#TaxmannPPT | Intermediary Services under GST – Understanding the Fine Print | BMR Legal Advocates

INTERMEDIARY SERVICES UNDER GST – Understanding the Fine Print Shankey Agrawal Partner, BMR Legal, LLB, C.S., Advocate-on-Record, Supreme Court of India

Introduction •

An intermediary is a crucial link between a company and its customers

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In the global business market, the role of an intermediary is crucial for developing client relationships in a certain geographic region.

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From a business standpoint, an intermediary is generally responsible for carrying out duties such as -

 Customer’s acquisition  Marketing & after-sales support  back-end support

 Facilitation of service 2

Historical Background A number of Tribunal rulings held that certain services such as agency and business promotion services rendered to foreign recipients would amount to the export of services.

In order to overrule the effect of these rulings, the concept of intermediary services was introduced.

The concept of taxability of intermediary services was first introduced in India in 2012, in the Service tax regime, in relation to supply of services.

In October 2014, the scope was widened by including agents/ brokers engaged in facilitating sale of goods between two persons. The primary objective was to tax Indian subsidiary companies who helped their foreign counterpart to directly sell goods to Indian customers.

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Definition of Intermediary in:

Pre- Gst Scenario

Post- GST Scenario

Sub-rule (f) of Rule 2 of the Place of Provisions of Services Rules, 2012 -

Section 2(13) of Integrated Goods and Services Tax Act, 2017 -

• “a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service on his account.”

• “a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.”

Broadly no change in the scope of intermediary services in the GST regime vis-à-vis the Service Tax regime, except the addition of supply of securities in the definition of intermediary in the GST Law

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Intermediary Services under GST

Essential Ingredients of Intermediary Services

An intermediary arranges or facilitates a provision of a ‘main service’ between two or more persons

Two Supplies:

Two Supplies:

One Supply is between the principal and the third party

The second supply is of his own service (agency service) to his principal

The consideration of intermediary service is separately identifiable from the main supply

The test of agency must be satisfied between the principal and the agent

An intermediary cannot alter the nature or value of service, the supply of which he facilitates

The payment for such services is received by way of commission

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Place of supply of Intermediary Services •

The general rule is that “place of supply” is the location of the recipient of goods or services.

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Section 13 of the IGST Act provides for location of recipient of service as place of supply of services. However, Intermediary services is an exception

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Section 13(8): The place of supply of the following services shall be the location of the supplier of services, namely:–– a. ….. b. intermediary services; c. …..

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As a result, if the supplier of intermediary service is located in India, the place of supply will be India.

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Resultantly, these services will not qualify as export of services 7

Scope of Intermediary Services The scope of intermediary service has been imported from service tax regime into the new GST law The entry threshold of the definition of the term ‘intermediary services’ clearly indicates that the nature of the service provider should be an agent or a broker or any other person by whatever name called The broker or agent must work on behalf of the principal supplier in his dealings with third parties The intermediary must not alter the nature or value of service, the supply of which he facilitates on behalf of his principal

The value of an intermediary’s service must be invariably identifiable from the main supply of service that he arranges The service provided by the intermediary on behalf of the principal must be clearly identifiable 8

Concept of Agency •

The terms ‘broker’ and ‘agent’ are not defined in the GST.

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Black’s Law Dictionary: An agent who acts as an intermediary or negotiator, especially between prospective buyers and sellers.

• Section 182 of the Contract Act, 1872 An agent is a person employed to do any act for another, or to represent another in dealing with third persons.

The person for whom such act is done, or who is so represented, is called the principal.

Service Tax Education Guide

Tri-partite arrangement

Arranges or facilitates services between two parties

Does not provide services on his own account

Cannot alter the nature and value of services

Value of agent’s supply is distinguishable from main supply

Excludes agents in respect of goods (commissioning agent, stock9 broker)

Departmental Clarifications

Departmental Clarification on Intermediary Services

MINIMUM OF THREE PARTIES TWO DISTINCT SUPPLIES

INTERMEDIARY SERVICE PROVIDER TO HAVE THE CHARACTER OF AN AGENT, BROKER OR ANY OTHER SIMILAR PERSON DOES NOT INCLUDE A PERSON WHO SUPPLIES SUCH GOODS AND SERVICES OR BOTH OR SECURITIES ON HIS OWN ACCOUNT SUB-CONTRACTING FOR A SERVICE IS NOT AN INTERMEDIARY SERVICE

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Illustration 1 • ‘A’ is a manufacturer and supplier of a machine.

• ‘C’ helps ‘A’ in selling the machine by identifying client ‘B’ • ‘C’ charges ‘A’ for his services of locating ‘B’ and helping in finalizing the sale of the machine between ‘A’ and ‘B’ • Accordingly, ‘C’, is facilitating the supply of machines between ‘A’ and ‘B’.

• In this arrangement, ‘C’ is providing the ancillary supply of arranging or facilitating the ‘main supply’ of machinery between ‘A’ and ‘B’ • Therefore, ‘C’ is an intermediary and is providing intermediary service to ‘A’.

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Illustration 2 • ‘A’ is a software company which develops software for the clients • ‘A’ has a contract with ‘B’ for providing some customized software • ‘A’ outsources the task of design and development

of a particular module of the software to ‘C’, • In this case, ‘C’ is providing main supply of service of design and development of software to ‘A’ • Thus, ‘C’ is not an intermediary in this case

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Illustration 3 •

‘An insurance company ‘P’, located outside India, requires to process insurance claims of its clients

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For this purpose, he approaches ‘Q’, located in India, for arranging insurance claims processing service from other service providers in India.

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‘Q’ contacts ‘R’, who is in business of providing such insurance claims processing service, and arranges supply of insurance claims processing service by ‘R’ to ‘P’.

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‘Q’ charges P a commission or service charge of 1% of the contract value of insurance claims processing service provided by ‘R’ to ‘P’.

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Accordingly, in this case, ‘Q’ acts as an intermediary as per definition of Section 2(13) of IGST Act.

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Illustration 4 •

‘‘A’ is a manufacturer and supplier of computers based Software in the USA

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As a part of this supply, ‘A’ is also required to provide customer care service to its customers to address their queries and complaints

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‘A’ decides to outsource the task of providing customer care services to a BPO firm, ‘B’.

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‘B’ provides customer care service to ‘A’ by interacting with the customers of ‘A’ and addressing/processing their queries/complaints

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‘B’ is involved in the supply of the main service and

therefore, ’’B’ is not an intermediary.

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Important Precedents

Important Advance Rulings / judgments GODADDY INDIA WEB SERVICES PRIVATE LIMITED, In re -[2016] 67 taxmann.com 324/54 GST 681 (AAR - New Delhi)

Support Services rendered outside India on principle-to-principle basis – Not Taxable

Facts

Held:

Taxpayer was providing various services to GoDaddy LLC located in US in relation to –

• The Taxpayer was providing services to the US Entity with the object of promoting it in India on a principal-to-principal basis.

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marketing,

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customer support services and

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processing of payments made by Indian customers to GoDaddy US.

• The Applicant never rendered services in India ‘on behalf of’ GoDaddy US. • Thus, the services were in nature of “support services” and not “intermediary”.

Not concerned with the services provided by Godaddy US i.e. domain name registration, webhosting and designing services etc.

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Important Advance Rulings / judgments VERIZON INDIA PRIVATE LIMITED v. CST- Service Tax Appeal No. 52799 of 2016, Dated-2/8/2019

Facilitation of supply of goods or service between two or more persons

Facts In this case, the Company was providing – 

telecommunication services,



market research,



identifying customers,



net pricing,



billing and administrative support

Held  The Tribunal held that for a service to be considered as intermediary, three parties need to be involved while there were only two parties in this case.

 The appellant did not act as an intermediary between two persons  Rather it was involved in the supply of services on a principal-to-principal basis.

Billing Method – Cost + Mark up of 11%

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Important Advance Rulings / judgments CHEVRON PHILIPS CHEMICALS INDIA PVT. LTD. v. CCGST & CE -[2020] 113 taxmann.com 632 /[2021] 53 GSTL 268 (Mum. - CESTAT)

No interaction with the Client indicates that the Company is not intermediary Held

Facts  Sales Promotion and Agency Agreement dated 14-9-2009, whereby the Company provided sale promotion services to the overseas entity in respect of various chemical products  As per the terms the Company was paid Agent’s Commission  The measure of remuneration/compensation of the service rendered is with respect to formula based on the invoice price.

The Tribunal noted that the Company – -

had no role in fixation of price or negotiation with the clients of group company or any third party.

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Further, the agreement did not encompass interaction or rendition of service to the clients of group company or any third party.

Thus, the Tribunal ruled that the services in question did not qualify as intermediary services.

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Important Advance Rulings / judgments VSERVGLOBAL PRIVATE LIMITED, In re-[2018] 99 taxmann.com 253 (AAR - MAHARASHTRA)

Involved in arranging or facilitating the supply of goods or services

Several ‘back office support’ services, such as –

Held

 creation of purchase orders, dispatch of salesrelated documents, liaise with supplies for cargo readiness, process payment request, payroll processing etc.

The Sum of activities performed by the Company clearly indicates that it arranges or facilitates the supply of goods/ services between its overseas Client and customers of the overseas Client.

Client itself identifies potential buyers/suppliers and negotiates with them The Company had no role until the Purchase/sale order is finalized by the client.

This pattern of the remuneration received by the Company reveals that the consideration being received is solely based on the number of purchase/sale transactions handled by them

The Appellant comes into the picture only after the finalization of the Purchase/Sale order by a Client to provide back office support

They are liaising with the client’s buyers/suppliers with respect to delivery, transportation of goods, and settlement of payment between them 20

Important Advance Rulings / judgments SUNRISE IMMIGRATION CONSULTANTS PRIVATE LIMITED v. CCE & ST- [2019] 106 taxmann.com 173 (Chd. - CESTAT)

Not involved in arranging or facilitating the supply of goods or services

The Company was services to banks/ universities.

providing colleges/

The scope of their services included: promoting the business of the colleges by introducing aspirant students to them and referring investors to borrow money from foreign-based banks.

In lieu of these services, the appellant received commission/ fees

Held The nature of service provided by the Company is the promotion of business of the client

The Company is nowhere providing the services between two persons.

Facilitating the students by introducing them to the colleges.

As the appellant did not arrange or facilitate the main service they cannot be called as an intermediary.

GLOBAL REACH EDUCATION SERVICE PVT LTD, In re-[2018] 96 taxmann.com 107/69 GST 408/15 GSTL 618 (AAAR-WEST BENGAL) It was held that promotion & marketing of various courses of foreign universities among prospective students in India does not constitute “export of services”.

The services are in the nature of21

Important Advance Rulings / judgments AIRBUS INDIA PRIVATE LIMITED, In re - [2021] 128 taxmann.com 121/87 GST 80/54 GSTL 194 (AAR - KARNATAKA)

Facilitation of supply of goods or service between two or more persons without undertaking any supply on its own account The Airbus Group has a specialized global sourcing team for sourcing of relevant products from international market Airbus France has entered into “lntra-Group Services Agreement” in terms of which the Company is required to perform two functions; i.e (i) Procurement Operations i.e. rendering of various technical advisory and business support

(ii) Procurement Transformation & Central Services The Company would be remunerated with a service fee computed on a `cost plus mark-up’ basis.

Held He is not undertaking any supply of goods on his own.

He is only arranging the contact between the Principal and the Indian supplier and the actual supply of the goods is done by the Indian supplier directly to the Airbus France.

The service of facilitating the main supply of goods between the Indian supplier and the Principal is provided by the Appellant to Airbus France.

Hence, the Appellant does not fall within the ambit of the exclusion contained in the definition of ‘intermediary’ 22

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