In this era of globalisation where jurisdictions are delimiting, taxability of an Intermediary is a tug of war in the Indian Indirect Tax System. Business entities having operations across geographies, in order to carry out cross-border transactions, take benefit from specific advantages which are specific to particular jurisdictions, such as natural resources, lower costs, a competitive fiscal environment, etc. Transactions in multiple jurisdictions involve efficient use of supply chain resources and also involves working with 'agents' or 'intermediaries'.
Intermediary Services is an old concept which was defined under Chapter V of the Finance Act, 1994, at the time of introduction of negative list regime in erstwhile Service Tax law. The definition was further amended in July 2014 and the legacy has been carried in the Goods and Services Tax regime along with the dispute. "Intermediary Services" was introduced with a motive to tax cross border transactions of services provided to persons situated outside India but performed within the territory of India.
With the shift to GST regime, point to be noted is that the definition of Intermediary Services as in Service Tax regime was lifted and was introduced as it is in the Integrated Good and Service Tax Act, 2017 (the IGST Act), which has kept the prevailing issue ignited. Section 2(13) of the IGST Act defines "Intermediary" as a broker, an agent or any other person who arranges or facilitates the supply of goods or services between two or more persons. But it specifically excludes a person who supplies such goods or services or both or securities on his own account. Thus, a person arranging and facilitating supplies between two persons is covered by the definition and not independent suppliers of such supplies.
POINT OF CONTENTION
Taxability of Intermediary Services is one of most prominent issues till date in the GST regime. The disputes raised by department on cross border transactions relate to supply of services such as marketing, support and agency services performed by Indian supplier towards supplier of main supplies sitting outside India. There is an absolute fight between industry and revenue department on interpretation of scope of 'activity of facilitation and arrangement of supplies', under Intermediary services. The tax authorities across the country have not been consistent in determining the nature of service considered 'intermediary' or on the levying of GST on promotion and marketing services, networking, back-end office support, customer relations, accounting, administration, liaising activities, and on managing various documentation requirements provided to clients located outside India.
In this regard, it is important to note that the evil does not lie in the definition, but in the provisions of place of supply (POS) under the IGST Act which prescribes location of the Intermediary as POS for Intermediary services. Resultantly, in case of Intermediary Services provided to a person situated outside India, the same shall be treated as services performed in India despite location of recipient being outside India. It means that supply of Intermediary Services does not qualify as export of services under the IGST Act. It is needless to mention that exports are zero rated under GST eventually not taxable, POS in India for intermediary services make it taxable always despite satisfaction of other condition of export such as realisation in foreign exchange and location of recipients etc.
JUDICIAL INTERPRETATIONS AND CLARIFICATIONS
The Central Board of Indirect Tax and Customs (CBIC) vide FAQ No. 25 on December 27, 2018, regarding banking sector has stated that Commission Agent in India should charge CGST and SGST/UTGST when acting as intermediary of foreign principal, as location of supplier and place of supply are in same state.
In Cliantha Research Ltd, GST-ARA-119/2018-19/B-50, Dated: May 04, 2019, the Authority for Advance Ruling (AAR) held that if the goods are physically made available by the sponsor in India from some other place outside India, then place of supply of service will be considered as India and thus, such will not be considered as export of services.
Further in Toshniwal Brother (SR), KAR/AAAR/06/2018- 19, Dated: January 09, 2019, the AAR has held that promotion of products of any other person qualifies as intermediary services.
However, AAR-Kerala has held that management consultancy services provided by applicant to clients abroad falls under SAC Code 998311 - Management consulting and management services including financial, strategic, human resources, marketing, operations and supply chain management and such services do not in any way, facilitate or arrange supply of goods or services or both between two or more persons and will not fall within definition of term 'intermediary'.
Recently the Hon'ble CESTAT has also held that an assessee providing marketing support services to its associate companies is not facilitating or arranging purchase and sale on behalf of Advertising Marketing and Distributor entities outside India, hence not intermediary services. This view has been upheld in ADM India (P.) Ltd Vs CST Bangalore, 22825- 22827/2017, Dated: November 20, 2017.
Thus, the significant divergence in views, negatively inter alia impact Information Technology/IT Enabled Service (IT/ITES) companies operating in India. In terms of a report of the NASSCOM, India is ranked as the 3rd most significant country for start-ups and it is an outsourcing destination for major companies operating world-wide.
Further, vide Circular dated July 18, 2019, the CBIC in the context of ITES clarified, that if a person provides a service independently on his/her own account and not as an agent of a third party, he/she would not come within the ambit of being an 'intermediary'. This circular resolves the adverse impact on Indian companies rendering back-office support services on their own account to organisations located outside India.
It would not be wrong to say that in view of various changes in law, the interpretational challenges, divergent advance rulings and circulars issued by the Government, industry remains uncertain and requires more clarity on this aspect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.