GST on Intermediary Services- Gamut of Clarifications and Litigations!!

The litigations pertaining to “intermediary services” existed under erstwhile service tax legislation and the legacy continues even under the Goods and Services Tax ( GST ) regime. There has been a plethora of judicial pronouncements and advance rulings with divergent views on the subject matter. Even though the Central Board of Indirect Taxes and Customs (CBIC) has issued various clarifications from time to time in an attempt to resolve the dispute, the ambiguity still persists.

Prima-facie, the “Intermediary services” supplied by the Indian service provider to the Foreign Entity is exigible to GST. The term “Intermediary service” has been defined to include a broker, agent or any person by whatever name or called, who arranges or facilitates the supply of goods / services / both between two or more persons but excludes any person supplying on his own account. It can be derived that the role of agent is limited to facilitation only and undertakes the transaction on behalf of another and not on his own account. Hence, the provider of the main services clearly stands excluded from the definition of “intermediary”. At this juncture, it is imperative to note that merely using the nomenclature “agent” in the service agreement does not necessarily make the service provider as facilitator or intermediary. The roles and responsibilities enumerated in the service agreement shall determine as to whether the service provider can be interpreted as intermediary or not.

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The use of the expression “arranges or facilitates” in the definition of intermediary suggests a subsidiary role for the intermediary. The intermediary arranges or facilitates some other supply, which is the main supply, and does not himself provide the main supply. Thus, the role of intermediary is only supportive. It can be derived that in cases where complete risk and responsibility are entrusted / sub-contracted the same shall qualify as providing supply on its own account.

Recently, CBIC has issued a very important clarification^[1] as to why data hosting services provided by an Indian entity to cloud computing service provider located outside India shall not be regarded as “intermediary services”. The clarification highlights certain very important aspects / ratios to be applied to determine the taxability.

Prima-facie the clarification was sought as to whether the data hosting service provider qualifies as “intermediary” between the cloud computing service provider and their end customers / users / subscribers. The key aspects and observations from the clarification are discussed below:

1. The captioned circular reiterates that a person who arranges or facilitates the main supply of goods or services or both and has not involved himself in the main supply on his own account is considered as ‘intermediary’.
2. It explains that the cloud computing service providers generally enter into contract with data hosting service providers to use their data centres for hosting cloud computing services. Data hosting service provider either owns premises for data centres or operates data centres on leased premises, procures infrastructure and human resource, handles operations like infrastructure monitoring, IT management and equipment maintenance, etc. to provide the said supply of data hosting services to the cloud computing service providers. Importantly, the data hosting service providers do not deal with end users/consumers of cloud computing services and may not even know about the end users.
3. The end users/ subscribers access cloud computing services seamlessly over the internet through technology hosted on data centers. Hence, there appears to be no contact between data hosting service providers and the end users/ consumers/ subscribers of the overseas cloud computing service provider. Thus, it is observed that the data hosting service provider provides data hosting services to the cloud computing service provider on principal-to-principal basis on his own account and is not acting as a broker or agent for facilitating supply of service between cloud computing service providers and their end users / consumers.
4. Accordingly, it was clarified that in such a scenario, the services provided by a data hosting service provider to its overseas cloud computing service providers cannot be considered as intermediary services and shall qualify as export of service as per the prescribed provisions.

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The clarification makes it amply clear that even if three parties are involved in a transaction / arrangement, it may not necessarily mean that the service provider is acting as an agent or intermediary between two parties. In the present scenario mentioned in the clarification, the service provider had no direct connection/arrangement with the end customer/user. Since there was no connection with the end user, the question of arranging/facilitating services between two parties does not arise.  

In one more clarification^[2], recently, the CBIC has attempted to clarify GST implications on advertising services provided by Indian service providers to Foreign entities as to in which scenarios the same qualifies as “intermediary services”. The facts and key takeaways from the clarification are discussed below:

1. The Foreign entity hires an advertising agency in India for advertisement of its goods or services and may enter into a comprehensive agreement with the advertising agency encompassing all the issues related to advertising services ranging from media planning, investment planning for the same, creating and designing content, strategizing for maximum customer reach, the identification of media owners, dealing with media owners, procuring media space, etc. for displaying / broadcasting / printing of advertisement including monitoring of the progress of the same. In such a case, the advertising agency provides a one stop solution to the client who outsources the entire activity to the agency.
2. It has been clarified that the agreement, in the instant case, is in the nature of two distinct principal-to-principal supplies and no agreement of supply of services exists between the media company and the foreign client. The advertising company is not acting as an agent but has been contracted by the client to procure and provide advertising services, including resale of media space on its own account and does not fulfil the criteria of “intermediary”.
3. Further, the clarification also describes a scenario where the advertising company located in India merely acts as an agent of the foreign client in engaging with the media owner for providing media space to the foreign client. In such cases, the agreement for providing media space and broadcasting the advertisement are directly provided by the media owner to the foreign client and the advertising company is merely facilitating the provision of the said services. Consequently, in such cases, the advertising company is an "intermediary" as per the provisions of GST law.
4. The clarification provides a clear demarcation as to provision of comprehensive services on principal-to-principal basis vis-a-vis acting only as a facilitator between foreign entity and media owner for providing media space and broadcasting.

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In a nutshell, on conjoint reading of GST provisions, clarification issued by authorities and judicial precedents (except few advance rulings), the facts and circumstances of each arrangement will play a pivotal role in determining the nature of supply. It is imperative to evaluate the nature of services, entrusted risk and responsibilities and other conditions to determine the tax applicability / export benefits.

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