Introduction to the Taxation of Intermediary Services under GST

Table of the Contents

1. Introduction

2. Intermediary Services: Concept and Its’ Treatment Under Gst & Service Tax

3. Test Of Intermediary

4. Board Circular Under Gst Clarifying Various Aspects

Checkout Taxmann's GST Issues to explore the various controversies (existing legal/future controversies) and enforcement of provisions of GST. This has been done by exploring various statutory provisions & reported judgements on GST issues. The book aims to provide information and analysis on various GST related constitutional and legal issues.

1. Introduction

In some businesses, an intermediary is an essential bridge between the business and customer. This is the reason that the Business organisations devote a significant quantum of organisational resources in an intermediary. Intermediary influences the business relationship of the organisation with customers. From a commercial perspective, an intermediary is broadly concerned with performing tasks like customer service, marketing service, after-sales service, back-end support and so on and so forth. The importance of an intermediary is significant in the international business market to build business relations with customers in a particular geographical area.¹ Resultantly, intermediary service provided by intermediaries forms an important element while dealing with the cross-border transactions. In the present Chapter, the Author shall discuss the concept of intermediary under GST Laws and various legal and constitutional issues surrounding the said issue.

2. Intermediary Services: Concept and Its’ Treatment Under Gst & Service Tax

• • Pre-GST Scenario

The concept of intermediary services were first introduced in India in 2012 in relation to supply of services.² After the amendment in 2014,³ the definition of intermediary service included supply of both goods and services which are rendered in the taxable jurisdiction. Prior to the introduction of the Intermediary services, a number of Tribunal ruling held that agency and business promotion services rendered to foreign recipient would amount to export of services.⁴

In order to overrule the effect of these rulings, the concept of intermediary services was introduced. The erstwhile Service Tax provisions⁵ defined the term intermediary as follows –

(f) “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;
[Emphasis Supplied]

Service Tax Education Guide⁶ further explained the term intermediary to include a person who arranges or facilitates a provision of a main service or a supply of goods between the supplier and the third party (i.e. the customer) for a consideration without any material alteration or further processing. The only exception is that the main service should not be provided by the intermediary on its’ own account.

Accordingly, from the above it is clear that an intermediary shall satisfy the test of agency between the intermediary (agent) and the supplier (i.e. the principal). In order to determine whether a person is an intermediary or not certain factors have to be considered. Firstly, that the intermediary shall not alter the nature or value of the service, the supply of which he facilitates on behalf of his principal except with prior permission from the principal. Secondly, the value of an intermediary’s service shall be invariably identifiable from the value of the main supply of service. Lastly, that the service provided by the intermediary on behalf of the principal shall be clearly identifiable. The place of provision of intermediary service was deemed to be the location of the service provider.⁷

• • Post-GST Scenario

After the introduction of the GST, the definition of intermediary service and the determination of place of supply has been inherited from the earlier Service Tax in India. The definition of intermediary service provided under IGST Act⁸ is substantially and conceptually the same as provided under the service tax in India. Similar to the erstwhile, Service Tax laws, the place of supply for intermediary service is deemed to be the location of the supplier of service.⁹ Further, the levy of GST has been exempted on the service provided by the intermediary, wherein both the location of supplier and the recipient of goods is outside taxable territory (i.e. India).¹⁰

3. Test Of Intermediary

With the growing influence of intermediaries and acceleration of cross border transactions, it is pertinent to determine the scope of such transactions from the view of tax treatment. However, the nature and scope of the intermediary service is a highly litigated issue in India that necessitates scrutiny.

The entry threshold of the definition of the term ‘intermediary services’ clearly indicates that the nature of the service provider should be an agent or a broker or any other person by whatever name called. In other words, there must be a relationship of agent and principal between the service provider and the service recipient. It is to be noted that the terms ‘broker’ and ‘agent’ are not defined in the GST. Therefore, reference can be made to definition of ‘broker’ in the Black’s Law Dictionary¹¹, in order to appreciate its contours. The said expression has been defined as under:

“An agent who acts as an intermediary or negotiator especially between prospective buyers and sellers”.

[Emphasis Supplied]

Further, the term ‘agent’ is defined in the CGST Act as follows:

(5) ‘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;
[Emphasis Supplied]

The said term is also defined under Section 182 of the Indian Contract Act, 1872, which may shed light on the scope of the said term:

“An agent is a person employed to do any act for another, or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the principal.”

[Emphasis Supplied]
The common requirement for considering a person as broker or agent is that he must work on behalf of some other person in dealings of such other person with third parties. The definition further refers to ‘any other person’. The term ‘any other person’ is preceded by specific terms ‘broker’ and ‘agent’. A broker or agent, as already noted, works on behalf of its principal and both of them constitute a class. Use of such specific words in the definition followed by general words, i.e. ‘any other person’, thus invites the application of principle of ejusdem generis. This doctrine of ejusdem generis is well settled legal method for interpretation of statutes in terms of which a generic expression following specific expression is interpreted to mean a similar instances as those covered by specific expressions.¹² Thus, insofar as the expression “or any other person” is positioned after two specific expressions, namely, (a) broker and (b) agent, it is clear that the legislative intent is to ensure that purport of the expression of “or any other person” is conditioned on the same lines as those arising out of the previous expressions i.e. broker or agent.

Since the definition of Intermediary under GST is identical to the definition of Intermediary under the erstwhile Service Tax, it may be appropriate to make a reference to the Service Tax Education Guide, wherein the nature of intermediary service was explained at length. The relevant portion is extracted as follows:

5.9.6 What are “Intermediary Services”?

Generally, an “intermediary’ is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two suppliers at any one time:

(i) the supply between the principal and the third party; and

(ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying agent or selling agent, or a stockbroker) is excluded by definition.

Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as “the main service”), but provides the main service on his own account.

“Nature and value: An intermediary cannot alter the nature or value of the services, 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.

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Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the ‘main service’.”

[Emphasis Supplied]

From the above, the Guide had clarified that a person’s legal status over the provision of service is the criteria in determining whether or not an intermediary service exists. It is evident that an intermediary is a person who is appointed by a principal and is authorized to act on his behalf. This implies that, if the relationship between the parties is on principal to principal basis and not principal to agent (who is authorized to act on behalf of the former) then there cannot be any intermediary. In addition, a person cannot be an intermediary if he provides the main service on his own account even when he performs the same agency activities (if he were an agent capacity).

Further, as per the definition “intermediary” it means a person who arranges or facilitates a supply of goods or services or both, between two or more persons ….. Thus, what is intended to be covered under the definition of intermediary, is a tri-partite scenario wherein three or more persons are involved in the same transaction. It does not seek to cover independent transactions between two persons. The word ‘between’ used in the definition of ‘intermediaries’ suggests that the arrangement in the transaction should necessarily involve an intermediary on one hand and two other persons on the other.

There are various judgments under the erstwhile Service tax regime, which provide clarity in relation to the nature of intermediary services. In this regard, reference can be made to the ruling of the erstwhile Customs and Excise Advance Ruling Authority in the case of GoDaddy India Web Services Private Limited¹³. In this case the Taxpayer Applicant was providing various services to one M/s GoDaddy.com LLC (‘GoDaddy US’) in relation to (i) direct marketing, branding, offline marketing of GoDaddy US in India, (ii) supervision of quality of third-party customers care center services appointed by GoDaddy US (iii) processing payment made by Indian customers for services provided by GoDaddy US in India etc. The issue before the Hon’ble Advance Ruling Authority inter-alia was whether the services performed by the Applicant would be in the nature of ‘intermediary services’ or ‘support services’. The Hon’ble Authority, after analyzing the relevant legal provisions, held that the Applicant provides a gamut of services to GoDaddy US with an object of promoting brand of GoDaddy US in India. Such services are provided on a principal to principal basis and at no point in time the applicant performs any services on behalf of GoDaddy US in India. Therefore, such services would be classified as ‘support services’ and not ‘intermediary services’. Similarly, there were a number of judgments of the Hon’ble CESTAT, which provide that where the services are provided on Principal to Principal basis without any direct contact with the customer will not qualify as ‘Intermediary service’.¹⁴

4. Board Circular Under Gst Clarifying Various Aspects

It is important to note that under GST, there were various inconsistent Advance Rulings on the nature and scope of Intermediary. For illustration, the Appellate Advance Ruling Authority in the case of Vservglobal Private Limited¹⁵ held that the activity of back-office support services, payroll processing, maintenance of records of employee would amount to Intermediary Service. Further, Appellate Advance Ruling Authority in the case of Global Reach Education Service Pvt Limited¹⁶ it was held that Promotion of courses of Foreign University in India on consideration based on certain percentage of fee paid by admitted students to the said university would qualify as Intermediary Service.

Similarly, the Karnataka Appellate Advance Ruling Authority in the case of Airbus India¹⁷ held that various support functions / activities in relation to procurement of goods viz. review of Indian supplier landscape, conducting supplier onsite assessments, reporting any unethical practices of suppliers, providing market information, checking quality standards etc. are in the nature of intermediary services.

In order to provide clarity on these issues, the Board has recently issued a circular providing some clarity on the subject. The circular provides the following primary requirements for ‘intermediary’ –

(i) An intermediary essentially “arranges or facilitates” another supply (the “main supply”) between two or more other persons and, does not himself provide the main supply. Ergo, there must be minimum three parties in an Intermediary transaction.

(ii)  There are two distinct supplies in case of provision of intermediary services i.e. (i) main supply, between the two principals, which can be a supply of goods or services or securities; and (ii) Ancillary supply, which is the service of facilitating or arranging the main supply between the two principals.

(iii) Intermediary service provider to have the character of an agent, broker or any other similar person: The use of the expression “arranges or facilitates” in the definition of “intermediary” suggests a subsidiary role for the intermediary. It must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply. Thus, the role of intermediary is only supportive.

(iv) Intermediary does not include a person who supplies such goods or services or both or securities on his own account: It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal to principal basis, the said supply cannot be covered under the scope of “intermediary”.

(v) Sub-contracting for a service is not an intermediary service.

(vi) The specific provision of place of supply of ‘intermediary services’ under section 13 of the IGST Act shall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India.

Thus, while the aforesaid circular provides some clarity on various aspects of the Intermediary Services. Having said that various legal issues are still left open despite the abovementioned circular.

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1. 1. Cunningham, M. T. & Turnbull, P. W., 1982, “Inter-organizational Personal Contact Patterns”, in Håkansson, H. (ed.), International Marketing and Purchasing of Industrial Goods.
   2. Place of Provision of Services Rules, 2012 issued vide Notification No. 28/2012 – Service Tax dated June 20, 2012.
   3. Notification No. 14/2014-S.T., dated 11-7-2014 amending Place of Provision of Services Rules, 2012.
   4. Paul Merchants Ltd. v. CCE, 2013 (29) S.T.R. 257 (Tribunal)
      GAP International Sourcing (India) Pvt. Ltd. v. CST [2014] 52 taxmann.com 528/2015 (37) S.T.R. 757 (New Delhi-CESTAT)
      Blue Star Ltd. v. CCE, Bangalore [2009] 18 STT 34/[2008] (11) S.T.R. 23 (Bang.-Trib.)
      ABS India Ltd. v. CST, Bangalore, [2009] (13) S.T.R. 65 [2008] 17 STT 223 (Bang.-CESTAT) Lenovo India Pvt. Ltd. v. CST, Bangalore, [2010] (20) S.T.R. 66 [2009] 21 STT 134 (Bang.-CESTAT)
      National Engineering Industries Ltd. v. CCE, Jaipur, 2008 (11) S.T.R. 156/17 STT 398 (New Delhi-CESTAT).
   5. Place of Provision of Services Rules, 2012; Rule 2(f).
   6. Taxation of Services: An Education Guide June 20, 2012, TRU, CBEC.
   7. Place of Provision of Services Rules, 2012; Rule 9 read with Rule 2(h).
   8. Integrated Goods and Services Tax Act, 2017; Section 2(13).
   9. Integrated Goods and Services Tax Act, 2017; Section 13(8)(b).
   10. Entry 12AA of the Notification No. 20/2019 issued by the Government of India, Ministry of Finance.
   11. Black’s Law Dictionary, 9^th Ed. (Page 250).
   12. Collector of Central Excise, Bombay v. Maharashtra Fur Fabrics Ltd. 2002 Taxman 718/2002 (145) ELT 287 (SC)
       Indian Oil Corporation v. A.P. Industrial Infrastructure Corporation Ltd. (2016) 14 SCC 655
       Union of India v. Alok Kumar (2010) 5 SCC 349
       Mangalore Electric Supply Co. Ltd. v. Commissioner of Income Tax AIR 1978 SC 1272.
   13. GoDaddy India Web Services Private Limited [2016] 67 taxmann.com 324/54 GST 681 (AAR-New Delhi).
   14. Commissioner of Service Tax v. Gupshup Technology India Pvt. Ltd. 2018 (9) GSTL 305 (Trib-Mum.)
       Evalueserve.com Pvt. Ltd. v. Commissioner of Service Tax, Gurgaon [2019] 106 taxmann.com 74/(365) E.L.T. 546 (Trib. – Chd.).
   15. In Re: Vservglobal Private Limited, [2019] 104 taxmann.com 423/(26) G.S.T.L. 127 (App. A.A.R. – GST – Maharashtra).
   16. In Re: Global Reach Education Service Pvt Limited; [2018] 96 taxmann.com 107(15) G.S.T.L. 618 (App. A.A.R. – GST-West Bengal).
   17. Airbus Group India (P.) Ltd. In re [2021] 128 taxmann.com 121/87 GST 80/54 GSTL 194 (AAR-Karnataka)