Numerous taxes, multiple assessments, and unnecessary procedural burden had necessitated the advent of a single levy which subsumed the prevailing taxes. Thus, GST was implemented with much fanfare. However, despite its ambitious beginning, GST is turning out to be, as the adage goes, merely an ‘old wine in a new bottle’. Keeping the teething problems aside, it appears many contentious legal issues in the old regime have been carried over to the new regime. One such contentious issue is the scope and ambit of the term ‘Intermediary’, particularly with respect to the ‘export of services’.
The litigiousness while interpreting ‘Intermediary’
Interpretation of ‘Intermediary services’ often ends in a legal battle. The reason is rather easy to comprehend. It has always been a government policy to not export local taxes so that exporters in India are not placed at a disadvantageous position as opposed to their counterparts abroad. This is a global principle. Thus, GST is not to be charged on goods or services exported ‘from’ India. However, contrary to this policy, intermediary services, even if rendered to a foreign entity, have been brought within the tax net.
A transaction is ‘zero-rated’ by the virtue of Section 16(1) of the Integrated Goods and Services Tax Act, 2017. The relevant provision is extracted herein under:-
- (1) “zero-rated supply” means any of the following supplies of goods or services or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
Since GST is fundamentally a ‘Destination based tax’, in the case of export of service, the service ought not to be taxed if the service provider is located in India and the service recipient is not within the Indian jurisdiction. For the service to qualify as “export of service”, it needs to satisfy the conditions mentioned in Section 2(6) of the IGST Act, 2017. The definition is as follows:
(6) “export of services” means the supply of any service when,––
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and
(v) 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;
One of the pre-requisites for “export of service” is that the place of supply falls outside India. As per Section 13 (2) of the Act, the place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services. In other words, sub-sections (3) to (13) are exceptions to the general rule that the place of supply shall be the recipient of services. Inter alia other sub-sections, sub-clause (b) under Sub-section (8) of Section 13 alone is of relevance to the discussion in hand and is extracted hereinunder.
(8) 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 aircraft and vessels, up to a period of one month.
A perusal of the above-extracted provision of law clearly establishes that in so far as an ‘Intermediary’ is concerned, the ‘Place of Supply’ shall be the ‘location of the supplier of the service’ notwithstanding the fact that the service is rendered to an entity abroad. Therefore, it is all the more important to give a narrow interpretation of the term ‘intermediary’.
While that being the law on the levy, there is a tug of war where on one hand, the assessee seeks shelter under Section 16(1)(a), and on the other, the assessee is brought under the definition of ‘Intermediary’ and subjected to tax by determining the ‘Place of Supply’ as per Section 13(8)(b) of the Act. Thus, the gravamen of the dispute boils down to the determination of whether an entity would classify as an ‘Intermediary’ under Section 2(13) of the Act or otherwise.
The scope and ambit of “Intermediary”
The definition of the term “intermediary” as per Section 2(13) of the Act is reproduced below;-
2(13) “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;
A bare perusal of the above provision, however, appears to suffer from the vice of being overbroad and vague. At first glance, the definition appears to encompass within its meaning any transaction with two or more parties. At least, such vide interpretation has been given by the Authority for Advance Ruling under GST for the term “intermediary” in several instances. Therefore, it becomes all the more imperative to decode every word of the definition.
The definition of ‘intermediary’ is an inclusive one. It unambiguously states that an intermediary would include a ‘Broker’ or an ‘Agent’ or any ‘Other person’. The essential requisite seems to be ‘facilitation of supply of goods or service between persons’.
Firstly, as per Section 182 of the Contract Act, 1872, an ‘Agent’ is a person employed to do any act for another or to represent another in dealings with the third person. An ‘agent’ is also a person employed to do any act for another or to represent another in dealings with the third person.
Secondly, as far as ‘Broker’ is concerned, no enactment specifically provides for a definition to take a cue from. However, the Full Bench of the Madras High Court in Kandula Radhakrishna Rao And Ors. vs The Province Of Madras not only defined ‘Broker’ but also made a clear distinction from a ‘Commission Agent’. The germane portion the Full Bench is extracted herein under;-
“…………….A broker is an agent employed to make a bargain for another and receives a commission on the transaction which is usually called brokerage. He has usually neither the custody nor the possession of the goods. It is the broker’s duty to establish privity of contract between the principal and the third party. The broker cannot sell in his own name nor can he sue on the contract. A commission agent, on the other hand, of the class to which the plaintiffs belong, is not like a broker. He has almost invariably, custody or possession of the goods, actually or constructively.”
Thirdly, the words ‘any other person’ specified in the statute has to be construed ‘ejusdem generis’ with ‘Broker’ or ‘Agent’ and not of a different class. To identify the class of persons contemplated under the statute, the legislature in its wisdom has deliberately added the phrase ‘arranges or facilitates the supply of goods or services or both, or securities, between two or more persons’. The aforesaid phrase ought to be read conjunctively with the first portion of the definition. This is so as to exclude any person who ‘arranges or facilitates the supply of service’ but does so on an independent basis and not on a representational capacity such as that of an agent or a broker. In other words, any person who provides service on a ‘principal to principal’ basis is excluded from the meaning of ‘intermediary’.
Nevertheless, Section 2(13) has pointedly incorporated a rider into the definition wherein the legislature specifically excludes ‘a person who supplies such goods or services or both or securities on his own account.’ The ride appears to be an exception in one way.
The divergent approach adopted by the Authority for Advance Ruling under GST
Notwithstanding that the Authority for Advance Ruling does not have the necessary jurisdiction under Section 97(2) of the CGST Act, 2017 to decide on “place of supply”, there have been several instances wherein different benches of the AAR have decided ‘place of supply’ by interpreting the term “intermediary services”.
It is to be noted that several of these issues have already become final as far as the erstwhile service tax regime was concerned. It is also to be noted that the pari materia definition of ‘intermediary’ under the Place of Provision of Service Rules, 2012 is similar to the one under the IGST Act, 2017. However, despite the above, these issues have been agitated before the AAR again.
For instance, in the case of In re Global Reach Education Services Pvt Ltd, the issue before the AAR was whether the marketing service and the university-specific support services provided by the supplier would amount to ‘intermediary service’. The appellant-applicant therein was an education consultant in the business of promoting the courses offered by various foreign Universities on a contractual basis; remuneration was a percentage of the tuition fee paid by the students. The aforesaid issue had already been settled under the erstwhile regime. However, the AAR held that the assessee was acting as a ‘recruiting agent’, and thus would fall within the meaning of ‘intermediary’. The various precedents under the service tax regime were distinguished by the AAR on the basis of semantics in the two definitions of ‘intermediary’.
Similarly, sales promotion activity and pre-sale support services by an Indian Company to a parent company situated abroad have been a contentious issue since the enactment of the Finance Act, 1994. Under the erstwhile Export of Service Rules, 2005, these activities have been held to be ‘export of services’ in a number of decisions. After the advent of Place of Provision of Service Rules, 2012, a detailed ruling by the AAR in the case of GoDaddy India Web Services Pvt Ltd is oft-cited. In the aforesaid decision, the AAR examined the bundle of services provided by the Indian subsidiary to its parent company situated abroad. Such services included sales promotion, marketing, and liaison services. The AAR, after observing that there is no privity of contract between the applicant and the customers of the entity abroad, came to the conclusion that such services were being provided on a principal to principal basis. It was held that such services would fall outside the scope of “intermediary service”.
However, this position appears to have been overturned in the GST regime by the AAR and Appellate AAR in the cases of In re: McAfee Software (India) Pvt. Ltd and In re: Infinera India Pvt. Ltd. By giving a wide interpretation of the term “arranging” and “facilitating”, the AAR has brought such services into the ambit of “intermediary services”. In fact, in the former case, the AAR has peculiarly held that “Nothing in the definition of intermediary services excludes a facilitator working on principal to principal basis”. In the latter, there has been no examination of this test at all.
It is astonishing to note that even in cases where the supplier renders outsourced service/back-end service to global customers of the main supplier, such services have been termed to be ‘intermediary services’. In both, In Re: Vserv Global Pvt. Ltd and In Re: Asahi Kasei India Pvt. Ltd, the most important factor that appears to have been taken into account was whether the aforesaid suppliers had acted as a ‘liaison’ between the service recipient abroad and the customers of the service recipient. The tests laid down by various authorities in the previous regime such as the ‘test of agency’ and the ‘principal to principal’ test were not applied.
Constitution of AAR under the erstwhile Service Tax regime vis-a-vis the present GST regime.
Prior to 2017, the Authority for Advance Ruling was constituted under the erstwhile Section 28F of the Customs Act, 1962. The Authority constituted under Section 28F of the Customs Act was made applicable to the Central Excise Act, 1944, and the Finance Act, 1994 by virtue of Section 23A(b) of the CE Act, 1944, and Section 96A(a) of the Finance Act, 1994 respectively.
A perusal of Section 28F shows that a balanced approached appears to have been taken in the previous regime as far as the constitution of the AAR was concerned. The relevant portion is extracted below:
2) The Authority shall consist of the following Members appointed by the Central Government, namely:-
- a Chairperson, who is a retired Judge of the Supreme Court;
- an officer of the Indian Customs and Central Excise Service who is qualified to be a Member of the Board;
- an officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India.
Under the present GST regime, the constitution of AAR is as follows:
(2) The Authority shall consist of-
- one member from amongst the officers of central tax; and
- one member from amongst the officers of State tax,
to be appointed by the Central Government and the State Government respectively.
A perusal of the above provisions would patently reveal that the element of impartiality has been diluted in the present regime as the adjudicators happen to be representatives of the State and Centre, and not entirely neutral persons sans any conflict of interest. Albeit the fact that a representative of the Department acting as an adjudicator is not uncommon, it is only natural for one to wonder if the present transition can be attributed to the very large number of cases being decided in favor of the assessee.
What is even more baffling is the number of applications for advance ruling being filed by overzealous professionals. This is despite the AARs’ notorious penchant for giving adverse rulings.
In light of the ‘Intermediary’ conundrum, the CBIC issued a clarification vide Circular No. 107/26/2019-GST, dated 18 July 2019 attempting to clarify the position as far as Information Technology Enabled Services were concerned. Far from propounding any test, specific guidelines or criteria to determine the nature of service, the circular gave rise to even more confusion. Ultimately, the said Circular was also withdrawn in anticipation of unwarranted litigation.
Whilst India being the hub of the outsourcing industry, and with a rapid increase in the service industry extending secondary services to multi-national corporations, it is in the best interest of the economy that a solid test for the determination of an ‘intermediary’ is devised by the CBIC. It must also be borne in mind that the export industry that is vital for the economy would be adversely affected if the widest possible interpretation is given to the term ‘intermediary’. On the other hand, it may also discourage the outsourcing industry as an increase in tax will no longer make India a cost-cutting jurisdiction for corporations. Let alone the economic perspective, it is also imperative that a concrete solution is arrived to ensure certainty and uniformity in decisions.
The article is authored by Naveena Durairaj and Salai Varun, Advocates practicing at the High Court of Judicature at Madras. The views expressed in this article are personal.