Place of supply – Intermediary Services

The confusion still persists about payment of CGST + SGST or IGST on intermediary services. We have tried to analyses the legal position and implications thereof.

As per Section 2(13) of IGST Act: 

(13) “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;

Further as per section 13 (8) The place of supply of the following services shall be the location of the supplier of services, namely:––

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

ii. intermediary services;

iii. services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.

….

By reading of provisions it is clear that place of supply would be location of supplier.  So, one can easily say that location of supplier and place of supply (i.e. Location of supplier) is within the same state and hence it would be an intra state supply.  Accordingly, CGST + SGST would be applicable.  Where is the confusion?

However, section 12 and 13 of the IGST Act is to govern only place of supply of services and in order to determine nature of supply we need to refer chapter IV – determination of nature of supply of the IGST Act.

It is worthwhile to refer section 8(2) of the IGST Act, which deals with intra -state supply.

(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:

In the instant case, place of supply as per section 13 (8) of the IGST Act, place of supply is location of supplier and accordingly it would be treated as intra-state supply.  However, it is pertinent to note that section 8(2) begin with subject to provision of section 12.  In other words, it confines to scenarios covered in the section 12 only.

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 provisions of’ as held by Hon’ble courts in various judgments.

Hon’ble Supreme Court in case of the South India Corporation(P) Ltd vs The Secretary, Board of Revenue, Trivandrum & Anr  (1964 AIR 207, 1964 SCR (4) 280), held that ‘The expression “subject to” conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.’

In the case of Southern Petrochemical Industries Co. Ltd vs Electricity Inspector and E.T.I.O. & Ors, it held that, ‘It is no doubt true that ordinarily the expression “subject to” conveys the idea of a provision yielding place to another provision or other provisions subject to which it is made as has been held in Surinder Singh v. Central Government and Others [AIR 1986 SC 2166, para 6], South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Trivandrum and another [AIR 1964 SC 207], Ashok Leyland Ltd. v. State of Tamil Nadu & Anr. [(2004) 3 SCC 1] and S.N. Chandrashekar and another v. State of Karnataka and Others, [(2006) 3 SCC 208]’

Further in case of Ashok Leyland Ltd bs State of TN (2004) 3- SCC 1 , 36 para 79, It was observed that ‘Subject to is an expression whereby limitation is expressed.’

Also, in case of Union of India versus Brigadier P.S. Gill 2012 (279) E.L.T. 321 (S.C.), similar view was held.

Further, in case of Gujarat Narmada valley fertilizers co. ltd. versus Union of India -2016 (342) E.L.T. 500 (Guj.), Gujrat Hugh court observed as follows: 

Expression “subject to” is a well known legislative device used in similarly but not always identical situations – When the legislative provision subject to another provision, former would yield to latter – In case of conflict, provisions of latter would prevail. [paras 20, 21, 22] 

Upon perusal of legal precedents, it appears that Section 8 of IGST Act, applicable for the provisions of Section 10 and 12 only.    

Section 10 : Place of supply of goods other than supply of goods imported into or exported from India

Section 12 : place of supply of services where location of supplier and recipient in India

Thus, both the section deals with domestic transactions, this implies that section 8 is not applicable to cross border transactions.

Section 13 of the IGST Act, deals with place of supply of services where location of supplier or location of recipient is outside India. In the instant case, the intermediary service would fall under section 13(8) of the IGST Act and the place of supply would be location of supplier, however the nature of supply cannot be decided under section 8 of the IGST Act, as enumerated above.

In order to decide nature of supply, a reference is invited to section 7 of the IGST Act, where clause (1) and (3) deals with Section 10 and 12 of the IGST Act, therefore applicable of the said clauses are ruled out. Clause (2) and (4) of the said Section deals with import of goods and import of services respectively, therefore, the applicability of said clauses is also ruled out. Consequently, we need to refer provisions Section 7(5)(c) which is a residuary entry applicable to cases not covered elsewhere.

Section 7(5)(c) is reproduced below: 

(5) Supply of goods or services or both,––

——

(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.

Based on the discussion above, a view may be taken that provisions of section 8(2) of the IGST Act is applicable to scenarios provided in the Section 12 of the IGST Act, which inter-alia deals with place of supply when location of supplier and recipient is within India.

Further, in Entry No. 25 of the FAQ’s on Banking, Insurance and Stock Brokers Sector released by the Central Board of Indirect taxes and Customs, the query before department was whether the intermediary services provided by a banking company to its offshore account holders be treated as an intra-State supply or an inter-State supply for payment of GST?

The department answered citing Section 13(8)(b) of IGST Act and responded that “the place of supply of such services is the location of the provider of services. As the location of supplier and place of supply are in same State, such supplies will be treated as intra-State supply and Central tax and State tax or Union territory tax, as the case may be, will be payable.”

The clarification of the department makes it amply clear that the intermediary services provided to an offshore account holder shall be treated to be intra-state supply where the place of supply shall be location of the service provider. However, it would be worthwhile to note that the FAQ does not have any legal binding.

Based on the above discussion, 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.

PS: As understood Gujarat HC admits writ petition challenging constitutional validity of Section 13(8)(b) of IGST Act, 2017 which deems place of supply for ‘intermediary’ as ‘location of supplier of service’; Petitioner has contended that said section seeks to create an artificial deeming fiction to tax ‘export of service’, which is ultra vires Articles 265 and 286 of Constitution of India; HC issues notice to Centre, CBIC & GST Council, while posting the matter for hearing on 9 October 2018.

Author: CA Nilesh Saboo (Partner BS & CO LLP) with CA Ishan Gilani