The intermediary service has been a controversial subject in cross border trade, since the days of Service Tax. The foremost controversy is on the outbound leg, as in if the services qualify as ‘intermediary services’, the place of supply becomes ‘the location of supplier of services’, and therefore ousting the services from the purview of export of services [Section 2 (6) of the IGST Act].
While the entire definition is ambiguous and pending constitutional litmus, the definition contains an inter alia exclusion of ‘own account’, which if applied correctly could provide a window of opportunity to various players to preserve the export status. The CBIC vide Circular No. 159/15/2021-GST (‘the Circular’) tried to provide certain clarity, but there are still gaps that need to be covered. In this backdrop, this article examines the ‘own account exclusion’.
As per Section 2 (13) of the IGST Act, ‘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.
Essentially intermediary is a person ‘who facilitates or arranges’ the supplies of certain goods or services (main supplies), however, if “such” main supplies are supplied by that person on “his own account” then his services get excluded from intermediaries scope. The person might be assuming agency position commercially i.e. he might only be arranging/ facilitating the supplies sought by a recipient, however, if he undertakes supplies on his own account, he stands excluded from intermediary services under the GST Law.
For example, a commission agent (A) who procures goods at INR 100 (from B) and re-sells the same at INR 110 (to C) is not an intermediary, despite him arranging procurement of goods for C from B. Inherently A understand his position as that of agent, however since he has assumed the status of main supplier (principal) he no longer remains an intermediary for GST purpose.
In the above example, we proceeded with a vanilla example wherein A bought and re-sold the goods, however, the true construct of ‘own account’ is more complicated than that. ‘On his own account’ is understood as “for one’s own sake; on one’s responsibility” [American Express Bank Ltd. v. Calcutta Steel Co., (1993) 2 SCC 199 (209), pp 19]. It, therefore, appears that the term is associated with responsibilities, disclosure, and representations made by the person. If facilitator/ arranger deals with the contracting parties in principal capacity then it can be said that he is supplying services on his own account. The ideology is specifically supported by para 3.4 of the Circular.
The next question that follows is what is the threshold of ‘responsibilities, disclosure, and representations’? In Comparex India Pvt Ltd. [STA 51221 of 2019], the Delhi CESTAT had upheld the own account status based on following observations;
Further guidance could be taken from contract law, a summarization of tests could be found in Gujarat High Court decision in Varsha Engineering Private Ltd. vs Vijay Traders (AIR 1983 Guj 166), i.e.
The ECJ in Henfling [Case C-464/10], and Beheersmaatschappij Van Ginkel Waddinxveen BV [Case C-163/91] had endorsed the view that ‘own account’ in the intermediary in VAT legislation should be determined in terms of the ‘agency’ test in national law.
Trading in services is a model used in numerous industries, most notably advertisement agencies, cargo agents, construction companies, telecom companies, internet service providers, R&D companies, etc. The intermediary person (A) while agreeing to provide a service to the end consumer (B) enters into a back to back arrangement with the person (C) who has the actual infrastructure to provide those services.
While evaluating the ‘own account’ aspect in services, often faced difficulty is the legal/ economic status of A. For e.g. whether a store selling pre-paid recharge of Airtel is providing telecom services to the customer or the store is re-selling certain services. And is it enough for him to label his services as not intermediary? Yes, he might be fully responsible towards the customer, yes he might tick some other boxes of principal, but his economic status is not that of a telecom company.
In another example, an RWA might act as principal for its residents when re-selling the electricity company, but if RWA is not legally authorized to re-sell electricity (see Srijan Realty Cal. HC 2019), could be a negative factor in the favour of principal status.
It is useful to refer to the Press Release dated 21 August 2017, wherein CBIC accepted the view that services of print media could be provided both under principal model as well as under agency model with both carrying different tax treatment. Still, the view would require a judicial sanctity for a general acceptance.
The upsurge of e-commerce has led to flourishing of the consolidation model. For e.g. a tour operator aggregates the services of a hotel, restaurant, and transport, sight-seeing and converts the output product as a separate product. While the output product might appear a separate product, the revenue authorities in their notices have reduced the position of aggregators to intermediary.
The allegation is mostly on the pretext that the customers understand the actual services and in some cases also know the actual service providers, therefore the intermediary is only facilitating/ arranging the services. In the matter of Global Transportation Services Private Limited [2016 (45) S.T.R. 574 (AAR)], the applicant was a provider of the transportation services (aggregating input services) and had pleaded its classification as principal to principal. The AAR while upholding the principal to principal status had based its arguments as follows;
Coming from a credible AAR authority (under service tax), and for its due reasons, the above tests appear to be exhaustive and good tests for adjudging the ‘own account’ criteria qua services.
Non-assumption of risk: The most peculiar cases are that of canalizing agencies (line producers, advertisement companies) who enter into tri-partite agreements. While they act as principal in virtually all aspects, they do not assume any responsibility for defective performance, which is transferred to the actual supplier as it. This non-assumption of risk for defective performance certainly impair the own account exclusion, but again the question still looms large over the threshold.
A buying house (generally found in textile sector) can work under two models under the commission model (by charging GST) or under P2P model by buying goods from Indian manufacturers and selling to overseas customers at profit. The P2P model is also becoming more and more first choice for overseas customers for various commercial reasons, thus necessitating the buying houses to go for P2P model.
But P2P model has another sort of complexity about it, such that the Indian manufacturers who are willing to supply want to claim export status of their own (reasons which may include availability of export benefits, credit facility, status holder, demonstration benefits, etc.). And therefore these manufacturers prefer to file shipping bill on their own count (billing to buying house and shipping goods overseas). This leaves the situation of buying-house uncertain as to the nature of their supplies i.e. whether it is export, local supply, or drop shipment.
Essentially from a macroscopic view, the buying house is indeed an intermediary, but he has altered situation to own account by carrying necessary responsibilities and risk. So while he is admittedly an arranger but of supplying main supplies “on his own his account”, but the catch is whether the main supplies are supply of goods or supply of services?
The results are very dichotomous such that on first glimpse it looks that the buying house is the supplier of goods, but on another plank ‘trading in goods’ is again a service of its own kind [see Section 66D (e) here]. If the supply is considered as supply of services, buying house can claim export status, but if it is considered as supply of goods, then due to gap in POS rules of goods, the transaction could be considered as taxable supply .
It is often the case between related parties sitting cross the border, utilizes their counterpart in the other country for one or the other reasons. Suppose an overseas company (OC) sends its employee in India for a certain project. During his stay in India, the Indian company-related party (IC) facilitate the employee for food, accommodation, transportation, internet etc., and in the end, takes reimbursement of all the costs from the OC.
There are two sets of overlapping controversies here firstly whether at all there is a supply. The GST law on definition of “services” [Section 2(102)] is yet to be developed, but considering the wide ambit of this definition, it brings into within its fold all ‘support/ facilitation’ element, even if it is a minuscule one. And the pure agent exception in Rule 33 is rigid that this transaction is not likely not to qualify for pure agent deduction .
Secondly, if at all there is a supply, is it supply as agent or as principal. In the employee example above, it is hardly unlikely that OC might even know who all the service providers for food, accommodation, transportation. Further, the contract performance of vendors is towards IC. IC has the right to sue for defects etc. Therefore IC is not dealing as agent of OC, but IC is acting on its own account when re-supplying services to OC [see for reference para 7.2 of ICU Medical India LLP 2020 (43) GSTL 85]
Therefore the correct play is that IC procures input services and avail ITC of GST charged (if any) and thereafter invoice to OC [charging output GST or not charging (if it qualifies as export)]. However, it is found in most cases that IC are treating the transactions as passive transactions (not taking credit and not charging output GST).
Another controversial area that has been fortunately dealt with by the Circular is sub-contracting. Para 3.5 of the Circular specifically states that sub-contracting is an exclusion to the intermediary. The supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors.
Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers, and therefore, not an intermediary. This circular resolves the controversy for the service providers who are supplying services that comes under general place of supply rules. But care should be taken in case of services of a kind covered under place of performance.
For e.g. OC has a contract to provide repair of goods to an IC (other than aircraft and vessel), OC in turn has sub-contracted this to another Indian vendor (IV). If the supply is construed as ‘own account’ supply, the POS of both legs would be determinable under Section 13 (3) (a) of the IGST Act. In such case, GST charged by IV to OC becomes a cost in as much as OC is not entitled to take ITC thereof. Proper planning is the only resolve here.
While it is true that the Circular has provided much need clarity in, validating that P2P qualifies as exclusion to intermediary services. However, there remains number of implicit issues for the reason that agency test is a complicated exercise. The contracts (where they exist) are found to be lacking relevant clauses which could validate the ‘own account status’. The revenue authorities have often latched to this deficiency in the contract and various refunds are stopped, tax has been demanded, relying upon one or two of the boilerplate clauses. The contract documentation should therefore be a concrete and validated one.
(Author can be reached at [email protected])