Services provided to foreign clients by commission agents in India has always been a bone of contention between the Government and the tax payers. Such services are always looked upon in the eyes of suspicion by the Government. Even during the service tax regime such services were marked with litigations though most of the judgements were favourable to the taxpayers. The Government will always treat any transaction of commission agents / export of services as an intermediary service.
We will first look into pre-GST era under service tax how the intermediate services were dealt with.
Post negative list regime under service tax, the services were taxed if it is consumed in the taxable territory except if it falls under negative list or were specifically exempted. Thus, it meant that services if it is consumed in a non-taxable territory then it will not be taxed under service tax. There was always an exception to the said rule and that was for intermediary services. The definition of intermediary has also gone through many changes under service tax. The definition from 01.07.2012 to 30.09.2014 as per clause (f) of Rule 2 of the POP Rules was:
“intermediary means a broker, any agent, or any other person, by whatever name called who arranges or facilitates a provision of a service (hereinafter called main services) between two or more persons but does not include a person who provides the main service on his account”.
The Rule underwent a change w.e.f from 01.10.2014 as follows:
“intermediary means a broker, any agent, or any other person, by whatever name called who arranges or facilitates a provision of a service (hereinafter called main services) or supply of goods between two or more persons but does not include a person who provides the main service on his account”.
Previous definition included provision of services whereas the changed definition included supply of goods also. The inclusion of goods also in the definition brought a major change in the way intermediary will be taxed and from 01.10.2014 Place of Provision of commission agents for sale of goods providing marketing / business promotion services to their overseas clients will be the “location of the service provider”. This brought a major change in the scope of taxing intermediary services and brought into its ambit provision of services of commission / sales agents in India with respect to supply goods also. The place of provision rule 9 also was amended and hitherto the place of provision of service for an intermediary service was the location of ‘service recipient’ and after amendment the place of provision of service was ‘location of the service provider’. The irony was, if the same commission agent was located outside India and marketing the goods of Indian manufacturers / seller then service tax was not applicable.
An Education Guide (‘Guidance Note’) on June 20, 2012 issued by the Central Board of Excise and Customs clarifying the meaning of intermediary states that:
Para 5.9.6 what are intermediary services?
Generally, an “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:
1. The supply between the principal and the third party; and
2. The supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.’
In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered: –
1. Nature and Value
2. Separation of Value
3. Identify and Title
Hence, from the analysis of the definition of ‘intermediary’ read with the aforementioned Guidance Note, the following points emerge:
1. An intermediary arranges or facilitates a provision of a ‘main service’ between two more persons.
2. An intermediary is involved with two supplies
3. the supply between the principal and the third party; and
4. the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.
5. An intermediary cannot alter the nature or value of service, the supply of which he facilitates on behalf of his principal, although the principal may authorize to negotiate a different price.
6. The consideration for an intermediary’s service is separately identifiable from the main supply of service that he is arranging and is in the nature of fee or commission charged by him.
7. The test of agency must be satisfied between the principal and the agent i.e. the intermediary. The Guidance note states that the intermediary or the agent must have documentary evidence authorizing him to act on behalf of the provider of the ‘main service’.
8. The payment for such services is received by way of commission.
As per the Guidance Note, the principal must know the exact value at which the service is supplied (or obtained) on his behalf.
Similar provisions were brought into GST as well and the provisions of intermediary services as it existed under service tax has been copied in GST. Section 2(13) of the IGST Act defines intermediary as ‘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;’ The definition more or less remains same as it was in service tax. Even the intention of the Government to treat intermediary services differently continues in GST as well. In general rule under GST, the place of supply of services will be the location of the recipient of services, but as per section 13(8) of the IGST Act:
The place of supply of the following services shall be the location of the supplier of services, namely: ––
(b) intermediary services;
Recently under GST few AAR (Authority for Advance Ruling) decisions had created controversy, in the case of Vserv Global (P.) Ltd. (2018-TIOL-263-AAR-GST), held that back-office support services do not qualify as export but are in the nature of arranging or facilitating supply of goods or services between overseas companies and customers. It categorised these as intermediary services, liable to GST at 18%, on the grounds that the place of supply of service is the location of service provider. Further, the Appellate Authority for Advance Ruling (‘AAAR’) confirmed the order passed by the AAR (2019-TIOL-37-AAAR-GST).
AAR Maharashtra in the case of Mayank Jain (TS-527-AAR-2019-NT) held that the services are in the nature of intermediary and not support service as being claimed by the taxpayer and the said service does not qualify to be an export of service.
It should be noted that an Advance Ruling is binding only on the taxpayer who had sought it and the concerned Revenue Authorities. However, the above-mentioned Advance Rulings provide clarity about the issues being faced and have persuasive value in matters before the Revenue Authorities.
The aforesaid rulings have created chaos amongst several MNCs engaged in providing back-end support services with the fear of being taxed at 18% GST, despite following favourable rulings:
Later, the CBIC issued a clarification vide Circular No. 107/26/2019-GST, dated 18 July 2019, providing three scenarios when a supplier of Information Technology-enabled Services (‘ITeS’) services such as call centres, BPO, etc. located in India, will qualify as export or intermediary for determining GST liabilities on such services. In Scenario 1, the Circular explains why ITeS services (as enlisted under Rule 10TA(e) of Income-tax Rules, 1962) are not covered by intermediary services as these are the services provided on their own account, but in respect of Scenario 2 (backend services) and Scenario 3 (ITeS along with arranging or facilitating the supply of various support services), it refuses to acknowledge that back-end services are also provided on their own account and are outside the purview of intermediary services.
Based on the above Circular, it would mean that BPO service providers engaged in back-end services such as transportation of goods, sales support services and others will now come under the ambit of GST and may be taxed at 18%. The Circular issued by the CBIC has kept the situation unsettled rather than settling it. Pursuant to various representations made by the taxpayers, the CBIC decided to withdraw, ab-initio, the Circular No. 107 /26/2019-GST dated 18 July 2019, on the scope of ITeS and its coverage under intermediary services.
Therefore, if the intermediary provides services to a foreign client and though he satisfies all the conditions of export of services under section 2(5) of the IGST Act except the place of supply condition because of the exception created as per section 13. This artificial restriction provided by law unnecessarily takes away the real colour of the transaction and denies benefits to the tax payers. The dispute which existed in the service tax era will continue to haunt the tax payers in GST also. The tax payers will always want to colour the transaction as principal to principal transaction and the authorities will always try to treat it is intermediary services.
When GST was brought in to make life simpler for everyone, has the intention of the Government been fulfilled?
For any clarifications, readers can be reached to authors at [email protected]