Intermediary Services Vs. Export of Services: An Open Pandora Box

Introduction

One of the biggest indirect tax reforms undertaken since India’s independence was the introduction of Goods and Services Tax (GST) which was enacted in compliance with the Government’s moto of ‘one nation, one tax’ in order to promote businesses, trade and to bring transparency in the tax system.

Ever since its inception, one of the areas which has gained attention of the taxpayers is relating to the tax implications on the transactions undertaken by the taxpayers with its overseas counterparts in non-taxable territory, whether classifying it as ‘export of services’ or falling under the category of ‘intermediary services’.

The concept of intermediary has been carried forward from the erstwhile Service tax regime which had been much debated issue and subject matter of long drawn litigation.

Before understanding the intermediary and export provisions and its issues under the GST law, let us first analyse the scope of intermediary and its related provisions, along with judicial precedents under the erstwhile regime.

Under Service Tax Regime

• The concept of ‘Intermediary services’ was introduced in the Service Tax regime under Rule 2(f) of the Place of Provision of Services Rules, 2012 (POPS) defines as:
  “Intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;
• Thus, it may be interpreted that an intermediary is involved in making two supplies at any one time i.e.:
  1. the supply between the principal and the third party; and
  2. the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.
• Rule 6A of the Service Tax Rules, 1994 defines the meaning of ‘Export of services’ which is as under:
  The provision of any service provided or agreed to be provided shall be treated as export of service when:

  1. the provider of service is located in the taxable territory,
  2. the recipient of service is located outside India,
  3. the service is not a service specified in the section 66D of the Act,
  4. the place of provision of the service is outside India,
  5. the payment for such service has been received by the provider of service in convertible foreign exchange, and
  6. the provider of service and recipient of service are not merely establishment of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Act.
• One of the important criteria that extricates intermediary services out of coverage of from export of services is its ‘place of provision’.
• Rule 9 of the POPS provides that in relation to specified services which inter alia includes intermediary services, the place of provision of services is the location of the services provider. It implies in case any Indian service provider provides intermediary services to services recipient outside India, place of provision of services is India i.e. location of service provider.
• It is imperative to note that in a usual scenario under the default rule, the place of provision of a service shall be the location of the service recipient. Accordingly, in a similar example, where Indian service provider provides services to the recipient outside India which are not classified under intermediary services, place of provision of services shall be outside India i.e. location of service recipient.
• The Education Guide issued by the Tax Research Unit of the Board in 2012 provided the factors which helps to determine when a person is acting as an intermediary. These includes:
  • 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.
    E.g. Services provided by a commission agent as a percentage of sales executed by him on behalf of principal would be classified as intermediary services. However, when fee charged has no direct nexus with the supply of goods or services by the principal to the third parties, then it would not be termed as intermediary.

Judicial Precedents under Service Tax

• M/S Chevron Phillips Chemicals India Pvt. Ltd. Versus Commissioner Of CGST & Central Excise, Mumbai East [2019 (12) TMI 1066 - CESTAT MUMBAI]: The appellant was engaged in providing business auxiliary services i.e. marketing and sales promotion of chemicals to its foreign counterparts and received the compensation/remuneration of the service rendered with respect to formula based on the invoice price. It is imperative to note that the appellant had no role in fixation of price, nor were they involved in negotiations with the third parties. Accordingly, Tribunal held that such services cannot be termed as an intermediary as they were acting as an independent party in terms of their contractual agreement.
• Lubrizol Advanced Materials India Pvt. Ltd. Versus Commissioner Of Central Excise, Belapur [2019 (1) TMI 720 - CESTAT MUMBAI]: The appellant was engaged in rendering administrative and sales related services to the group entities located outside India. The original authority rejected the refund claim treating the services supplied as intermediary. The Tribunal held that the consideration received by the appellant which was based upon cost plus mark-up was for providing the services on principal to principal basis and is nowhere connected with the main supply of goods. The appellant is not acting as a bridge between the overseas group entities and supplies made to their customers in India and accordingly, it cannot be treated as intermediary service and should be governed under the provisions of Rule 9 of the rules.
• Principal Commissioner CGST Delhi South Commissionerate Versus M/S. Comparex India PVT LTD. [2020 (1) TMI 429 - CESTAT NEW DELHI]: It was held that where the respondent is engaged in purchase and sale of software licenses on its own account and independently negotiates prices with the overseas customers, such activity would fall under export of services and not intermediary services.
• M/S Times Internet Ltd Versus Commissioner Of Central Excise, New Delhi [2013 (9) TMI 513 - CESTAT NEW DELHI]: The appellant was providing services to connect service user and service provider and was remunerated on the basis of destination based consumption tax. It was held that the appellant was providing intermediary services to its clients who is the ultimate service provider.
• Commissioner Of Service Tax, Central Excise Vs Lamhas Satellite Services Ltd [2019 (6) TMI 271 - CESTAT MUMBAI]: The applicant entered into agreement with Globecast based outside of India to provide services in relation to distribution of Russia Today Channel in India for which the applicant has entered agreements with the channel distribution partners and various hotels. The role of the applicant was to receive the consideration from Globecast and in turn pay to various channel distributors apart from receipt of other professional/service fee. The CESTAT held that applicant acted as mediator for provision of services by channel distribution partners to Globecast which in turn would fall under intermediary services.

Authority for Advance Ruling (Service Tax)

• M/S Godaddy India Web Services Pvt. Ltd. Versus Commissioner Of Service Tax, Delhi-IV [Ruling No. AAR/ST/08/2016]: The applicant was engaged in providing business support services to GoDaddy US in terms of marketing, branding and sales promotion services along with allied services like after sales support, payment collection support by engaging third parties who would have direct contract with their overseas entity. The Authority for Advance ruling held that supporting the business/brand of GoDaddy US in India was the main service and processing payments and oversight of services of third party call centres were ancillary and incidental to the provision of main service in a naturally bundled services and since these services are being provided on own account, it cannot be treated as intermediary services.
• M/S Universal Services India Pvt. Ltd. Versus The Commissioner Of Service Tax, Gurgaon [Ruling No. AAR/ST/ 07/2016]: The service provided by the applicant to WWD US is processing of payments, which is the main service for which they would receive fee equal to the operating costs incurred by the applicant plus mark-up. It was held that such services would not be treated as intermediary services as no remuneration is received by the applicant from Indian Customers. The applicant would receive fees even if the Indian customer directly remit foreign entity through International credit card.

Under GST Regime

• The term ‘Intermediary’ has been defined under Section 2(13) of the IGST Act as under:
  “intermediary” means 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 definition of intermediary can be broken down into four legs i.e.:
  1. a broker or an agent;
  2. arranges or facilitates supply of goods or services or securities;
  3. between two or more persons;
  4. excludes a person who supplies such goods or services or securities on his own account.
• It is noteworthy to mention that the concept of principal-agent relationship has been originated from the Indian Contract Act, 1872. Chapter X of the said Act deals with laws relating to Agency where “agent” has been defined as a person employed to do any act for another or to represent another in dealing with third persons and the person for whom such act has been done or who is so represented is called “principal”. Therefore, the crucial element to qualify principal-agent relationship is the representative character of the agent which enables him to carry out activities on behalf of the principal.
• Under the GST Act, Section 2 of the CGST Act, 2017 defines “Agent” and “Principal” as follows:

  “Agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;

  “principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both;

• On the perusal of above definitions, it may be interpreted that the crucial component for covering a person within the ambit of the term “agent” under the CGST Act is corresponding to the representative character identified in the definition of “agent” under the Indian Contract Act, 1872.
• The term ‘export of services’ has been defined under Section 2(6) of the IGST Act as:
  “Export of services” means the supply of any service when, –

  1. the supplier of service is located in India;
  2. the recipient of service is located outside India;
  3. the place of supply of service is outside India;
  4. the payment for such service has been received by the supplier of service in convertible foreign exchange; and
  5. the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8
• Since GST is a destination-based tax and levied at a single point at the time of consumption of goods or services, provisions relating to place of supply helps in determining destination of supply. In case of export of services, ultimate beneficiary of the services is located outside India and accordingly no taxes should be charged since goods will ultimately be consumed outside India. This is also in line with promoting India’s trade and making Indian goods or services competitive. However, one of the important conditions in respect of export of services is payment in foreign currency has been received.
• Section 13 of the IGST Act deals with provisions relating to place of supply where either of service provider or service recipient is located outside India. As per the default rule under Section 13(2), place of supply is the location of service recipient. However, Section 13(8) created a deeming fiction for intermediary services where place of supply of services is location of service provider which is generally in India and accordingly, GST applicability arises.
• The intent of the government to create such deeming fiction is to tax the services which are actually supplied in India. However, it leads to an increase in the overall cost of goods or services as tax credit cannot be availed by foreign recipient deterring India’s exports.
• It is interesting to note where the Indian Company engages foreign agent to promote Indian business outside India or to attract foreign customers, by the virtue of intermediary provisions, the place of supply would be location of service provider, which in the instant case is located outside India, accordingly GST applicability would not arise under import of services.
• The Department Related Parliamentary Standing Committee on Commerce presented 139th report on ‘Impact of GST on Exports’ making recommendation to amend Section 13(8) of the IGST Act to exclude intermediary services and make it subject to the default Section 13(2) so that benefit of export of services would be available.
• The Central Board of Indirect Taxes and Customs (‘CBIC’) also issued Circular No. 107/26/2019-GST dated July 18, 2019, clarifying the applicability of GST on supply of Information Technology enabled Services (‘ITeS’) and back-end support services. The Circular clarified following key issues:
  • Services provided by the supplier (back end ITeS services) on his own account to recipients or customers of recipients, will not qualify as intermediary service; and
  • Backend services for arranging or facilitating supply of goods or services like order placement and delivery and logistical support, obtaining relevant governmental clearances, transportation of goods, post-sales support and other services, etc., will qualify as intermediary service.
• However, pursuant to various representations made by the taxpayers, the CBIC withdrew, ab-initio, the Circular No. 107/26/2019-GST dated 18 July 2019. It was not stated at the time of such withdrawal whether it was (i) due to ab initio erroneous interpretation realized by Government or (ii) due to reconsideration of an earlier interpretation, that the circular was withdrawn. Further, it is not impossible for tax administration to read the above cited reasons into this withdrawal of circular, and start denying zero-rated benefits to IT-ITeS businesses.
• Further, Circular No. 57/31/2018-GST dated 4 September 2018 brings out clarity on the scope of principal-agent relationship in the context of Schedule I. Relevant extract of Para 3 of Schedule 1 has been reproduced below for ease of reference:
  “3. Supply of goods—
  (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
  (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.”
  Said circular clarifies that the key ingredient for determining principal-agent relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. In other words, the crucial point is whether the agent has the authority to pass or receive the title of the goods on behalf of the principal. To discuss it in detail, let us discuss two scenarios to determine principal-agent relationship:

  Scenario 1: Mr. A appoints Mr. B to procure certain goods from the market. Mr. B identifies various suppliers who can provide the goods as desired by Mr. A, and asks the supplier (Mr. C) to send the goods and issue the invoice directly to Mr. A. In this scenario, Mr. B is only acting as the procurement agent, and has in no way involved himself in the supply or receipt of the goods. Hence, in accordance with the provisions of this Act, Mr. B is not an agent of Mr. A for supply of goods in terms of Schedule I.

  Scenario 2: Mr. A, an artist, appoints M/s B (auctioneer) to auction his painting. M/s B arranges for the auction and identifies the potential bidders. The highest bid is accepted and the painting is sold to the highest bidder. The invoice for the supply of the painting is issued by M/s B on the behalf of Mr. A but in his own name and the painting is delivered to the successful bidder. In this scenario, M/s B is not merely providing auctioneering services, but is also supplying the painting on behalf of Mr. A to the bidder, and has the authority to transfer the title of the painting on behalf of Mr. A. This scenario is covered under Schedule I.

• Correlating the principal emerging from above scenarios with intermediary services, it may be interpreted where the agent is engaged in providing services or transfer of title in his own name on behalf of principal, it would qualify under intermediary.
• The constitution of AAR under GST mainly consist of tax officers unlike under erstwhile regime where AAR were headed by the retired judges. Interestingly, there has been a lot of Advance Rulings pronounced by the Authority for Advance Ruling as well as Appellate Authority on the criteria and mechanism whether the services provided to foreign overseas entities amounts to intermediary services or export of services. Majority of the rulings has pronounced its decisions considering whether the applicant is directly engaged in interacting with the third parties on behalf of the principal to facilitate the supply of goods or services between two parties and ignored the concept of composite supply under GST.
• Composite supply is a supply consisting of two or more supplies of goods or services, which are naturally bundled and supplied in conjunction with each other in ordinary course of business where one of which is a principal supply. Taxability of composite supply is determined basis the nature of principal supply. Accordingly, where a supply involves business support services provided on own account as well as facilitation services, where the predominant nature is that of support services which are being provided as a package and bundled in natural course of business, it should be qualified as export of services.

Advance Rulings on Intermediary under GST

• Global Reach Education Services Pvt Ltd [2018-VIL-06-AAR] (West Bengal AAR & AAAR): The applicant provides promotional and marketing activities by way of promoting the courses by foreign universities and receive consideration in the form of commission from the foreign university for the service rendered to prospective students. The Authority held that the main service provided by the applicant is facilitating recruitment of students and the consideration is paid as commission on the basis of course fee and recruitment through the applicant. Promotion of the courses is incidental to the above principal supply; accordingly, services does not qualify as export of services but intermediary services. Same view has been taken by Appellate Authority for Advance Ruling [2018-VIL-04-AAAR].
• Vservglobal Private Limited [2018-VIL-270-AAR] (Maharashtra AAR & AAAR): Held that where the applicant is engaged in providing business support services comprising of back office support and accounting services which inter-alia includes liaison with the buyers/sellers with respect to delivery, transportation of goods and payment etc. it would fall under the category of intermediary since the applicant arranges or facilitate the supply of goods or services. The ruling of AAR has been upheld by the Maharashtra AAAR on the appeal filed by the applicant [2019-VIL-39-AAAR].
• M/s Fulcrum Info Services LLP [2019-VIL-323-AAR] (Karnataka AAR): Held that where the applicant is engaged in providing support services which is in the nature of back office work mainly assistance in different types of compliances, manual document preparation etc., it would not be classified as an intermediary services since there is no interaction of the applicant with the third parties, either directly or indirectly.
• M/s Toshniwal Brothers (SR) Private Limited [2018-VIL-203-AAR] (Karnataka AAR & AAAR): Held that marketing, sales promotion and certain post-sales support services to the foreign client by the applicant would be classified as intermediary services instead of export of services as the contract agreement between both the parties clearly refer the applicant as an agent who is responsible on behalf of principal in negotiating the business transactions with the prospective customers while taking care of the interest of principal along with regular visits to prospective customers in the taxable territory. Similar view has been taken by the Appellate Authority for Advance Ruling [2019-VIL-02-AAAR].
• NES Global Specialist Engineering Services Private Limited [2019-VIL-63-AAR] (Maharashtra AAR): The applicant propose to enter into an agreement with their parent entity outside India to provide support services in respect of foreign business carried out by NES Abu Dhabi which inter-alia includes accounting, sales/purchase invoicing, payroll assistance etc. in exchange of fee on cost plus markup. The Authority held that the relationship between the parties are that of independent contractors and not in a principal-agent relationship. Accordingly, transaction between applicant and NES Abu Dhabi is a zero-rated supply.

Conclusion

In view of extensive deliberations and the rationale behind the order pronounced by the Advance authority, it is evident that in the erstwhile Service tax regime as well as GST regime, the contractual agreements between the parties tends to be of paramount importance which act as a deciding factor as to whether the services would qualify as export of services or intermediary services. Accordingly, it is imperative that a detailed analysis/re-examination of contracts entered with overseas entities is carried out by the taxpayers to evaluate nature of supply, payment terms etc. in order to avoid future litigations.

Surprisingly, most of the Advance rulings pronounced under GST is pro-revenue as the constitution of such authority are mainly amongst the officer of Central tax/state tax. Even though definition of intermediary under GST is exactly similar to the one specified in service tax regime, AAR has not considered the rationale behind the ruling pronounced under erstwhile service tax law. There have also been divergent rulings on the same issue by two or more AAR leading to conflicting views and ambiguity of opinions.

Therefore, in order to maximize the tax revenue, the authorities tend to extend the principle of agency to widen up the ambit of intermediary services even though such services may be provided independently or on own account.

It is, therefore, high time that taxing services under the ambit of intermediary services is dealt with by changing provisions relating to the place of supply in respect of such intermediary services as has been recommended by the 139th Report of Parliamentary Standing Committee on Commerce.