Impact of GST on Intermediary Services
Intermediary originates from the word ‘intermediate’. Intermediate means someone or something in the middle. A middleman who mediates in a supply between two persons is an intermediary. To further analyse the provisions and understand the impact, combined reading of the provisions of intermediary, place of supply and inter/ intra state supplies is of paramount importance.
Section 2(13) of the IGST Act, 2017 defines 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;
Three critical aspects of this definition are:
(a) The name does not matter. An agent, a broker, a negotiator or linkman, all are intermediaries.
(b) Such person must arrange or facilitate supply of goods or services between the principal supplier and the recipient.
(c) Such persons must not supply the goods or services on their own account.
Service Tax
An Education Guide on Taxation of Services issued by Tax Research Unit, Central Board of Excise and Customs on 20th June, 2012 stated that in order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:
Nature and value: An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal.
Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”.
Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable.
The above points can be squarely applied in understanding whether a transaction is covered under intermediary services or not in GST law.
Supplies involved
Another important aspect to be looked upon in this regard is that any kind of intermediary service involves two supplies happening simultaneously. The first one is supply which the intermediary is facilitating. This is the primary supply between the principal supplier and the recipient. The second one is supply of intermediary service against which consideration in the form of commission or brokerage, etc is received.
When observed generally, these transactions appear to be normal and can be seen in regular business practice. However, what makes the provision of intermediary so unique?
Place of Supply
GST being a destination-based tax, the place of supply in general parlance is the location of the recipient. Even the exceptions to the default provision of place of supply, prescribe the location of receipt of services as the place of supply. In none of these exceptional points has location of supplier been construed as the place of supply except, in case of intermediary services, the place of supply is the location of supplier of services, only if either the supplier or recipient is located outside India.
Section 13(8) of IGST Act, 2017 states:
The place of supply of the following services shall be the location of the supplier of services, namely:
(a) services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;
(b) intermediary services;
(c) services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.
Example: Mr A (Intermediary) is located in West Bengal, India. He provides services to his Recipient located in Tokyo, Japan. The Place of Supply shall be West Bengal, India [by virtue of Section 13(8)(b)].
Will this transaction qualify as an export?
This transaction appears to be an export but only because of the afore-stated provision, is not an export since one of the conditions for qualifying a service as export is that the place of supply should be outside India.
It was held in the case of M/s Material Recycling Association of India by the Hon’ble Gujarat High Court that intermediary services are not export of services and this provision of intermediary has been prevailing since Service tax regime.
The next question comes, is the said transaction an inter-state supply or intra-state supply?
Section 8(2) of IGST Act, 2017 states that subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply.
This provision is dependent on section 12 and hence the case of intermediary covered in section 13 is outside the purview of intra-state supply per se.
Section 7(3) of IGST Act, 2017 states that subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in––
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
For reasons aforesaid, the given transaction does not fall under section 7(3) either.
Section 7(5) of IGST Act, 2017 states that supply of goods or services or both,
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Therefore, on plain reading of all the three provisions referred above, it can be lawfully concluded that intermediary services on account of Section 7(5)(c) qualifies as inter-state supply.
Section 5(1) of the IGST Act provides that Integrated Tax (IGST) must be levied in cases of inter-state supply.
Hence, it can be inferred that, intermediary services provided by a person located in India to someone located outside India shall attract IGST, even though place of supply being location of such intermediary.
A contrary view was given in the case of M/S. Sagar Powertex Private Limited by the Authority for Advance Ruling, Gujarat dated 14th October, 2020.
It was submitted by the applicant that they are acting as an agent of foreign entities who are supplying machineries directly to the end customer and the company is getting commission for being an intermediary, thereby creating Principal- Agent relationship.
The question involved in the case was, in the said transaction, whether IGST is applicable or CGST + SGST is applicable. It was held that the applicant is liable to payment of CGST and SGST for the services provided as an “intermediary”.
This ruling has paved way for further litigation and confusion.
However, the problem with charging IGST would remain as the GSTN Portal while filing GSTR-1 would not allow an entry of payment of IGST when the place of supply is the same state as that of the location of the supplier.
Import of Services
As per the case of Material Recycling Association of India (mentioned above), there is no distinction between the intermediary services provided by a person in India or outside India. Therefore, the same provisions are applicable in both the cases, i.e., when intermediary is located in India or outside India. In other words, the place of supply would remain the location of supplier. Hence, the supply does not qualify as an import. This could lead to a question in the minds of the readers that doesn’t this create a loss for the Government? The answer is, in most cases, the recipient located in India would avail ITC of the amount of tax paid under RCM.
A Unique Case
Example: Location of Supplier of goods is located in Italy and the recipient is located in France. An intermediary located in India facilitates this transaction. In such a case, by virtue of Notification No. 20/2019 – Integrated Tax (Rate), the intermediary service is exempt from GST.
The relevant extract of the said service covered in this exemption notification is as follows:
Services provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory.
Summary of the Provisions
Disclaimer:
The purpose of this is to share knowledge and it is for education purpose only. This does NOT constitute NOR does this form part of neither it is to be construed as, A LEGAL OPINION. The analysis is solely based on the reading abilities of the Author. They may be correct/incorrect as per you. No representation or warranty, express or implied, is made or given in respect of any information provided. UNDER NO circumstances should any recipient rely on this communication as a basis for any legal decision. The views expressed are of personal to the author. They do not reflect the views of any organization he may be directly/indirectly associated with. Neither author nor any of its affiliates accepts any legal liability, or responsibility, for, or provides any assurance or guarantee of accuracy, authenticity, completeness, correctness, dependability, reliability, suitability or timeliness of, any part of this article. The contents of this article are based only on the understanding of the Law, Rules, Notifications, etc. of the author and THEY ARE NOT BASIS FOR ANY LEGAL OPINION.
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