NOVEMBER 22, 2018

By Rakesh Kumar, Retd. Member (T), CESTAT

SEC 2(13) of the IGST Act defines the term "intermediary" as - "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 significance of a supplier of services being classified as "intermediary", and accordingly, the services supplied by him being classified as "intermediary services", is that if the supply of some intermediary services by a person located in India is to a recipient located outside India, in terms of the provisions of Sec 13(8)(b) of the IGST Act, the 'place of supply' in respect of such supply of services would be the location of the supplier and the supply, in terms of Sec 8(2) of the Act, would be intra-state supply attracting CGST and SGST/UTGST, not inter-state 'export supply' under Sec 7(5)(a) read with Sec 2(6) of the Act, which being zero rated under Sec 16(1) of the Act, does not attract GST.

Thus, Sec 13(8)(b) read with Sec 2(6) hits an exporter of intermediary services hard, as even though the service recipient is located outside India and the payment for the services has been received by the service supplier in convertible foreign exchange, the supply is not treated as service export under Sec 2(6) of the Act and attracts GST making the exports uncompetitive.

This issue has recently become important, as AAR, Maharashtra in a ruling dated 7th July, 2018 in respect of an application filed by M/s V Serve Global Pvt. Ltd - 2018-TIOL-263-AAR-GST, where the applicant proposes to provide back office support services to their overseas client engaged in trading of chemicals and other products in international trade and undisputedly, the applicant would come in picture only after finalization of purchase/sale order by their client and as such would have absolutely no role in procurement or finalization of any sales order for their client or purchase of any goods or services on behalf of their client, has held that the services to be provided by the applicant are facilitating the supply of goods or services or both between the overseas client and the customers of the overseas client and, therefore, the applicant is covered by the definition of "intermediary" under the IGST Act and, accordingly, in terms of the provisions of Sec 13(8)(b) of the Act, the place of supply of the services provided by the applicant to their overseas client would be the location of the supplier i.e. the location of the applicant and the services proposed to be rendered by the applicant to their overseas client would not qualify as 'export of services' as defined u/s 2(6) and thus, not a 'zero rated supply' under Sec 16(1) of the Act.

Is this ruling of AAR correct?

Who are covered by the definition of "intermediary" under Sec 2(13) of the IGST Act?

2. For being covered by the definition of 'intermediary" under Sec 2(13) of the Act, a person must satisfy the following conditions.

(i) He must be a 'broker' or an 'agent' or 'any other person by whatever name called, who arranges or facilitates the supply of goods or services or both or securities'.

(ii) The supply arranged or facilitated must be between two or more persons.

(iii) He is not the person who supplies the goods or services or securities on his own account.

Thus, an intermediary is a person between the supplier and the recipient who arranges or facilitates the supply for commission. There can be no scope for confusion when the person either acting as an agent of the supplier or acting as an agent of the recipient, arranges the supply or acting as a broker between a supplier and recipient, finalizes some sale or purchase deal and in these circumstances, the person who arranges the supply or brokers a sale/purchase deal between two or more persons would be an intermediary. But the definition of "intermediary" also covers the persons who facilitate the supply of goods or services or both or securities between two or more persons. What is the scope of 'facilitation'?

3. The expression 'facilitates the supply of goods or services or both or securities, between two or more persons…' would cover a very wide range of activities ranging from marketing or sales promotion of the goods or services of the client, locating prospective buyers for the client's products or locating sources of supply of the goods or services required by the client, price negotiation with the prospective buyer/ prospective supplier, procuring sales orders in respect of the goods or services of the client and like activities, on one hand, to the activities after finalization of sale/ purchase deal by the client, like coordination with the buyer/seller and other parties for execution of the sale/purchase contracts entered into by the client, maintaining account of the client's transactions and other back office work relating to the sale/purchase transactions of the client etc., on the other hand. Would a person engaged only in the back office administrative and accounting support activity for his client after the finalization of sale/ purchase deal and who had no role whatsoever in finalization of sale/purchase deal on behalf of his client, be also covered by the definition of "intermediary"?

In my view, the answer to this question would be in the negative, as in accordance with the principle of noscitur a sociis, the expression - 'any other person…who arranges or facilitates the supply of goods or services or both or securities….' would get its colour from the associated terms - 'broker' or 'agent' and, therefore, this expression would cover only those persons whose activity is akin to the activity of brokers or agents which results in or may result in finalization of some sale/purchase deal on behalf of the client.

Therefore, the back office administrative and accounting support service provided by a person to his client in respect of some sale /purchase transactions of the client after finalization of the sale/ purchase deal, in which the person had not played any role whatsoever, cannot be classified as "intermediary service", and since this service is not covered by the Sub-sections (3) to (13) of Sec 13 of the IGST Act, in case the service recipient is located outside India, the place of supply would be outside India, and if other conditions of Sec 2(6) are satisfied, the transaction would be treated as export of service.

The decision of AAR, Maharashtra (supra) on this point in its ruling mentioned above, therefore, does appear to be correct.

(The views expressed are strictly personal)