Nature of Supply of Intermediary Services when either of Supplier or Recipient is located outside India

Goods and Service Tax has been introduced with effect from 1^st July 2017. The introduction of GST in India with its extension to J&K was a historical change in Indirect Tax regime in India.

The type of GST that is levied depends upon the nature of supply. The same is explained with the following table: –

Nature of Supply	Applicable GST
Interstate Supply of GST	IGST
Intrastate Supply of GST	CGST plus SGST

As per general understanding, the nature of supply is determined in the following manner: –

Nature of Supply	Conditions to be Fulfilled	Exceptions
Interstate Supply of GST	Location of the supplier and place of supply are in different state	Supply to SEZ, Export Supply, High Seas Sales, Supply of goods to tourist
Intrastate Supply of GST	Location of the supplier and place of supply are in same state	Supply to SEZ, Export Supply, High Seas Sales, Supply of goods to tourist

However, in author view, the above rule will not work in determining nature of supply in case of intermediary services when recipient of intermediary services is located outside India. In this article, an attempt has been made to analyse the nature of supply of ‘intermediary services’ when location of service recipient is outside India. Let us understand the same with following example: –

Mr. A, who is located in Maharashtra, provided intermediary services to Mr. B who is located in USA.

Now the question arises, whether supply constitute intrastate supply resulting into applicability of CGST plus SGST or constitute interstate resulting into applicability of IGST. Before answering the question in detail, let us decide the following: –

(i) Location of Service Provider –Maharashtra

(ii) Place of Supply –Location of Service provider i.e. Maharashtra as per section 13(8)(b) of IGST Act 2017. For better understanding, statutory text of section 13(8)(b) of IGST Act 2017 is reproduced as follows: –

(8) The place of supply of the following services shall be the location of the supplier of services, namely: ––

a) services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;

b) intermediary services;

c) services consisting of hiring of means of transport, including yachts but excluding air crafts and vessels, up to a period of one month.

It is evident from the above that in case of intermediary services provided to a service recipient located outside India, the place of supply will be the location of the service provider.

(iii) Location of Service Receiver – USA

Now we have basic inputs to derive the answer whether intermediary services provided to a person located outside India constitutes interstate supply or intrastate supply.

The term intrastate supply of Goods/Services is defined vide section 8(2) of IGST Act 2017 in the following manner: –

(2) Subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra- State supply:

Provided that the intra- State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.

It is evident from the above provision that when the location of the supplier and place of supply of services are in same state or same union territory then the supply constitutes intrastate supply and subject to CGST plus SGST.

However, section 8(2) of IGST Act 2017 starts with phrase ‘Subject to the provisions of section 12’. Section 12 of IGST Act 2017 determines the place of supply in respect of services when both the location of the supplier of services and the location of the recipient of services is in India. Statutory text of section 12(1) is reproduced as follows: –

The provisions of this section shall apply to determine the place of supply of services where the location of supplier of services and the location of the recipient of services is in India.

Now the following question arises: –

(i) What is the relevance of phrase ‘Subject to the provisions of section 12’ in section 8(2)?

(ii) Whether provision of section 8(2) of IGST Act 2017 can be applied to determine the nature of supply when place of supply is determined under section 13 of IGST Act 2017 which deals with determination of place of supply when either of the location of the supplier or service recipient is outside India?

(iii) If the nature of supply cannot be determined under section 8(2) of IGST Act 2017 then which provision of IGST Act 2017 will apply for determining nature of supply of intermediary services when service recipient is located outside India?

Analysis of question number 1

The literal meaning of term ‘subject to’ means ‘dependent upon’. Thus, when a provision is made to subject to another provision then former cannot override the later. As per section 8(2) of IGST Act 2017, when the location of the supplier and place of supply are in same state or union territory then supply constitutes intrastate supply of goods/services. However, section 8(2) is subject to section 12 of IGST Act 2017.

Section 2 defines various terms which are used in the IGST Act 2017. The term ‘location of the supplier’ has been defined vide section 2(15) of IGST Act 2017. Hence the meaning of the same can be taken from section 2(15) of IGST Act 2017. However, term ‘place of supply’ neither has been defined under section 2 of IGST Act 2017 nor under CGST Act 2017. In fact, the term ‘place of supply’ is determined under section 12 and 13 of IGST Act 2017.

Section 8(2) of IGST Act 2017 also does not provide any reference for term ‘Place of Supply’. However, section 8(2) is subject to section 12 of IGST Act 2017. Thus, on a harmonious interpretation of law, it can be inferred that section 8(2) of IGST Act 2017 covers only those situations which are covered by section 12 of IGST Act i.e. where ‘location of the supplier’ as well as ‘location of the recipient’ is located in India.

Analysis of question number 2

It is well-settled principal of law that an interpretation which renders an entry otiose has to be avoided. The provisions of statue must be read in such a manner that effect can be given to each provision of law.

If we apply the principle contained in section 8(2) of IGST Act 2017 to determine the nature of supply where location of service recipient is outside India then the phrase ‘‘Subject to the provisions of section 12’ would become redundant. Hence such an interpretation has to be avoided.

With above legal background, in view of author, provisions of section 8(2) of IGST Act 2017 cannot be applied to determine the nature of supply when place of supply is determined under section 13.

Analysis of question number 3

The nature of supply of intermediary services will be determined as per section 7(5)(c) of IGST Act 2017. 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.

It is evident from the above that when supply of goods or services are in the taxable territory and such supply is not being an intrastate supply and not covered elsewhere then supply constitutes interstate supply.

In view of the above legal analysis, service provided by Mr. A to Mr. B would constitute interstate supply of service even if location of the supplier and place of supply are in same state. Hence the said transaction would be subject to IGST.

Disclosure in GSTR-1

Supply of intermediary services by a person located in Maharashtra to a person located outside India cannot be considered as export of service since the place of supply is India. As per section 2(6) of IGST Act 2017, interalia, place of supply must be outside India to constitute export of service. In our discussion, the place of supply is India hence the supply of intermediary service to a person located outside India will not constitute export of service.

Thus, in author’s view, the transaction under discussion should be shown in following manner: –

(i) Table number 5 of GSTR-1 which covers Taxable outward inter-State supplies to un-registered persons where the invoice value is more than Rs 2.5 lakh

When the invoice value of intermediary services provided to a person located outside India is more than 2.5 lakhs then the same can be shown in table number 5 of GSTR-1. The registered taxable person is required to select ‘97-Other Territory’ in place of supply column.

(ii) Table number 7 of GSTR-1 which covers Taxable intrastate outward supplies to un-registered persons irrespective of invoice amount or inter-State supplies to un-registered persons where the invoice value is up to Rs 2.5 lakh

When the invoice value of intermediary services provided to a person located outside India is up to Rs. 2.5 lakhs then the same can be shown in table number 7 of GSTR-1. The registered taxable person is required to select ‘97-Other Territory’ in place of supply column.

Consequence of wrong determination of nature of supply

In our example, let us assume that Mr. A has paid CGST plus SGST on intermediary services provided to Mr. B considering the same as intrastate supply. Subsequently Mr. A found that services provided to Mr. B was interstate supply thus he should pay IGST on the same. Now Mr. A has to take following actions: –

(i) Mr. A has to file refund of CGST plus SGST initially. (Section 71(1) of CGST Act and SGST Act)

(ii) Mr. A has to pay afresh IGST

(iii) Mr. A is not required to pay interest on delayed payment of IGST (Section 19(2) of
IGST Act)

Conclusion

Each word in statue must be given importance. No word of statue can be ignored otherwise the conclusion drawn from the interpretation of statue may be wrong. In our discussion, mere ignorance of term ‘subject to’ can turn the nature of supply from interstate to intrastate. The nature of service will remain always IGST when following conditions satisfied: –

(i) Location of Service provider is in India

(ii) Location of Service receiver is outside India

(iii) Place of Supply is determined as per section 13 and same is in India

(The author can be reached at bajaj.ashish19@gmail.com)