When a service falls under the definition of intermediary, the provision of place of supply becomes different. Thus classification of a service under intermediary or otherwise affects various provisions like inter-state/intra-state supply or export or import of service. Therefore, it is necessary to under the provision of intermediary under GST.
Intermediary Under Goods and Services Tax:
In terms of provisions of Section 2(13) of the IGST Act, 2017, an "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 definition emphasises following points;
- An intermediary arranges or facilitates supply of goods or services or both, or securities between two more persons.
- It does not include a person who supplies such goods or services or both or securities on his own account.
Let us try to understand it by simplest example. Supply of goods. A wholesaler buys some goods from a manufacturer and sells it. The goods sold by the wholesaler belongs to the wholesaler, and hence the supply of this service is not an intermediary service. It is not necessary that all the goods kept in the wholesaler place is owned by him. It is enough that just before the sale, the goods are transferred by the manufacturer to the wholesaler and the wholesaler sales the goods to his buyer on his own account. Here is person is not acting as an intermediary.
On the other hand, let us see the activity of "commissions agent". The commissions agent sales the same goods, however the sale is happening between manufacturer and buyer; the commission agent is not the owner of goods when the sale is happening. The commission agent is acting as an intermediary.
Thus, such supplies involve three persons; principal whose goods or services are being supplied, and recipient who are receiving the supply of goods or services or both and an intermediary in between. The operative part of the definition of "intermediary" is "who arranges or facilitates the supply of goods or services or both or securities". Thus, an intermediary is one who arranges or facilitates supply of goods or services or both, belonging to the principal. Therefore, the nature of goods or services supplied by the intermediary must be same as goods or services supplied by the principal. If the nature of supply of goods or services by some person is different from the supply of principal, it cannot be said that the person is merely arranging or facilitating supply of goods or services. An intermediary cannot alter the nature or value of supply, which he facilitates on behalf of his principal. Further a person can arrange or facilitates supply of goods or services belonging to some other person only when she has been authorised by the principal. In view of this, the test of agency must be satisfied between the principal and the agent i.e. the intermediary.
The consideration for an intermediary's supply is separately identifiable from the main supply that he is arranging and is in the nature of fee or commission charged by him. It is not necessary that the intermediary must receive consideration from principal only; she can receive her consideration from the third party also.
In simple words, an intermediary is like an agent or broker, acting as an agent for parties who wish to buy or sell stocks, bonds, real or personal property, commodities, or services. A distinguishing feature between an agent and a broker is that a broker acts as a middleman. The GST Act clubs all intermediaries as 'agents' who carries on the business of supply or receipt of goods and/or services on behalf of another and clubs these entities together with commission agents, brokers, etc.
Let us take an example of travel agent. He supplies travel services belonging to principal. He may receive consideration from the third party directly. Nature and value of services supplied by the travel agent is same as the nature and value of services provided by the principal. Travel agent is an intermediary. Similarly, stockbroker facilitates supply of securities belonging to some principal, and hence it is an intermediary.
Intermediary under Service Tax Provisions:
Rule 2(f) of the Place of Provision of Services Rules, 2012 defines intermediary services as,
"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 two or more persons, but does not include a person who provides the main service or supplies the goods on his account;"
It may be noted that the definition of "intermediary" in Section 2(13) of the IGST Act and under erstwhile Service Tax law has been identical; thus, the law developed under Service Tax provisions shall be squarely applicable in GST era.
(i) Third party sale/Sale of goods through transfer of documents:
The Tribunal held that, in AIA Engineering Limited v. Commissioner Service Tax [2016 (41) S.T.R. 974 (Tri. – Ahmd.)], the appellant has recorded the transactions between them and WSL as a purchase transaction and transaction between them and ACC as sales transaction for the goods delivered by WSL to ACC directly from Karnataka to Jharkhand. The entire transactions as reproduced by us herein above indicates that the said transactions are nothing but an activity of purchase and sale of the goods. In view of these, it is not supply of intermediary service. Department appeal to the Supreme Court has been dismissed as reported in Commissioner v. AIA Engineering Ltd. – [2016 (41) S.T.R. J262 (S.C.)].
(ii) All brokers are not intermediaries:
An interesting question arose in case of Ship Brokers. The Tribunal held in case of Interocean Shipping Company v. CST [2013 (30) S.T.R. 244 (Tri. – Del.)]
"A ship broker, as the name itself suggests, is essentially a broker. Ship brokers are specialist intermediaries for negotiations between ship owner and charterers who use the ship to transport some cargo or between the buyers and sellers of the ship. A ship broker brings together a ship owner who wants employment/fixture for his ship located at a particular Port and ship charterer who requires a particular type of ship at or around a particular Port to transport some cargo. They help in negotiating the terms of the charter and finalisation of charter – party agreement and also assist both the parties in compliance of the charter – party terms and full and final settlement of all the dues and claims. The ship broker also acts as an intermediary for bringing together a ship owner who wants to sell his ship and the prospective buyer and assisting in sale of the ship. For providing these services, the ship brokers have to maintain database of ship owners, the class of ships owned by them and their location. It is not the case of the Department that the appellants have agreements with shipping companies etc. for representing them in negotiations. The essential ingredient of a 'Commission agents' service is acting on behalf of a principal which is missing in the case of the appellants. From the nature of their activity it is clear that brokers are purely intermediaries who do not act on behalf of either ship owner or the charterer and, therefore, they cannot be said to be commission agents."
The department appeal to the Delhi High Court was dismissed [2014 (34) S.T.R. 3 (Del.)], and later the judgment was approved by Supreme Court as reported in [2015 (40) S.T.R. 210 (S.C.)]
In the case of Commissioner of Sales Tax, M.P. v. Pondurang Tukaram Dalal, decided by Hon'ble High Court at Nagpur vide judgment reported in [AIR 1957 Nagpur 61: (V44 C 19 Mar.)], the respondent was giving the facility of displaying their goods to weavers in his shop, where the prospective buyers of the fabrics brought by the weavers, could come and examine the same. The price of the goods was negotiated between the buyers and the weavers through the respondent. On the price being settled between a buyer and the weaver, the weaver used leave his goods in the respondent's shop and get the price from the respondent and the respondent used to recover the amount from the buyer by giving him a bill in the name of his shop. The point of dispute was as to whether the respondent was only a broker or a commission agent and hence a dealer liable to pay sales tax. Hon'ble High Court in this can held that the activity of the respondent is of a broker, not a commission agent, observing as under –
"This distinction is borne out by a reference to strand's Judicial Dictionary. The meaning of a broker is –
"Brokers are those that contrive, make and conclude bargain and contracts between merchants and tradesmen, in matter of money and merchandise, for which they have a fee or reward. (Jacob, cited by Best, CJ), Gibbous vs. Rule, 1827 – 4 Bing 301 (F)"
The distinction between the two is that a commission agent, having control over to goods, sells them to others. Though he may act for a disclosed principal at either end, he negotiates the sale with the purchasers on his own. The broker does not sell the goods on his own, but merely brings the vendee and vendor together and settles the price. Bearing in mind the facts in the present case and considering the making of the bills by the assessee in his name according to the practice of the trade, we are of the opinion that the assessee belongs to the category of brokers, rather than agents who stock goods from sellers for sale on their own behalf to purchases, charging commission either one way or both way."
(iii) Freight Margin:
When a person negotiates deals with principals, and sells the same to customer; it is not an intermediary service. The Authority of Advance Ruling of Service Tax, In Re: Global Transportation Services Pvt. Ltd. [ 2016 (45) S.T.R. 574 (A.A.R.)], held,
"First issue is whether freight margin recovered by the applicant from the customer would be covered by intermediary service in terms of Rule 9(c) of POP Rules. Rule 9(c) of said Rules inter alia states that the place of provision of "intermediary services" shall be the location of the service provider. "Intermediary" is defined in terms of Rule 2(f) ibid and means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (called main service) or supply of goods, between two or more person, but does not include a person who provides the main service or supplies the goods on his account. It is noticed that the definition of "intermediary" does not include a person who provides main service on his own account. It is observed the relationship between the applicant and the airline/shipping line is separate and distinct from the relationship between the applicant and its customer. The applicant contracts with its customer to provide for transportation of cargo. The applicant also negotiates with an airline/shipping line seeking space and time for transportation of cargo. However, it does not imply that the applicant contracts with the airline on behalf of its customer as an intermediary. In the present case, the airline issues the Awb upon the applicant who adorns the role of a 'consignor'. In case of damage or destruction of cargo, the applicant shall have an independent right of recover of damages against the airline. Similarly, the customer shall also have a right to recover damages from the applicant in such a scenario. Therefore, agreement between applicant and airline/shipping line would be on principal to principal basis."
Thus, services provided by Freight forwarders, Goods Transport Agencies are not intermediary services.
(iv) Support Services:
In GoDaddy India Web Services Pvt. Ltd., various types of business support services were provided, on cost plus margin basis. The Authority for Advanced Ruling held that it is not an intermediary service- [2016 (46) S.T.R. 806 (A.A.R.)]. Read-No Service Tax on Web Hosting & Domain name registration/ transfer services provided by GoDaddy: AAR
Advance Ruling under GST:
Advance Ruling Authorities under the earlier regime were headed by Retired Supreme Court Judges and very senior technical members. Now, in GST regime, such authorities consist of junior departmental officers. It is said that independence of judiciary is a fundamental feature of Indian democracy. In the present regime of advance ruling, the members are departmental officer, always under pressure of revenue collecting department. When justice is left in the hand of revenue collection, no justice can be expected. That is what is happening in the present advance ruling regime and ridiculous orders are being passed. Though such orders do not merit discussion, and are not applicable to the assessees in general; let us have a look at these orders.
(i) In Global Reach Education Services Pvt. Ltd. [2018 (12) G.S.T.L. 387 (A.A.R. – GST)], it was held that "marketing services" provided to global universities are "intermediary" services. No effort was made by the AAR to examine- (i) If the nature of services of principal and agent is same and (ii) Is there an agency agreement.
The appellate authority of Advanced Ruling in the case [2018 (15) G.S.T.L. 618 (App. A.A.R. – GST)] expanded the definition and held that "even ancillary services" falls within the meaning of intermediary services.
(ii) Support services in shipping in an intermediary service- In Re: Five Star Shipping [2018 (14) G.S.T.L. 443 (A.A.R. – GST)].
(iii) In Vservglobal Private Limited [2018 (19) G.S.T.L. 173 (A.A.R. – GST)], it was held that back office support services, payroll processing, maintenance of records of employee provided by applicant to overseas companies, i.e., clients after finalization of purchase/sale between client and its customer – Accordingly, support services being provided by applicants would be 'intermediary services' and the applicant would be covered in the definition of 'intermediary' in terms of Section 2(13) of Integrated Goods and Services Tax Act, 2017.
When I read these judgments, I feel pity for the taxpayers in India. Can we allow our system to pass such ridiculous orders in the name of quasi-judicial proceedings? I feel shameful to be a part of such system where such orders are passed with impunity in the name of quasi-judicial proceeding.
The best part of advance ruling provisions in GST is that no assessee is bound to go to advance ruling authorities. Further, advance ruling binds only those assessees who approach them and were a party before the authority. It is really very sad for those assessees who got such orders. They cannot run their business being bound by such patently wrong and biased orders, whereas other assessees shall be enjoying the benefit. They need to find some way to get out of clutches of these orders.
Self-Assessment under GST:
GST Act provides for "self-assessment" of tax. The power of self-assessment of tax is by no means less wide than any power of assessment of tax of any authority. A self- assessment of tax is a valid assessment unless it is changed by some higher authority. An assessee, while computing is his tax liability under self-assessment procedure is entitled to interpret doubtful provisions in favour of the assessee. If two views are possible in a tax statute, the view favourable to the assessee shall be taken; and in self-assessment procedure the assessee must use that.
The definition of intermediary is very clear. If there is any doubt, it shall be and ought to be resolved in favour of the taxpayers.
Originally published by TaxGuru 3 April 2019
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