The scope of intermediary services has been under constant debate both under the service tax regime and after the introduction of GST. A writ petition is also pending before the Gujarat High Court challenging the tax treatment of intermediary services on the ground that the provision imposing tax on intermediary services provided to a recipient outside India creates an artificial deeming fiction to tax an export of service[1].
The decision of the Hon’ble Authority for Advance Ruling in VSERVGLOBAL PVT LTD[2] which has been confirmed by the Appellate Authority for Advance Ruling has resulted in further confusion in this space on expanding the scope of intermediary services to all back office operations which would severely impact the BPO industry which is a major foreign exchange earner and a large scale employer.
In order to clear the air, pursuant to the decision of AAR, based on representation received from the Industry, the Government of India through Ministry of Finance has issued Circular No.107/26/2019-GST, dated July 18, 2019 (Circular) to clarify the activities provided by service providers in IT/ ITES industry which would amount to ‘Intermediary’ services.
Before analysing the Circular, it is important to understand the background in which the Circular has been issued.
Advance Ruling in VSERVEGLOBAL
In the case of VSERVGLOBAL PVT LTD (Supra), the assessee entered into an agreement with an overseas entity to provide back office administrative and accounting services. Assessee is required to coordinate with buyers, sellers and other necessary parties for execution of purchase and sell contract entered into by the client. It was also stated that the assessee has no role until the purchase /sale order is finalized by the overseas client. The assessee comes into picture only after finalization of purchase / sale order by a client to provide back office support.
The Authority for Advance Ruling rejected claim of assessee that principal supply is ‘back office support’ and ‘accounting’ and other services are only ancillary. The Hon’ble AAR held that activities undertaken by the applicant are for and on behalf of the clients to facilitate supply of goods and services between their clients and their customers. The assessee is clearly covered by the definition of “intermediary”. It was held that the provisions pertaining to ‘place of supply’ in case of intermediary services as provided in sub-section 8 of section 13 are relevant; that such services do not qualify as “export of services” as defined u/s 2(6) of the Act and thus not a “zero rated supply” as per section 16(1) of the IGST Act, 2017.
Subsequently, the Hon’ble Appellate Authority for Advance Ruling confirmed the order passed by the Authority for Advance Ruling[3]. The Appellate Authority while considering the submission of the Assessee that the Ruling of the Authority for Advance Ruling would impact the BPO industry observed as follows:
“38. The argument of the appellant that the impact of AAR ruling will result in subjecting the back office operations to GST which will affect the industry engaged in supplying such services to its overseas clients, is ill-found and misconstrued. The ruling given by AAR is always applicant specific and based on the records available before the Authority. We have also perused the agreement between the Appellant and its Client which was also the subject matter of proceedings before the AAR. The said agreement in no way is restricted to the scope of only the back office operations of the Appellant, rather, it goes beyond the same and is in the nature of intermediary as discussed above. Therefore, there does not appear to be any intention of the AAR to tax the back operation of the Appellant and the Ruling of AAR which is based on a specific agreement can not be generalized.”
While the Appellate Authority was of the view that the Ruling would not impact the industry, improper understanding of the ruling and media reports surrounding the decision created confusion in the industry as the companies will not be able to absorb the demand of 18% for the services provided to overseas customers.
Recent Circular on Intermediary Services
Accordingly, based on the representation received from the Industry, the Circular has been issued to clarify certain queries raised by the industry in the form of illustration.
| Scenario | Clarification |
| Supplier of ITeS services supplies back end services
In the case of supply of ITeS services to customers of his clients on clients’ behalf, but the services are actually supplied by the service provider on his own account |
The supplier will not fall under the ambit of intermediary where these services are provided on his own account by such supplier
The supplier will not be categorized as intermediary |
| The supplier of backend services located in India arranges or facilitates the supply of goods or services or both by the client located abroad to the customers of client.
Such backend services may include support services, during pre-delivery, delivery and post-delivery of supply (such as order placement and delivery and logistical support, obtaining relevant Government clearances, transportation of goods, post-sales support and other services, etc.). |
The supplier of such services will fall under the ambit of intermediary under the IGST Act as these services are merely for arranging or facilitating the supply of goods or services or both between two or more persons. |
| The supplier of ITeS services supplies back end services, as listed in para 4 above, on his own account along with arranging or facilitating the supply of various support services during pre-delivery, delivery and post-delivery of supply for and on behalf of the client located abroad. | In this case, the supplier is supplying two set of services, namely ITeS services and various support services to his client or to the customer of the client.
Whether the supplier of such services would fall under the ambit of intermediary under sub-section (13) of section 2 of the IGST Act will depend on the facts and circumstances of each case. |
The following principles emerge from the Circular:
- Where the supplier provides the services on his own account then such service shall not qualify as intermediary service.
- Where the supplier merely facilitates the supply of goods or services, does not provide the services on his own account including support services, during pre-delivery, delivery and post-delivery of supply will be considered as ‘intermediary service’.
- The supplier provides ITes service along with other support services, whether the principal supply is ITes service or intermediary service would depend on the facts of each case.
Thus, the circular only reiterates the finding of the Authority for Advance Ruling in Vserve Global.
The circular does not lay down any specific guidelines to examine whether backend services provided by Indian companies to its clients located abroad would qualify as export of services.
Though the Circular only states the obvious that IT & ITES services provided by the assessee would not be considered as intermediary service, the Circular has definitely given much required comfort to IT Sector.
[1] Special Civil Application No. 13238 of 2018
[2] 2018-TIOL-263-AAR-GST
[3] V SERV GLOBAL PVT LTD [2019-TIOL-37-AAAR-GST]
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