Among many intricacies of GST moving around, one is about GST implication on the ‘export of services’ and ‘Intermediary Services’. Different GST treatment provided to these two supplies and lack of clarity in GST law dragged some taxpayers to the way of litigation. Lets us try to interpret this.
GST Law has defined these two supplies as mentioned below:-
1. As per section 2(13) of IGST Act, 2017 “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.
(For e.g Stock Broker, Commission Agent, Tour operator, Recovery Agent etc.)
2. Export Of Services
As per section 2(6) of IGST Act, 2017 “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; 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.
Keeping in my mind the above-mentioned provisions try to interpret the below example.
Example: M/s PQR Ltd. in Haryana facilitates services by way of arranging buyer on a remote basis to M/s XYZ Ltd. in London to sale goods of Rs.10 crore to Person E based in Chennai.
PQR Ltd. received Rs. 1 crore (1% of total order value) in convertible foreign exchange as commission income from XYZ Ltd.
In which category this transaction would fall either “Export of Services” or “ Intermediary Services” for PQR Ltd.?
In this case, We can see that supplier of service(i.e. PQR Ltd.) is located in India and the recipient of service (i.e. XYZ inc.) is located outside India, and even payment has been received by PQR Ltd. in foreign exchange but the most important condition which is the place of supply is not decided yet. To decide this let’s have a look at Place of supply provisions under GST:
As per Section 13 of IGST ACT, 2017. (1) The provisions of this section shall apply to determine the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.
(2) 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:
Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.
(8) The place of supply of the following services shall be the location of the supplier of services, namely:––
(b) intermediary services;
We have seen that the service mentioned in the above example is covered under special provisions of the place of supply as intermediary services and place of supply for the same is the location of supplier i.e. India.
Therefore the condition of the place of supply is outside India is not fulfilled and it cannot be considered as an export of services. It will be considered as intermediary services and PQR Ltd. has to pay CGST and SGST of Rs. 9 Lacs each.
On similar facts, Hon’ble Gujrat High Court decided in the case of Material Recycling Association of India Vs. Union of India & 2 others dated 24.07.2020 that it is an intermediary transaction as all prescribed conditions for a transaction to be termed as export of services is not satisfied. A transaction cannot be defined as the export of services on the ground that the mere recipient of service is located outside India.
Although the Government has introduced a new Entry No. 12 AA by Notification No. 20/2019-IGST Dated 09.09.2019 which states that In case of Services provided by an Intermediary when the location of both supplier and recipient of goods is outside the Taxable territory.
IGST shall be charged at Nil rate provided that the following documents shall be maintained for a minimum duration of five years:
1. Copy of Bill of Lading
2. Copy of Executed Contract between supplier/seller and receiver/buyer of Goods
3. Copy of Commission debit note raised by the intermediary service provider in the taxable territory from service recipient located in non-taxable territory.
4. Copy of Certificate of Origin issued by service recipient located in non-taxable territory.
5. Declaration Letter from Intermediary service provider in the taxable territory on company letterhead confirming that commission debit note raised relates to contract when both supplier and receiver of goods are outside the taxable territory.
But this notification covers only a limited scenario where the location of both supplier and receiver of goods outside the taxable territory. It indicates that exemption is provided only in case of the movement of “Goods” not “Services”.
Further, Government has issued a circular no. 107/26/2019-GST dated 18-07-2019, which clarified issues relating to Information Technology-enabled Services and Back-end services including support services of delivery. As per this circular ITes services is to be treated as “Export of services” and back end services are to be treated as “Intermediary Services”. Later on, this circular has been withdrawn ab initio vide Circular No.127/46/2019-GST dated 04-12-2019. The controversial phrase “on his own account” used in the definition of intermediary services has been tried to be clarified by this circular to some extent but not completely. Now, this circular has been withdrawn and again this question is unresolved. Due to this many litigations arose.
In Vserv Global (P.) Ltd. (2018)-AAR Maharashtra, Back office administrative and accounting support services including payroll processing provided to the overseas client by the applicant has been held as “Intermediary services” and place of supply of services is considered in India and GST is payable.
On the contrary, in Nes Global Specialist Engineering Services P Ltd. (2019)-AAR Maharashtra, It was held that administrative and support services supplied to a foreign client, where payment is received in foreign exchange is export of service.
Similarly in Go Daddy India Web services P Ltd.(2016), Assessee was providing marketing and promotion services and in addition assessee also providing services of supervision of call center services and payment processing services to its foreign principal. It was held that the place of supply of service is outside India and tax is not payable.
If we refer to the “CBE&C’s Taxation of services: An Education Guide” published on 20-06-2012: To determine whether a person is acting as intermediary or not, the following factors need to be considered:-
1. 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 authorise the intermediary to negotiate a different price.
2. Separation of Value: The Value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging.
3. Identity and Title: The service provided by the intermediary on behalf of the principal are clearly identifiable.
This article is an attempt to present the legal and judicial status of the difference between intermediary services and the export of services. Until we receive the specific clarification on this issue from the judiciary or Government, We need to take care of such transactions in the best way to avoid any further repercussions.