Background
In October 2014, the service tax law was amended to widen the tax base by including agents/ brokers engaged in facilitating sale of goods between two persons.
The POS of an intermediary was amended in POS Provisions to introduce a deeming fiction to treat the location of the intermediary in India as the POS, by denying the real time destination of supply of service, which is outside India.
The primary object was to tax Indian subsidiary companies that helped their foreign counterparts to directly sell goods to Indian customers, despite netting CFE earnings.
Legacy dispute:
The definition of the term ‘intermediary’ as existed in service tax law is the same as in GST law.
The definition in both laws provides that ‘intermediary’ means any person who arranges or facilitates supply of goods between two persons.
However, a valid question here is whether sales agents who are merely marketing or promoting the goods of ultimate seller in general would be an ‘intermediary’.
The Tribunal has dealt favorably in such issues under service tax and provided some relief to the taxpayers.
Given the varied industry practice and the fine difference in case of a normal sales agent vis-à-vis an intermediary, the issue cannot be expected to be settled soon.
GST Law and its strange Complexity
Under GST, tax is levied on the taxable supply of goods/services. Tax is applicable on the taxable services supplied in India.
In the GST regime, intermediary services by Indian suppliers to foreign principals are taxed to GST. In common parlance, any person who enables the supply of goods/services between two persons, is considered as intermediary.
There has been a lot of confusion regarding tax implications on the pre-sales and post-sales services vs intermediary services done by Indian suppliers to foreign customers.
GST provisions were drafted continuing the old practice of taxing intermediary services provided by Indian companies to their foreign counterparts/customers.
The place of supply in such scenario is prescribed in Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017, as the location of supplier is India.
Accordingly, Indian intermediaries are required to pay tax on services when provided in India as it existed in the past service tax regime. Be that as it may.
The dual GST and the difficulty in deciding the nature of tax applicable to Intermediary services
Given the dual GST in India, it has become complicated to identify whether a taxpayer should discharge intra-state or inter-state tax, as compared to the service tax days.
Having said that, the next most important thing answer to find will be, in the event of the tax to be discharged being held as an inter-state tax all right, whether such services will amount to export of services or not?
The said issue needs to be examined in the light of legal provisions and the recent decision of the Gujarat High Court in the case of Material Recycling Association of India [2020 VIL 341 GUJ].
The petitioner in above case challenged the constitutional validity of Section 13(8)(c) of the IGST Act (determining the place of supply for intermediary) primarily on the grounds of arbitrariness and territorial jurisdiction.
However, what is alarming for the industry is not only the fact that Court dismissed the petition, but some of the arguments and observations made on the sidelines of the judgment.
Before, delving deep into the subject, let us examine following aspects which have a strong bearing on the issue:
- Two key ingredients which determine the transaction as “inter-state” vis-à-vis “intra-state” are: (i) location of supplier and (ii) place of supply.
- As per Section 7 of the IGST, where location of supplier and place of supply are in two different States, it is an inter-state supply.
- Similarly, as per Section 8 of the IGST Act a supply is intra-state supply, where location of supplier and place of supply are in the same State.
- Further, as per Section 7(5)(c) of the IGST Act if a supply made in India is not an intra-state supply it would be an inter-state supply.
Intra-state or Inter-state Tax Applicable- A live debate?
To reiterate, Section 13(8)(c) of the IGST Act determines the place of supply for intermediary as the location of supplier.
At first blush one would conclude that in case of intermediary services, the supply would always be an intra-state supply, since place of supply would coincide with the location of supplier.
The petitioner, while challenging the constitutional validity of the above provision, canvassed similar argument before the Court that the supply of intermediary services provided by Indian companies to its foreign customers would amount to ‘inter-state supply’.
The High Court decided the matter in light of above submission and held that such transaction is an ‘intra-state supply’.
Let us now go through the other connected provisions under GST. Section 8(2) of the IGST Act provides that a supply would be an ‘intra-state supply’ when the supplier and place of supply are in same State.
However, a closer look at Section 8(2) provides a special condition attached to it which reads as ‘subject to the provision of Section 12, supply of services……’
The provision begins with the term ‘subject to’ thereby giving a meaning that Section 8 is inextricably conditional upon Section 12. The Supreme Court has held in many cases that the use of words ‘subject to’ is to effectuate intention of legislation and the correct meaning would be ‘conditional upon’.
Thus, in other words, Section 8 does not have its own identity unless Section 12 is invoked. Section 12 of the IGST Act, deals with various scenarios for determining the place of supply of services.
However, Scope of Section 12 is restricted only to determine nature of supply of service where both supplier and recipient are located in India.
To the contrary, where either of the parties is situated outside India, the place of supply would be governed by Section 13.
Hence, in case of ‘intermediary services’ provided by an Indian company to foreign customer, the same is covered under Section 13(8)(c) of the IGST Act.
Therefore, in cases where intermediary service is provided by an Indian supplier to its foreign customer, it can be said that the said transaction does not qualify as ‘intra-state supply’ in terms of Section 8(2), since the place of supply in this case is not determinable under Section 12.
If the answer to the above is in the affirmative, the residuary provision i.e. Section 7(5)(c) has to be called to the rescue of the center from having to secede its taxing jurisdiction to the state as it would otherwise turn an intra-state transaction and therefore the legislature is compelled to deem it an inter-state supply much against the underlying purport of Sec 7(5)(c).
The Gujarat High Court in Mohit Minerals case [2020 (33) ELT 321 Guj] while dealing with the applicability of IGST on ocean freight in the hands of Indian importers held that Section 13 of IGST Act is no doubt an option to explore whether the transaction can be held an inter-state supply under Section 7(5).
But, the Court further held that Section 7(5)(c) is a residuary clause intended to capture any substantial transaction which should not escape tax net .
But at the same time in the opinion of the Author, legislature must act within the field of its taxation allotted under Article 246A(2) read with Sec 269A(1)&(5) without traversing into the common taxing jurisdiction set out under Article 246A(1) where the states are also a part and any exrtra-jurisdictional act will be seen as confiscatory of the powers of the state.
Indeed, Section 7(5)(c) intends to cover any supply in taxable territory i.e. India in contra distinction with a deemed place of supply as in India.
In any case, the term neither ‘supply’ is defined in the constitution nor ‘supply in taxable territory’ is defined under the GST Acts.
Also given the nature of residuary provision badly entangled with the fact that both supplier and place of supply are located in India, the said transaction may not fit within the fours of Section 7(5)(c).
Obiter dicta or a Binding Precedent
Certainly, it would be a relevant to take note of the above discussed legal position in direct light of the ruling given by the Gujarat High Court in the case of Mohit Minerals Vs UOI.
It should be appreciated that the High Court had given its decision on constitutional validity of Section 13(8)(c), in so far as it relates to place of supply for intermediary services.
The question whether the said transaction should qualify as inter-state or intra-state supply was no doubt the main matter before the court.
But it is still possible to think that the other view held by the Court while dealing with the matter that it is not merely an observation made in the passing about the purport of Sec 7(5)(c) but in the nature of a binding precedent in understanding the scope of the said deeming provision Sec7(5)(c), to be used exceptionally as suggested therein.
It may not be therefore correct to regard it as an ‘Obiter’ but a binding precedent, especially when the observation was made particularly while analyzing the constitutional validity of Sec 13(8)(c) in so far it related to determination of place of supply for intermediary services.
Author’s End Note
While the legacy issue of sales agent vs. intermediary is still continuing on one hand, the above dispute under GST is also further adding to it.
It is high time the 139th report of Rajya Sabha made in December of 2017 on intermediary services to be treated as exports, is taken note of by the all-powerful GST council, which it has ignore all along. If treated as exports it could attract more investments and accelerate CFE earnings.
In the Budget speech the Hon’ble Finance Minister of India Smt. Nirmala Sitharaman has assured on the floor of the Parliament that the government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.
The levy of GST on intermediary when receipts are in CFE is also a kind of harassment faced by such taxpayers as they have already either shifted their bases from India or made direct sales through their counterparts in India.
To be more competitive in the international markets as with other countries like EU, Middle East, Singapore etc. where there is no such treatment or burden taxes in deference to the WTO/OICD norms, must be our country’s endeavor as well we wish.
In the above narrated background, it is time the Government followed the right taxation policy and conferred the benefits of exports applicable to sales and Import/Export Intermediaries quickly is the humble suggestion of the Author on behalf of the Export business to be able to compete effectively in the post pandemic economic world
K.Srinivasan (IRS)
January, 21, 2021.
Author Bio
If you go back to Income Tax deduction under 80 O till mid 90s available to intermediary services , there were lots of disputes between UOI and assesses . you will have many decisions by different courts.