INTERMEDIARY SERVICES
BACKGROUND
The most common point of discussion that arises in respect of services provided under Master
Service Agreements by Indian entities to parent entities/ group entities/ affiliates etc., often
located outside India pertains to whether these services constitute intermediary services or
not.
The trend that used to exist in erstwhile laws does to an extend transition into GST regime as
well. This can be seen through the numerous advance rulings that are issued in respect of
intermediary services addressing them outright or otherwise.
It is worthwhile to appreciate that the definition of “recipient’ is of significant importance in
determining whether a supply of services warrants payment of tax on account of place of
supply being the location of the service provider, which is precisely the issue in intermediary
services. Just because a service falls within the ambit of intermediary, it does not attract a
different treatment. The definition of ‘intermediary services’ becomes relevant only when the
‘the location of the service recipient’ is located outside India.
INTERMEDIARY SERVICES – PRIOR TO 2012 UNDER SERVICE TAX
While by and large the issue of rendition of services under the erstwhile “Business Auxiliary
Services” read with the then Export of Services rules rendered the “facilitation of marketing
services in India on account of the cross border clients” as export and exempted. In the case
of Microsoft Corporation India Pvt. Ltd (“the Appellant”) before the CESTAT Delhi, the two
member bench of Tribunal could not come to an agreement in the matter, and have referred
the case to the third member of the Tribunal in their order dated 2011.
As per the facts of the case, Microsoft Corporation India Pvt. Ltd. is a subsidiary of Microsoft
Operation Pvt. Ltd. (“MO”) of Singapore. MO entered into a Market Development Agreement
with the appellant on July 1, 2005. Under the agreement, MO appointed the appellant for
marketing Microsoft products in India. MOs stand was that the same was exports and should
be exempted. The Adjudicating authority held the services were not exports and were exigible
to payment of services tax. The main question before the Tribunal was whether the Business
Auxiliary Service of marketing products in India for a foreign principal was “delivered outside
India” and “used outside India” in terms of the provisions of Export Service Rules, 2005. The
two member bench offered opposing views and the matter was referred to a three members
bench. The basic divergence for the differing opinion was the reliance on “Principle of
Equivalence” as to whether the activity of marketing rendered in India ended in India or was
to the use of the cross border entity
The Larger bench of the Tribunal in the year 2014 held in the majority view that the services
were used outside of India and read with the provisions of the export of service rules held that
the services were exported and exempted.
While the issue in relation to Microsoft was going on, the Ministry of Finance introduced the
concept of intermediary services and making them taxable to service tax in the year 2012.
INTERMEDIARY SERVICES – POST 2012 UNDER SERVICE TAX
The charging section added in the year 2012 as part of the overhauling of the way service tax
was levied, Section 66B of the Finance Act, enables taxation of such services as are provided
in the taxable territory. Thus, the services that are provided in a non-taxable territory would
INTERMEDIARY SERVICES
not be chargeable to Service tax. The entire criticality of the services that would be chargeable
to service tax became determinant on the supply and the place. For Intermediary services, the
place of provision was deemed to be the location of the service provider. And it is pertinent to
note that the concept of intermediary was expanded to include the ‘intermediary of goods’ also
in the year 2014.
Intermediary Services: As per Sub-rule (f) of Rule 2 of the place of provisions of Services
Rules, 2012, ‘Intermediary’ means
“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 2 or more persons but does not include a person who provides the
main service
The Rule 9 of the Place of Provision of Service Rules, 2012 states that for “intermediary
services: the place of provision of service shall be location of the service provider thereby
making for a total digression from the accepted principle that the same amounted to export of
services till then.
INTERMEDIARY SERVICES – UNDER GST REGIME
The concept of Intermediary was brought into GST for both supply of goods as well as services
right from the time of inception of GST with effect from July 01, 2017.
Term Intermediary has been defined in the sub-section (13) of section 2 of the IGST Act as
follows:
“’Intermediary’ means 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.”
The above definition can be broken into the following:
• arranges or facilitates supply between two more persons.
• does not include a person who supplies on his own account.
PLACE OF SUPPLY
The requisite for invoking section 13 of IGST Act, 2017 is that either the location of supplier or
the location of recipient is outside India.
There exists no ambiguity on the matter that ‘location of supplier of services’ as per section
2(15) of IGST Act, 2017 falls in India, Since, Party A, the supplier of service, is located in India.
However, the matter whether the ‘location of recipient of services’ is outside India needs to be
scrutinised.
The definition of ‘location of recipient of services’ under section 2(14) of IGST Act, 2017 is as
follows:
“(14) “location of the recipient of services” means,––
(a) where a supply is received at a place of business for which the registration has
been obtained, the location of such place of business;
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(b) where a supply is received at a place other than the place of business for which
registration has been obtained (a fixed establishment elsewhere), the location of such
fixed establishment;
(c) where a supply is received at more than one establishment, whether the place of
business or fixed establishment, the location of the establishment most directly
concerned with the receipt of the supply; and
(d) in absence of such places, the location of the usual place of residence of the
recipient;”
The recipient as per section 2(93) of CGST Act, 2017, in respect of supplies where
consideration is payable shall be the person liable to pay the consideration.
Intermediary services hence can be classified into two based on the location of recipient of
services, i.e., the person liable to pay consideration
1) CASE 1 – Where the location of recipient of services is outside India
2) CASE 2 – Where the location of recipient of services within India
However, all intermediary services do not have any special treatment under GST. Only those
services which qualify as intermediary services while the location of the recipient is located
outside India would fall under the ambit.
CASE 1 – Place of supply of intermediary services where location of supplier or location of
recipient is outside India is covered under section 13(8)(b) of IGST Act 2017. The relevant
extract of section 13(8) of IGST Act, 2017 is as follows:
“(8) The place of supply of the following services shall be the location of the supplier
of services, namely:
––(a) services supplied by a banking company, or a financial institution, or
anon-banking financial company, to account holders;
(b) intermediary services;
(c) services consisting of hiring of means of transport, including yachts but
excluding aircrafts and vessels, up to a period of one month.”
The location of supplier of services would be the place of supply in respect of intermediary
services. Accordingly, the registered location of the intermediary would be the place of supply.
CASE 2 – There are no specific provisions covering place of supply of intermediary services
where both supplier and recipient of India. Therefore, reference may be taken to section 12 of
IGST Act, 2017. The applicable portion of the section is extracted below:
“(2) The place of supply of services, except the services specified in sub-sections (3)
to (14),––
(a) made to a registered person shall be the location of such person;
(b) made to any person other than a registered person shall be,––
(i) the location of the recipient where the address on record exists; and
(ii) the location of the supplier of services in other cases.”
Further, As per section 2(6) of IGST Act, 2017, one of the primary conditions to be satisfied
for a supply of services to be considered as ‘export of services’ is that the place of supply of
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services needs to be located outside India. Therefore, the services provided by Intermediary
does not qualify as exports of services.
In line with the above, the place of supply for each of the cases are as below:
• Place of supply for services provided to recipient located outside India would be
location of Intermediary.
• Place of supply for services provided to recipient located in India would be the
registered location of the recipient.
GST LIABILITY ON INTERMEDIARY
SERVICES PROVIDED TO RECIPIENT LOCATED OUTSIDE INDIA
It can be understood that any intermediary services where the recipient is outside India would
attract GST. However, this is subject to exemptions provided under the law.
Entry 12AA of Notification No. 9/2017 – Integrated Tax (Rate) dated June 28, 2017 (inserted
vide Notification No. 20/2019 – Integrated Tax (Rate) dated September 30, 2019) specifies Nil
rate of tax in respect of ‘Services provided by an intermediary when location of both supplier
and recipient of goods is outside the taxable territory’, subject to following conditions:
“Following documents shall be maintained for a minimum duration of 5 years:
1) Copy of Bill of Lading
2) Copy of executed contract between Supplier/Seller and Receiver/Buyer of goods
3) Copy of commission debit note raised by an intermediary service provider in taxable
territory from service recipient located in non- taxable territory
4) Copy of certificate of origin issued by service recipient located in non- taxable territory
5) Declaration letter from an intermediary service provider in taxable territory on company
letter head confirming that commission debit note raised relates to contract when both
supplier and receiver of goods are outside the taxable territory”
Subject to fulfilment of the above conditions, the intermediary services in respect of goods
provided would be treated as an exempt supply. Intermediary, however, would be required to
reverse ITC under the provisions of section 17 of CGST Act, 2017 read with the relevant rules.
Intermediary services provided in respect of services would continue to be taxable under GST
as an Intra-State supply of services, where CGST and SGST is required to be discharged.
SERVICES PROVIDED TO RECIPIENT LOCATED IN INDIA
Exempted provided under Entry 12AA of Notification No. 9/2017 – Integrated Tax (Rate) dated
June 28, 2017 is limited to ‘Services provided by an intermediary when location of both
supplier and recipient of goods is outside the taxable territory’.
In this scenario, recipient of intermediary services is located within India, i.e., supplier or
recipient of goods (parties to the supplies other than Intermediary) is located in India.
Therefore, the benefit of the exemption notification does not apply.
In line with the above, the intermediary services provided by the Intermediary in respect of
supply of goods as well as services to the ‘recipient of intermediary services’ would be
subjected to GST. Intermediary would be required to discharge IGST/ CGST+SGST
accordingly.
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CIRCULAR IN RESPECT OF INTERMEDIARY
The Circular bearing no. 107/26/2019-GST had been issued by CBIC for supply of ITeS to
qualify as export of services in the GST ecosystem.
The Revenue authorities two after introduction of GST had started issuance of notices to
various IT enabled Service providers holding that the services rendered by them were not
exported and not to be treated as Zero rated and therefore seeking levy of GST on the export
of their services. Since the matter reached a criticality, the CBIC issued the following circular
in the month of July 2019.
The said circular essentially consisted of three different illustrated scenarios. The following
captures the essence of the narrative of the circular.
Scenario – I: Supply on own account Services in the form of back-end services to the
client on its own account or even the client’s customer, have been clarified to not
qualify as an “intermediary.” This will apply when “A” supplies services on its own
account to his client “B” or to B’s customer “C.” This would not be categorised as an
intermediary under section 2(13) of the Integrated Goods and Service Tax Act, 2017
(IGST Act), and the place of supply will be determined basis the location of the recipient
of service.
Scenario – II: Supply by arrangement or facilitation: when the supplier arranges or
facilitates the supply of goods or services between two or more persons, such services
will be considered as intermediary services under section 2(13) of the IGST Act. The
circular has provided an illustration for back-end support services in the nature of predelivery, delivery and post-delivery support (such as order placement, delivery and
logistical support, obtaining relevant Government clearances, transportation of goods,
post-sales support and other services, etc.). Because of such services qualifying as an
intermediary, the zero-rated status as “export” will not be available. For example,
supplier “A” located in India arranges or facilitates back-end services such as delivery,
logistical support and post-sales support, etc. to customer “C” on behalf of his client
“B” located abroad would be an intermediary. Consequently, the place of provision of
service shall be India and such services will attract GST.
Scenario – III: Supply on own account along with arrangement or facilitation The
supplier is providing a combination of services described in Scenarios I & II, i.e., two
sets of services, namely, services on its own account and other back-end facilitation
services. In this case, the circular prescribes that the supplier of such services may fall
under the purview of intermediary services depending on the facts and circumstances
of each case, and the set of services determined as the principal/ main supply.
The aforementioned circular was later withdrawn vide issuance of Circular bearing no.
127/46/2019-GST dated December 04, 2019 on the grounds that the earlier circular caused
apprehension to many stakeholders.
INTERMEDIARY SERVICES
NOVELLO COMMENTS
PART-1 – TAXABILITY OF INTERMEDIARY SERVICE
When a service provider located in India is providing ‘Intermediary services’, tax applicability
differs based on the type of intermediary (goods or services) as well as the recipient of
services.
In respect of services provided to recipients (as defined under GST) located outside India,
they fall within the ambit of intermediary services where location of supplier outside India and
gets governed under section 13 of IGST Act, 2017. However, by virtue of entry12AA of
Notification 9/2017 – Integrated Tax (Rate), services provided by intermediary where both
supplier and recipient of goods are outside India is exempt under GST. The exemption
however would require reversal of ITC under section 17 of CGST Act, 2017. Further, in respect
of intermediary of services (facilitation of service rendition between two parties), CGST and
SGST would be required to be paid.
In respect of services provided to recipients (as defined under GST) located within India, they
are covered under section 12 of IGST Act, 2017 which deals with cases where both the
supplier and recipient are in India, even though they are intermediary services. There is no
difference between intermediary of goods and intermediary of services in such a case. They
would be required to be paid tax (IGST/ CGST + SGST) on the consideration based on the
location of the recipient.
PART-2 – SERVICES QUALIFYING AS ‘INTERMEDIARY SERVICES’
In respect of the ever present conundrum relating to whether a service is an Intermediary or
not, the earlier circular provides for a partial relief to India Inc as it sets out that where there is
a facilitation of goods or services that is being provided, the same would not be considered as
an intermediary of services.
However, for other services potentially falling under Scenario II, will result in a debate. This is
because the Appellate Authority for Advance Ruling in Maharashtra, while examining similar
facts, held that back-office support services such as post-transaction support do not qualify as
“export of service,” as they are in the nature of arranging or facilitating supply of goods
between overseas companies and customers. However, the Authority for Advance Ruling in
Karnataka has approved the position that post-transaction support will qualify as export.
The application of this circular could Jinx the already settled position on the treatment given
as export under GST by treating pre or post sale support services as an “intermediary,” as the
general understanding has been that only sale origination and execution roles (performed by
commission agents and brokers, etc.) are covered in this category. Therefore, it appears to
be a suitable recourse on the part of the government to withdraw the circular. However, this
brings everyone back to the question – What is intermediary services?
The saga of confusion continues