Mr S. Harishanker

Are `investment research and advisory services' to overseas clients `export of services'? This was the question that came up before the Authority for Advance Rulings (AAR) recently.

The applicant was Arisaig Partners (India) Pvt Ltd, Mumbai, a wholly-owned subsidiary of AP Asia, a foreign company. "It has entered into an agreement with holding company for providing services on fees which are claimed to be at arm's length on total costs over a financial period," reads the text of the December 5-dated order of the AAR (Central Excise, Customs & Service Tax), New Delhi. AP Asia has offices also in Singapore, Hong Kong, Korea and the UK, as www.arisaig.com.sg informs. It is `an independent investment management boutique, established in October 1996, wholly owned by its three founding partners,' viz. James Alexandroff, Lindsay Cooper and Torquil McAlpine. The firm specialises in `investing in small and medium-sized companies in Asia, excluding Japan.'

The small village of Arisaig, after which the firm is probably named, `lies on the famous Road to the Isles, lapped by the waters of Loch nan Ceall with breathtaking westerly views,' educates www.information-britain.co.uk. "A narrow road meanders from the village out to the Rhu peninsular, with every twist and turn affording a magical view of sea and island. Seals bask on the rocks and herons stand stock still in the shallow waters."

Meandering through the firm's site, you'd stumble upon the firm's `unusual' performance fee structure: "We must do better than 12.5 per cent per annum compound and are entitled to 10 per cent of the surplus above the hurdle rate. Any fee earned is then re-invested into the underlying fund for a minimum of two further years."

AP Asia's `process' is described thus: "We are itinerant, research-driven, stock-pickers. We undertake over 1,500 company visits each year across the 15 markets which we follow." One learns that the firm has a `sizeable database of proprietary financial models that has taken considerable time and effort to develop' and that the `team of 20 investment professionals' constructs `detailed models' on all companies that AP Asia owns and also very many that it does not. Not long ago, AP Asia picked up close to 10 per cent stake in Champagne Indage, the country's largest wine maker. In April last year, Adlabs Films Ltd approved a preferential issue of 7.5 per cent equity stake worth $6 million to AP Asia at Rs 150 per share.

Well, the question that lay before the AAR read as follows: "Whether investment research and advisory services proposed to be provided by AP India to the overseas entity fulfil the eligibility conditions provided in the Export of Service Rules, 2005 (as amended), which have been introduced by Notification No. 9/2005-ST dated March 3, 2006?"

Interpretation of terms

No answer has emerged from the Authority, as yet. Because the case has been listed for hearing on January 11, 2007. Meanwhile, Business Line contacted Mr S. Harishanker, Executive Director and Head of Indirect Tax, Tax & Regulatory Services, KPMG India Private Ltd, Gurgaon, to know more about the issue.

"The application appears to be regarding the additional condition incorporated in the Export Rules from April 19, which provides that a service would qualify as `export' service, only if the same is `delivered and used outside India'," postulates Mr Harishanker. "The terms `delivered outside India' and `used outside India' are at present not defined in the Export Rules and it is highly debatable as to how these terms could be interpreted."

What is the problem with these phrases? It is possible to argue that in case of advisory services, the `delivery outside India' could be demonstrated in the form of written communication flowing from the service provider in India to a service recipient outside India, explains Mr Harishanker. "So long as the client takes a decision (based on such advice) outside India, the service can be argued to be `used' outside India. An alternate view, in the event the advice relates to investments in India, is that the services should be regarded as `used in India'." He, however, concedes that the mere fact of the decision culminating into an investment being made in India, cannot be construed as services `used in India'. Because, "In such a case, the decision `not to invest in India' could cause the service to be construed as not used in India."

Such contrary conclusions themselves indicate that the use ends with the decision of investing or not the investment itself, distinguishes Mr Harishanker.

"In the absence of any specific definition of such terms as delivery and use, a more liberal and logical view would be to treat these services as `export' so long as the decision making takes place outside India rather than the resultant action of investment into India," he opines. "We also hope that the service tax laws are adequately amended with appropriate terms, or a clarification is issued explaining the intent and purpose of use of the terms `delivery' and `use' as criteria for considering the services as `export'," says Mr Harishanker.

D. Murali