., Civil Appeal No.1609/2022, decided on 23.2.2022. 9. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.

‘Intermediary’ is defined under Section 2(13) of the IGST Act, which reads as under;

Section 13 of the IGST Act deals with place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India. Sub-section (8) of Section 13 contemplates that, the place of supply of the following services shall be the location of the supplier of services, namely;- “(a) x x x x (b) intermediary services; (c) x x x x

The GST Council in its 45th Meeting held on 17.9.2021 inter alia made certain recommendations relating to changes in GST rates on supply of goods and services and changes related to GST law and procedure. Issuance of the following circulars was recommended in order to remove ambiguity and legal disputes on various issues, thus benefiting taxpayers at large. Amongst them the circular clarification on the scope of ‘intermediary services’ is relevant herein. In this direction, the Central Board of Direct Taxes as well as the Customs GST Policy wing has issued the circular dated 20.9.2021 on the subject - clarification on doubts related to scope of “Intermediary”. In the said Circular, the primary requirements for intermediary services are notified as under; “The concept of intermediary service, as defined above, requires some basic prerequisites, which are discussed below:

Minimum of Three Parties: By definition, an intermediary is someone who arranges or facilities the supplies of goods or services or securities between two or more persons. It is thus a natural corollary that the arrangement requires a minimum of three parties, two of them transacting in the supply of goods or services or securities (the main supply) and one arranging or facilitating (the ancillary supply) the said main supply. An activity between only two parties can, therefore, NOT be considered as an intermediary service. An intermediary essentially “arranges or facilities” another supply (the “main supply”) between two or more other persons and, does not himself provide the main supply.

Two distinct supplies: As discussed above, there are two distinct supplies in case of provision of intermediary services; (1) Main Supply, between the two principles, which can be a supply of goods or services or securities; (2) Ancillary supply, which is the service of facilitating or arranging the main supply between the two principles. This ancillary supply is supply of intermediary service and is clearly identifiable and distinguished from the main supply.

Clauses 1.2, 1.3 and 2.3 of the agreement read thus; “1. 2. Infinera shall identify the exact scope of services required to be rendered by IIPL in the form of a statement of work in the format attached herein as Attachment A (each such statement of work, a “SOW”). Infinera shall execute such SOWs from time to time as it deems necessary. Inter alia, the time-frame for rendering the services, delivery terms, personnel to be deployed and the procedures to be used in rendering the services shall be outlined in the SOW.

It is discernable from the clauses of the agreement that the petitioner is not permitted or authorized to act as an agent of Infinera in USA or representative of Infinera in USA or incur any obligation or make any commitment on their behalf with respect to supply of goods to any customer and the petitioner is not authorized to enter into contracts or conclude any agreement for and on behalf of Infinera in USA for supply of its products to the customers in India in the light of these clauses in the agreement and the detailed instructions provided by the CBIC on the scope of intermediary services, more particularly, the primary requirements for intermediary services referred to therein.

The arguments advanced by the learned counsel for the revenue that the petitioner gets compensated for the activities carried out by it on the cost plus basis whether such activities lead to a sale of Infinera products or not as stated in the appeal memorandum filed before the Appellate Authority for Advance Ruling read with clause 4 of the agreement dealing with the consideration, would not conclude whether the petitioner’s activities comes within the ambit of ‘intermediary’ as defined under Section 2(13) of the Act.

In the case of Material Recycling Association of India, supra, referred to by the learned counsel for the revenue, the High Court of Gujarat was delving upon the basic logic or inception of Section 13(8)(b) of the IGST Act, 2017 considering the place of supply incase of intermediary to be the location of supply of service and such intermediary services whether would be out of the purview of IGST.

Similarly, in the case of M/s Puri Investments, supra, the Hon’ble Apex Court while dealing with the proceedings initiated under Section 14 of the Delhi Rent Control Act, 1958, has held that the High Court decided the legality of the order of the Tribunal through the lens of an appellate body and not as a supervisory court in adjudicating the petition under Article 227 of the Constitution of India, which is impermissible.

With great respect, these judgments would be of little assistance to the revenue in the facts and circumstances of the present case.

Learned counsel for the petitioner has also cited certain judgments which may not be necessary for us to refer to the same in the light of the subsequent circular issued by the CBIC dated 20.9.2021. 20. For the reasons aforesaid, we are of the considered view that the matter requires reconsideration by the Authority on Advance Ruling as the said clarification was not available at the time of issuing the ruling by the Authority on Advance Ruling and Appellate Authority for Advance Ruling. Hence, we deem it appropriate to set aside the impugned orders and remand the matter to the Authority on Advance Ruling.

Accordingly, we pass the following: ORDER i) Writ petition is allowed in part. ii) The order impugned dated 20.1.2020 passed by the Karnataka Appellate Authority for Advance Ruling, Bengaluru, as well as the order of the Authority on Advance Ruling in Karnataka Goods and Services Tax, Bengaluru, dated 12.9.2019 passed under Section 68(4) of the Central Goods and Services Tax Act, 2017 and under Section 98(4) of the Karnataka Goods and Services Tax Act, 2017, are set aside. iii) The matter is remanded to the Authority on Advance Ruling in Karnataka Goods and Services Tax, Bengaluru, for reconsideration. iv) The Authority on Advance Ruling in Karnataka Goods and Services Tax, Bengaluru, shall reconsider the matter keeping in view the clarification on doubts related to scope of intermediary issued by the Central Board of Indirect Taxes and Customs GST Policy Wing, dated 20.9.2021. v) The Authority on Advance Ruling in Karnataka Goods and Services Tax, Bengaluru, shall take a decision in accordance with law, in an expedite manner, after providing an opportunity of hearing to the petitioner. JUDGE JUDGE