The ruling is being seen as an important one as it was based on deliberations on the place of provision (PoP) of services rules 2012 and service tax rules (STR) governing export of services as introduced in the negative list regime.
Tandus group is a leading manufacturer of floor covering material and has worldwide sales operations. Tandus India is a wholly-owned subsidiary of Tandus Flooring Asia Pte Ltd based out of Singapore. Tandus Flooring US LLC (Tandus US) and Tandus Flooring (Suzhou) Co Ltd (Tandus China) are group companies. Tandus India has been providing marketing and support services in relation to carpets and floor covering material proposed to be sold in India by Tandus US and Tandus China.
Tandus India would promote, market and demonstrate the products to customers in India, manage the dealers accounts and projects, assist the customers to select the appropriate product and submit various marketing research reports to the Tandus US and Tandus China. However, the ultimate sale transactions were carried by Tandus US and Tandus China directly or through their own dealers in India.
Keeping in mind the relatively nascent understanding of new provisions under the negative tax regime, Tandus India had approached AAR to determine the place of provision of marketing and sales support services provided to Tandus US and Tandus China, and if the place of provision happens to be outside the taxable territory, whether the same would qualify as export of services.
The services of the nature provided by Tandus India can be confused with the intermediary services. The term intermediary as defined under PoPs means an agent or any other person who arranges or facilitates a provision of a main service between two or more persons but does not include a person who provides the main service on his own account. The place of provision in case of intermediary services is governed by the rule 9 of the PoPs which is the location of service provider. However, Tandus India demonstrated its services to be a main service, and as such clearly covered by rule 3 of the PoPs where the place of provision is defined as the location of the receiver of the services.
AAR, after considering the nature of the activities rendered by Tandus India to Tandus US and Tandus China, ruled that the activities of Tandus India are not covered by any of the exceptions under rules 4 to 12 of the PoPs. Accordingly, the services of Tandus India will be governed by rule 3 and the place of provision would be the location of the service recipient.
The AAR further held that the services of marketing and sales support in India provided by Tandus India to Tandus US and Tandus China would also qualify as export under rule 6A of STR.
The ruling sounds good on merits and also conforms to the objectives of the law of land to encourage export of services.
Normally, a ruling of this nature would be unremarkable, as the law is quite clear on all points relevant to the ruling. However, the attitude of the Indian service tax authorities has been extremely hostile towards marketing services in particular. In a number of cases, the authorities have rejected claims by service providers providing marketing services that these be treated as exports.
At one point, under the earlier law (the Export of Services rules), the revenue authorities had even issued a circular that interpreted the rules in a beneficial manner. This circular (issued on February 24, 2009) even gave marketing services as an example of a service where there was lack of clarity and proceeded to clarify that it should be treated as an export.
However, that clarification did not result in much relief to service providers. The department continued to rule that marketing services were not to be treated as exports.
One hopes that after this ruling under the PoPs rules, the issue will finally achieve clarity with the service tax authorities.
The author is leader, indirect tax practice at PwC India
Supported by Tajinder Singh