Since the time the concept of ‘Intermediary' was introduced in the service tax law, the issue as to who is an ‘intermediary' has been discussed extensively by the industry, interpreted and analysed by the experts, tested and explained by the courts and above all clarified, clarified and clarified by the Government. The concept of intermediary typically entails a bridge or communication link between two businesses.
The intermediary is thus a person who facilitates or arranges the business transaction to take place between two willing persons. And the business transaction happens directly between the two persons who are communicating through the intermediary or the middleman.
A variety of activities such as call centres, back-office support services, promotion and marketing agencies, pre or post-sales support services, quality control or supervision activities, payment collection etc. are typically viewed as ‘intermediary' services by the department authorities. Typically, an overseas entity appoints a company in India to provide the support services, such as above, so that its customers or recipients of goods or services have a better customer experience. Even a recipient of goods or services may appoint a service provider to find suppliers of such goods or services. Are all these service providers (and other similar ones too) fall within the mischief of the definition of the term ‘intermediary' as provided in Section 2(13) of the IGST Act OR are these services provided by the Indian service providers on a principal-to-principal basis?
In the service tax regime, this issue resulted in multifold of litigation and thus a plethora of judicial analyses is available on this topic to better understand the scope of the term. With the introduction of GST law in India in 2017, the definition of the term ‘intermediary' as provided under service tax law was adopted in the GST law, with the addition of securities. As a natural corollary, the judicial wisdom that the courts had already offered in this subject should have also followed. However, as was expected the department authorities under GST regime too continues to agitate business transactions of the above nature. And to address the matter, the Government has yet again issued a clarification, now under the GST law.
So let us discuss and understand the recent clarification issued by the Government vide circular No. 159/15/2021-GST dated 20th September 2021, post the decision taken by the GST Council in its 45th meeting. The circular in detail discusses the concept of ‘intermediary' and deals with the definition and the main ingredients of the definition in detail. The circular states that by definition, an ‘intermediary' is a person who:
- Arranges or facilitates the supply of goods or services or both between two persons, and hence there are three persons involved in the transaction,
- That for provision of intermediary services there are two distinct supplies – (a) a main supply between two principals from the supplier to the recipient, and (b) an ancillary supply by the person who facilitates or arranges the main supply between the two principal suppliers,
- Intermediary has the character of an agent, broker or any other person, by whatever name called,
- That the intermediary does not includes a person who supplies such goods or services or both on his own account, and
- Sub-contracting for a service is not an intermediary service.
To elaborate the point, the circular provides few illustrations wherein different situations have been discussed and an indicative analysis is given to say in what situation a service provider in India can be termed as an ‘intermediary' or not. Along with the illustrations a caveat has also been provided by the Government, that the illustrations are only indicative and not exhaustive and should not be considered as the final word on such service categories discussed therein. Therefore, to determine as to what would constitute an ‘intermediary' service under sub-section (13) of Section 2 of the IGST Act, each case should be examined in light of the specific facts of and the terms of contract of such case. It is like, we don't want the officers to take a narrow view but if they will do, let the courts do the needful. The illustrations mentioned in the circular will surely create more issues than settling anything.
For example, the first illustration mentioned in the circular deals with the most common business transaction where a manufacturer and supplier of machines is helped by a marketing service provider by identifying a buyer finalisaiton of contract of supply of the machine. The circular states that this arrangement is that of an ‘intermediary'.
This is one of most common marketing arrangements, especially in situations where the manufacturers and suppliers are located outside of India and the services of identifying customer in India and marketing and brand promotion are either undertaken by a subsidiary or a group company or by a third-party entity in India.
It is important to understand the difference between a simple marketing service provider and an ‘intermediary'. Identification of potential customers through direct approach or by whatever means holding seminars or webinars, posting advertisements, giving demos or explaining the features and capability of the machine to the interested buyer or introducing potential customers to the supplier, or even passing on the instruction related to pricing are all marketing activities.
To become an ‘intermediary', something beyond than just marketing should be done that leads to “arranging” or “facilitating” the supply, let us say, negotiating the price on behalf of the supplier, concluding on the terms of supply as an agent, arranging supply of machines like getting customs clearances, arranging transport of goods etc. Till such activities are not undertaken, marketing service provider should not be termed as an ‘intermediary'. The illustration is quite upsetting. It seems that all judicial precedents of the service tax regime on this point have been forgotten.
Another important point here is that the circular has not elaborated on the scope of the terms – “arranges” or “facilitates”. We will have to wait and watch how much wide connotation will the authorities given to the terms ‘arranging' or ‘facilitating'. Going by the experience of service tax regime where despite similar clarifications by the Government, the department officers continued with their crusade of raising demands, will this clarification serve any better purpose! And hence, the businesses should mentally prepare themselves to traverse the long litigation path on this issue yet again, in the GST regime too.
While that happens, an important task for companies is to start looking at their arrangements and ensure that the terms of the agreements provide enough clarity to help them sail through the interpretational conundrum that will surely follow, once the same old authorities will look at the documents under the new law of GST.
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