GST on intermediaries Saga continues so as the dilemma!
With a few adverse pronouncements covering the aspect relating to intermediary services by the GST Advance Ruling Authorities (AAR), the entire IT and ITES sector is seething at views expressed in the rulings. With Indias economic foreground occupied with Information Technology and back-office support captive entities, actions intending taxing their export incomes in India would not only dent present Governments initiatives of Make In India and Ease of Doing business, but also have long term implications, where the larger players might prefer moving to other cost-efficient economies like China or the South East Asian competition.
Intermediary as a concept was introduced for the first time from 1 July 2012 at the time of shifting taxation of service from selective list based regime to negative list based regime wherein the place of provision of intermediary services provided to or received from overseas businesses was determinable based on location of service provider. In other words, the intermediary services provided to a foreign customer would not qualify as exports and was subject to service tax in India. Similar basis for taxing the intermediary services has been continued even under the GST regime.
In the foregoing paragraphs, we have made an efforts to briefly explain the evolution of the concept of intermediary services over the period from introduction to the GST regime and the controversy surrounding the same.
A. Intermediary under the Service Tax provisions
The definition of the term intermediary was provided under Rule 2(f) of the Place of Provision of Service Rules to mean-
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 or supplies the goods on his account;
To clarify the scope of the intermediary services, the Central Board of Excise & Customs (Board) vide Para 5.9.6 of the Taxation of Services An Education Guide, specifically clarified that, in order for any service to be classified as an intermediary service:
There must exist two separately identifiable services, one the main service provided by the principal and second the intermediary services provided by the agent;
The agent must render services on behalf of the principal;
The services provided by the agent but be rendered in order to facilitate the provision of the main service provided by the principal; and
The agent must not provide any service on its own account
The Education Guide also mentions that usually travel agents, tour operators, commission agents and recovery agents are examples of the genus of persons classifiable as an intermediary. The common feature as can be seen in the illustrated persons, is that such persons always act in a representative capacity while arranging/facilitating provision of service or supply of goods between two or more persons. Further, supply of goods or services on own account by such intermediary is excluded from the scope.
Rulings/Judgments on the issue
The authority of advance ruling in the case of GoDaddy India Web Services Private Limited [2016-TIOL-08-ARA-ST] held that the applicant providing business support service such as marketing and other allied services like oversight of quality of third party customer care centre operated in India and payment processing services provided on behalf of GoDaddy US by the applicant to GoDaddy US cannot be categorized as intermediary or services, as intermediary service. This judgment was followed in several other rulings like in the cases of Global Transportation Services Private Limited [2016-VIL-19-ARA] and Universal Services India Private Limited [2016 (42) STR 585 (AAR)]. These rulings clearly demarcated and clarified the role of an intermediary. The Honble CESTAT Chandigarh in the case of Evalueserve.com Private Limited Vs. CST, Gurgaon [2018 (3) TMI 1430 CESTAT CHANDIGARH] held that any entity rendering services on their own account, even on behalf of their customers would not constitute an intermediary.
B. Intermediary under the GST regime
The definition of an intermediary as prescribed under Section 2(13) of the IGST Act, 2017 is very similar to the definition as given under the erstwhile service tax law and defined to mean:
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
As evident from the definition both under the service tax as well as GST regime, the supplier to be covered within the ambit of the intermediary should be a broker or an agent or any other person, by whatever name called, who should essentially facilitates or arranges provision of service or goods between two or more persons. The word means in a definition governs the words following and has a restrictive meaning. The words, broker and agent is followed by any other person by whatever name called. The most appropriate rule of interpretation in such a scenario is the principle of Ejusdem Generis. The application of this Rule is necessitated, because of the use of a general phrase preceded by specific words. The words ejusdem generis mean of the same kind or nature. As per this rule of interpretation, where a class of things is followed by general wording that is not itself expansive, the general wording is usually restricted things of the same type as the listed items. Therefore, as the phrase by whatever name called follows the words broker and agent, such other persons needs to be in the same genus as that of a broker or an agent. In other words, the phrase by whatever name called, will mean a person who is also appointed, in a representative capacity and does not act out on his own account.
For instance, consider A Limited, an EU based pharmaceutical equipment manufacturer. It engages an Indian Company B Limited to identify potential customers for purchase of its equipment in India, to liaise with customers, engage in price negotiations, etc. In this transaction, the supply of the pharmaceutical equipment would be the core/main supply and supplies by B Limited facilitating the supply of such pharmaceutical equipment would the intermediate supply.
In addition to defining the nature of person, the nature of supply, the definition of the term intermediary also contains an exclusion in as much as any person (including a broker, agent or any other person) who provides the main supply on his own account, would not be an intermediary. In other words, even if the supplier satisfies the nature of service and is an agent/broker; if such a person provides the supply on his own account, then such a supplier would not be covered under the definition of term intermediary.
In the GST regime, there are quite a few rulings pronounced on the aspect of intermediary services. However, all such rulings have preceded on the genus that mere arranging or facilitating provision of service or supply of goods between two person would be enough to bring the said person in the ambit of intermediary services. Further, the concept of either provision of service on own account or in the capacity of agent or broker has not been examined in all such cases.
In the case of Global Reach Education Services Private Limited [2018-VIL-06-AAR] the authority held that the applicant facilitating the recruitment/enrolment of students in foreign universities for a commission, were intermediaries and services rendered by them would not be treated as export of services as per Section 13(8)(b) of the IGST Act, 2017. This is followed by a more recent ruling in the case of Vservglobal Private Limited [2018-VIL-270-AAR] wherein the authority made an observation that, any supplies which tantamount to facilitating or arranging the rendering of a main supply, would be treated as supplies by an intermediary. This decision disregarded that the applicant was rendering the main supply for which there is a specific exclusion as per the definition of an intermediary.
C. Closing remarks
Globally EU, Canada and UK amongst many others, in the context of cross-border provision of intermediary services have zero-rated the same by prescribing place of supply or provision of such services rendered to overseas businesses determinable based on the location of service recipient.
It came as a welcome respite to the taxpayers when the initial draft of the Model GST law released in the public domain in the month of June 2016 did not carry forward the same approach to tax the cross-border provision of intermediary services as was prevailing under service tax regime. The draft law did not contain any reference to the intermediary services in the context of place of supply as a consequence of which the same was determinable under the residual category (i.e. if the recipient is located outside India, the services would have qualified as exports). This however, was quickly over-turned in the amended Model GST law released in the month of November 2016, where the specific provisions prevailing under the service tax regime were brought back for determination of place of supply for provision of intermediary services provided to overseas customers (i.e. despite the services rendered to an overseas recipient, the same would not qualify as exports since the service provider is located in India).
Vide Para 15.3 of the 139th Report on Impact of Goods and Service Tax by Department related Parliamentary Standing Committee on Commerce, the Committee recommended that the Government may cause amendment to section 13(8) of IGST Act to exclude intermediary services and make it subject to default section 13(2) of the IGST Act so that the benefit of export of services would be available. However, no such amendment was included by the Government while passing the IGST (Amendment) Act 2018 [No.32 of 2018].
From the introduction of the aforesaid concept of intermediary in the indirect tax regime, it has become an all-encompassing term interpreted far beyond its legislative intent. The entities engaged in any business processes outsourced by the overseas customers (involving more than two persons) like provision of marketing services or rendering services on behalf of the customers have been considered as intermediaries, without clearly examining the nature and scope or functions performed by such Indian service providers.
The scope cannot be extended in such a way so as to include any person involved in the supply chain to be an intermediary on the pretext that such person is facilitating provision of service or supply of goods. The definition specifically includes an agent or broker within its ambit and hence, it can be inferred that an intermediary is essentially a person who plays a vital role in getting together the contracting parties and creating a fix for the parties to finalise and get into an arrangement for rendering of the main supplies. Mere introduction of buyer with the seller is not sufficient for a service provider to qualify to be an intermediary. Also, negotiation appears to be a pre-requisite for qualifying to be an intermediary if one has to consider the functions performed by agent or broker or similar persons.
Given this very ambiguous line of difference and several intricacies in the issue, it is important that all companies having tripartite arrangements with overseas affiliates or external customers, rendering services on their behalf to their clients, re-examine their agreements/contracts from the perspective of classification (intermediary services vis-à-vis-support services) which will determine whether the subject services qualify for zero rating or otherwise. Further, companies engaged in provision of back office services to overseas group entities comprising of undertaking various support functions including marketing support bundled together and remunerated on composite basis may stand on better footing in terms of defending the non-applicability of the aforesaid provisions of intermediary as against companies engaged in only in marketing services on commission basis. Any link with the result of the so called facilitated service for purpose of remuneration (like commission based on the value of sales fructified) will be antithetic to the independent service. Therefore when the person is a broker or agent then the burden to establish that the service is on own account will be greater if the commission is linked to the final sales generated.
Even otherwise, the recent ruling which appears to have not taken into account all the facts as well as the intention behind introduction of into context while concluding the intermediary link, would have a far-reaching impact. It is therefore expected that the Government takes cognizance of the tax positions taken globally as well as the recommendation made by the Parliament Committee and clarify the scope or make suitable amendments to avoid any further damage and contain the uncertainty prevailing in the minds of taxpayer.
Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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