APRIL 22, 2020

By Tarun Sharma, Joint Director & Ankit Awal, Principal Associate, Lakshmikumaran & Sridharan

THE concept of Intermediary has always been a paradox and an area of concern for various Industries since the time it was first introduced in the service tax regime with effect from 01.07.2012 and the legacy of which has been taken forward into the GST regime. Industries which are most affected and concerned typically operate on a model whereby some activities are performed by an Indian entity for a foreign company (generally a parent company / subsidiary of same parent company). The scope of said activities varies from entity to entity, however, it generally covers back office operations, call center services, pre-sales and marketing activities, promotional activities, technical support services, payroll support services, etc.

Section 2(13) of IGST Act, 2017 defines an 'intermediary' to mean 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 on his own account. As per Section 13(8)(b) of the IGST Act, 2017, in the case of intermediary service, location of the supplier of service is the place of supply of said service.

Similar to erstwhile service tax regime, under GST regime as well, tax authorities have been disputing the claims filed for refund of tax paid on account of back end support type services provided to overseas clients, on the premise that the services so provided fall under the purview of intermediary services and applying Section 13(8)(b), place of supply of these services is the location of the supplier i.e. India and not the location of foreign client in terms of default rule under Section 13(2) of the IGST Act.

Considering this issue, the Parliamentary Standing Committee on Commerce in its 139th report tabled in December 2017 recommended to exclude 'intermediary service' from Section 13(8) and make it subject to the default Section 13(2) of the IGST Act. However, such recommendation is yet to see the light of day.

Resultantly, it is enormously important for the taxpayer to examine whether its output service to foreign client fall within the purview of 'intermediary' or not.

On literal interpretation, it appears that the definition of intermediary requires involvement of at least three persons in a transaction which are, supplier of goods or services, recipient of goods or supplier and a third person (viz. broker, agent, or any other person) who arranges / facilitates the supply of goods or services between them. Further, the phrase 'any other person' used in the said definition creates a doubt whether any person who arranges / facilities the supply will be covered here, or it would cover only those persons who act like agents or brokers. It is also crucial to examine up to what extent scope of 'arrangement / facilitation' can be expanded or contracted.

The implication and essence of definition of 'intermediary' under erstwhile service tax regime was identical to what is there under the GST regime. This has caused the aggrieved taxable persons to raise questions regarding qualification of a service as intermediary or export of service before several Authorities for Advance Ruling ('AAR') under erstwhile service tax regime as well as GST law.

In some cases, AARs [Asahi Kasei India Pvt. Ltd., 1 - 2019-TIOL-52-AAAR-GST, NES  Global  Specialist Engineering Services Pvt. Ltd., 2019 (3) TMI 594, Fulcrum Info Services LLP, - 2019-TIOL-336-AAR-GST, GoDaddy India Web Services Pvt Ltd. -2016-TIOL-08-ARA-ST and CESTAT [ Verizon India Pvt. Ltd. - 2019-TIOL-2268-CESTAT-DEL, Beaumanoir India Pvt. Ltd. -2019 (6) TMI 630, Evalueserve. Com Pvt. Ltd. - 2018-TIOL-2621-CESTAT-CHD, Sunrise Immigration Consultants Pvt Ltd. - 2018-TIOL-1849-CESTAT-CHD] have held that the services provided like marketing support and back office support (including accounting, export / import compliance, manual documentation, e-mail responses, purchase invoicing, sales invoicing, payroll assistance, etc.), by the service provider to foreign client will not be intermediary services, considering the relationship between parties and that the service provider provides service on its own account, in light of clarifications provided by the CBIC in the Education Guide issued under service tax regime.

On the contrary, in other cases, AAR [Vservglobal Pvt. Ltd. - 2019-TIOL-37-AAAR-GST, Mcafee Software (India) Pvt. Ltd.- - 2019-TIOL-355-AAR-GST, Ansys Software Pvt. Ltd.- 2019-TIOL-321-AAR-GST] have considered the support services as intermediary services by treating that the supplier is arranging or facilitating the supply between the overseas client and customers of the overseas client. Moreover, there have been conflicting views on whether the decisions pronounced in the erstwhile service tax on intermediary issue have any precedential value under GST or not.

To put an end to the controversy on 'intermediary', CBIC issued a clarification vide Circular No. 107/26/2019-GST, dated 18.07.2019 wherein the services provided by ITeS industry were classified in three scenarios. In respect of first scenario where services like back-end services, call centers, data processing etc. are provided by the Indian supplier on its own account to foreign customer or even to its customer's customer, it was clarified that such services will not constitute as intermediary services. In the second scenario, where the supplier facilitates the supply of goods or services like order placement, post-sales support, obtaining government clearances, etc., it was clarified that such services will fall under the scope of intermediary services. In third scenario, where the services provided involve both the services of scenario 1 & 2, CBIC clarified that the nature of services will have to be determined based on the facts and circumstances of the case. In nutshell, Circular dated 18.07.2019, rather than clarifying anything, made the entire issue look more confusing and complex. Later, following a massive backlash from the industry, CBIC vide Circular No. 127/46/2019 - GST dated 04.12.2019 has rescinded, void-ab-initio the aforesaid clarifications.

A lack of clarity from the Government and conflicting decisions from the AAR on intermediary issue, is causing the industry an ultimate sufferer in this entire episode. The unsettled legal position has created a vacuum for the tax authorities to examine the slant of intermediary in every overseas transaction of the taxpayers. Paradoxically, the issue of scope of intermediary services stands open even as the third year of the GST implementation is coming to an end causing a lot of trouble and creating an atmosphere of uncertainty amongst one of the largest industries of modern India - ITeS Industry.

To sum-up, due to not having set legal parameters / attributes, it becomes crucial for the prudent taxpayer to examine the transactions independently considering facts of each case including parameters like whether the supply is made on own account on a Principal to Principal basis or whether the service provider is arranging / facilitating the supply of main service or goods or not etc., based on contractual arrangement entered by the parties. This may help the taxpayers to avoid / minimize the unnecessary litigation with the tax authorities.

[The views expressed are strictly personal.]