GST made its entry on 1st July 2017 in India and subsumed various center and state levy taxes in it. The central government also celebrated 1st anniversary of GST successfully recently. Therefore, it is a good time for us to analyse what has been achieved and what more could have been achieved. Though, GST is clear on various issues, there is need of clarification on various issues.
In this article, we are going to discuss the need for clarification in determining intermediary services as Intra-State or Inter-State where location of supplier or location of recipient is outside India. Let us begin with understanding the definition of intermediary services under GST.
As per Section 2(13) of Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as “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.
On the lines of charging sections under GST, Inter-State supplies is leviable to IGST and Intra-State supplies is leviable to CGST/SGST. So, to know whether intermediary services is leviable to IGST or CGST/SGST, let us discuss the nature of Intermediary Services.
Nature of Intermediary Services-
Section 8(2) of IGST Act defines that supply of services where the location of supplier or location of recipient is in same state or in same union territory, it would qualify to be as Intra-State supply but the same is subject to provisions of Section 12.
Section 12 shall apply to determine the place of supply of services where the location of supplier of services and location of recipient of services is in India. Section 13 shall apply to determine the place of supply of services where the location of supplier of services and location of recipient of services is outside India.
There is no specific provision to determine the place of supply of intermediary services in Section 12, therefore the general provisions contained in Section 12(2) would apply to determine the place of supply where the location of supplier and location of recipient in India. But, in contrast there is specific entry in Section 13 to determine the place of supply for intermediary services where the location of supplier of services or location of recipient of services is outside India.
Now, we are discussing whether intermediary services is Inter-State or Intra-State where the location of supplier or location of recipient is outside India as there is ambiguity on the same.
Let us suppose ABC Ltd. Located in Delhi provides intermediary services by way of acting as a commission agent for sale of products of its subsidiary ABC Inc. Is this supply of service by ABC Ltd. is leviable to CGST/SGST or IGST?
Considering the supplier is located in Delhi, the place of supply would also be Delhi as per Section 13(8) of IGST Act.
In the present transaction, the place of supply and location of supplier are in the same state. One may argue that this transaction would qualify to be as an Intra-State supply as per Section 8(2) of IGST Act. If we carefully see, lawmakers have used the words “subject to provisions of section 12” in Section 8 of IGST Act. The literal meaning of the term ‘subject to’ is ‘dependent upon’. Thus, when a provision is made subject to another provision, the former cannot override the later. Let us look at the legal implications of the words ‘subject to proviisons of’ as held by Hon’ble courts in various judgments.
In the case of South India Corporation(P) Ltd. Vs. Secretary, Board of Trivandrum and Another reported at AIR 1996 Supreme Court SC 207, the Supreme Court observed that the provision which is subject to other provision is placing that another provision to which it is made subject to in case of any disagreement in between two.
In case of Commissioner of Central Excise, Bhavnagar Vs Savrashtra Chemicals Ltd. Reported at 2007 (212) E.L.T 7(S.C), the court noticed the meaning of word ‘subject to’ is liable, subservient or affected by.
In case of K.RC.S Balakrishna Chetty and Sons and Co. Vs. State of Madras reported at AIR 1961 SC 1152 , the three bench judge of Supreme Court observed that the meaning of word ‘subject to’ is ‘conditional upon’.
From the reading of above legal positions, a view can be taken that it is necessary to fulfil the condition of section 12 to fall in Section 8(2) of IGST Act. Thus, it is wrong to term intermediary services as an Intra-State supply of services in case where the location of supplier or location of recipient is outside India. This is for the reason that Section 12 is applicable only to determine place of supply where the location of supplier and location of recipient is in India and not covers the cases where the location of supplier or location of recipient is outside India.
Therefore, in this view, it shall qualify to be in the course of inter-state trade or commerce on the lines of Section 7(5)(c) as the same is a residuary entry to cover all cases not covered elsewhere.
The statutory text of section 7(5)(c) is reproduced as follows-:
Supply of goods or services or both-
a) When the supplier is located in India and the place of supply is outside India.
b) To or by a Special Economic Zone developer or a Special Economic Zone unit: or
c) In the taxable territory, not being an intra-State supply and not covered elsewhere in this section.
shall be treated to be a supply of goods or services or both in the course of inter-State-trade or commerce.
Thus, there is much ambiguity as shown above on the fact whether the intermediary services where the supplier is in India and recipient is outside India is intra-state or inter-state. Still, prima-facie on the wordings of the statue, it is to be treated as an inter-state supply of service. The same need a clarification by Department otherwise it is prone to litigation.