BACKGROUND
The issue of “intermediary” in GST has been quite vexating for the last few years. While by and large the Service tax provisions were brought into the GST ecosystem, the Revenue authorities sought to issue Show Cause notices and challenge the position of an export as that of an intermediary and not to be treated as exempted and went a step ahead in issuing demand notices for tax payments. On the other hand, we had various instances where the refund claims of genuine exporters rejected simply on the grounds of being an Intermediary. Some of the rejection orders were simply issued without any grounds or explanation to say the exporter was an intermediary and rejected the refund claims without any reasonable speaking order in fact.
A Brief on the Circular earlier issued and rescinded
CIRCULAR IN RESPECT OF INTERMEDIARY
The Circular bearing no. 107/26/2019-GST dated 18 July 2019 had been issued by CBIC for supply of ITeS to qualify as export of services in the GST ecosystem.
The Revenue authorities post its implementation 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 pre-delivery, 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.
Matter taken by the GST Council Meeting
One of the matters that was taken up for discussion in the 45th GST council meeting held on the September 17, 2021, was the issue of the scope of Intermediary Services.
An intermediary is defined under Sec 2(13) of the IGST Act, 2017 as-
“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”
It means a person acting as a broker, an agent or such other person who arranges or facilitates supply between two parties and does not include a person supplying on his own account. While the intermediary has been defined in the IGST Act, there has been lot of different views on the interpretation of the scope of Intermediary services.
Circular dated 20th September issued in the matter pertaining to Intermediary
In response to the representations made at the council meeting on the ambiguity caused in the interpretation of the scope of “Intermediary services” under the GST regime, the Ministry of Finance has issued a clarification on the matter vide Circular No. 159/15/2021-GST dated 20th September 2021.
The below paragraphs bring out the conditions and the essence of an intermediary as clarified in the circular.
PRIMARY REQUIREMENTS FOR INTERMEDIARY SERVICES
The Circular as part of clarification on the interpretation of the scope of Intermediary services has now provided prerequisites for a service to qualify as an Intermediary Service:
- The transaction involving an intermediary service must include a minimum of Three Parties namely, the principal supplier, the recipient and the intermediary who facilitates or arranges supply (ancillary service) between the supplier and the recipient.
The circular sets out the instance very clearly that the natural corollary of intermediary services is that the arraignment requires a minimum of three parties and that an activity involving only two parties cannot be considered as an intermediary service.
- The circular also refers to the concept of two distinct supplies in case of provisions of intermediary services namely-
(1) Main Supply and
(2) Ancillary supply.
There must necessarily be two supplies:
- Main Supply: The main supply is between two principals which can be a supply of goods or services.
- Ancillary Supply: that this service is a service of facilitating or arranging the main supply between two principal and that this ancillary supply is supply of intermediary supply and is clearly identifiable and distinguished from the main supply. The supply of intermediary services which is the ancillary service of facilitating or arranging the main supply between the Supplier and the Recipient.
- A person supplying the main supply of Goods, services or both or Securities, either in part or in full, on his own account, on principal to principal basis, shall not be considered as an intermediary.
- It is also pertinent to note that the Circular clarifies the role of intermediary to set out the explanation that an intermediary must arrange or facilitate some other supply and doesn’t himself provides the main supply. In this context the intermediary is expected to provide a supportive role.
- The definition of intermediary services does not include a person who supplies such goods or services or both or securities on his own account. The circular in an amazing move to benefit many companies of India Inc sets out that the use of word “such” refers to the main supply of goods or services or both between two or more persons which are arranged or facilitated by the intermediary.
In the implication it is sets out that wherein the person supplies the main supply, either fully or partly on principal to principal basis, the said supply cannot be covered under the scope of an intermediary. This becomes critical since even in the event of three persons in the picture that would demand the trigger of an intermediary concept, as long as the supply is made on a principal to principal basis, intermediary concept does not get mandated.
- Intermediary services does not include services of sub-contracte., a sub-contractor provides the main supply of the principal supplier on his behalf and cannot be considered as an intermediary. This would be a major relief since it has been set out explicitly as part of the circular.
- Intermediary provision gets invoked when either the supplier of the service or the recipient of the services are located outside India.
PLACE OF SUPPLY FOR INTERMEDIARY SERVICES
In addition to addressing the scope of Intermediary services the circular has clarified that the provisions for Place of Supply specified under Section 13 (8) of the IGST Act shall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India. The relevant extract of the Section for reference:
“(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.”
Therefore, when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India the Place of supply shall be the location of the supplier of Intermediary Services.
Further, in cases where both the location of supplier and recipient of the Intermediary Services are in India, the general place of supply provisions under section 12 of the IGST shall be applicable.
ILLUSTRATIONS
The circular sets out illustrations for ease of understanding but also states that the illustrations are generic and interpretations of scope of supply of intermediary services must be made based on the prerequisites mentioned Supra. In addition to the illustrations that has been brought about in the circular, we have also for included a few for ease of understanding to set out the instances where activities would be treated as Intermediary or otherwise.
Illustrations where services cannot be considered as Intermediary Services:
- Outsourcing of Main Supply:
Software company ‘A” which develops software for the clients as per their requirement, having a contract with ‘B’ for providing some customized software for its business operations. ‘A’ outsources the task of design and development of a particular module of the software to ‘C’, for which “C’ may have to interact with ‘B’. Since ‘C’ is providing main supply of service of design and development of software to ‘A’ on a principal to principal basis, ‘C’ does not qualify as an intermediary.
‘A’ is a manufacturer and supplier of computers based in USA and supplies its goods all over the world. As a part of this supply, ‘A’ is also required to provide customer care service to its customers to address their queries and complains related to the said supply of computers. ‘A’ decides to outsource the task of providing customer care services to a BPO firm, ‘B’. ‘B’ provides customer care service to ‘A’ by interacting with the customers of ‘A’ and addressing / processing their queries / complains. ’B’ charges ‘A’ for this service. Since ‘B’ is involved in supply of main service ‘customer care service’, ‘B’ shall qualify as an intermediary.
- Sub-Contracting:
‘B’ enters into a contract with ‘A’ for Annual Maintenance of tools and machinery. ‘A’ subcontracts a part or whole of it to ‘C’. Accordingly, ‘C’ provides the service of annual maintenance to ‘B’ on behalf of ‘A’. ‘C’ shall not be providing Intermediary services as he is providing the main supply of Annual Maintenance Service on his own account.
In addition to the above illustration, The Circular bearing no. 107/26/2019-GST, which was later withdrawn vide Circular bearing no. 127/46/2019-GST, included an illustration where it was clarified that:
- 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, does not qualify as an “intermediary.” i.e., When “A” supplies services on its own account to his client “B” or to B’s customer “C.”
Illustrations where services qualify as Intermediary Services:
- ‘A’ is a manufacturer and supplier of a machine wants to sell the machine. ‘C’ helps ‘A’ by identifying client ‘B’ who wants to purchase this machine and helps in finalizing the contract of supply of machine by ‘A’ to ‘B’. ‘C’ would qualify as an intermediary as he facilitates a main supply of machine between ‘A’ and ‘B’ and charges ‘A’ for his services.
- An insurance company ‘P’, located outside India, wants to outsource the work of processing insurance claims to any other firm. ‘P’ approaches ‘Q’, located in India, for arranging service providers in India. ‘Q’ contacts ‘R’ to perform the outsourced work of ‘P’. ‘Q’ who charges ‘P’ a commission or service charge of 1% of the contract value of insurance claims processing service provided by ‘R’ shall qualify as an intermediary as he only facilitated the main supply of outsourcing insurance claims processing service between ‘P’
Additional illustrations:
Party A (outside India) and Party B (within India) entered into a Design and development Services Agreement in terms of which, Party B is required to develop software code along with allied services to Party A. This service includes code development, quality assurance, integration services and customer support. Further, in the course of providing such services, Party B is obliged to hire and use services from third party consultants for rendering the services set out in the Contract between A and B, with whom Party A had no privity of contract.
The above case does not speak of another party to whom Party A is making supplies, hence it appears that the services from B to A does not qualify as an intermediary service due to the lack of the third party. However, if these services provided by B is facilitating a supply between A and a third party, then the service between B and A may qualify as Intermediary service. Greater significance should be assigned to what is the actual circumstances as opposed to how the contracts are framed. Though contract often provides a reasonable indication whether a service is an intermediary or not.
- Company Ain India is a fully owned subsidiary of A us Inc. Ain provides IT and support services to customers located outside India. It further provides a platform for the customers to transact by integrating with major banks in the US to provide customers ability to transact or move money between accounts.
The place of service is outside India and person liable for payment is A us Inc. for the supplies made by Ain India. Based on the prerequisites, Ain India is not an agent or broker providing service rather is directly providing such services to customers located outside India on a principal-to-principal basis and therefore is not an intermediary
NOVELLO COMMENTS:
The matter being raised at the GST council meeting finally resulted in a circular which provides clarity on the long pending ambiguity on the scope of intermediary services.
The circular while it sets out towards the removal of major ambiguity of the IT/IT enabled services is little silent on other service verticals and even instances where goods are involved as to what would determine if the same are falling under intermediary or otherwise.
It has clearly set out parameters where a service shall qualify as an intermediary service with the involvement of three parties in a transaction consisting of a main supply of Goods, Services or both or Securities between the principal parties and an
ancillary service of facilitation of the main supply provided by the Intermediary, who does not provide the main supply, on his own account, either partly or in full.
To those IT/ITES companies who have challenges pending before them in the form of Show Cause Notices or rejection of refund claims on account of this issue, it can be a very positive development in closure of the Notices and improving their cash flow situation. One can also hope genuinely that enough instructions would be given to various filed formations not to simply issue notice or reject the refund claims on flimsy grounds anymore on the issue so that India Inc, can move on with their business not be worried about tax strategies but their business strategies which was the main intent behind introducing “One Nation, One Tax” namely GST.
For coffee and conversations on the above, feel free to reach out to me at [email protected]