Among the many contentious tax levy, the dilemma if a service is classifiable as an Intermediary Service shall perhaps never lose limelight. There has been various discussions and opinions put forth regard this, but the decisions in recent Advance Rulings is opening up a pandora box of unanswered questions for companies to ponder upon.
The meaning of Intermediary under sec 2(13) of IGST Act is defined to be any person who arranges or facilitates the supply of goods and service between two parties and does not make supply on his own account. This would mean that an intermediary only connects two parties to facilitate supply and cannot change the nature of transaction being entered into by them. Further, if either the intermediary or his customer/principal is located outside India, the place of provision of supply would be the location of the intermediary as per sec 13(8) of IGST Act. This implies that place of provision of supply in such scenario would be the place of the intermediary in India and CGST/SGST would be chargeable. This also implies that the transaction can never be termed as Export and corresponding export benefits is unavailable.
The Government issued Circular No. 107/26/2019-GST clarifying the scope of intermediary services by describing three scenarios and its tax implication. Although first two scenarios in the notification is unambiguous, Scenario-III of the circular specifies that supplier of ITeS service providing back end support services on behalf of his client may or may not qualify as intermediary and the same is determinable depending on the facts and circumstances of each case. Terming this scenario as case specific is apparently paving way for litigations.
Due to such ambiguity, not only is there an increasing number of AR applications filed by the Companies, there is also increasing audit/investigation from the department’s intelligence wing to safeguard their revenue. The boom in the IT sector in the past years have led to newer business models including software related support service, sourcing support service, marketing support service etc. Each company has its own way of structuring these transactions that suits its business the best with cost optimisation. Substantial number of foreign companies have been setting up their companies in India due to cost viability only for the purpose of supporting their principal business. Such companies set up in India have conveniently been terming such support service as export of service and enjoying tax benefits. Post the issue of said circular, their business model is being subject to investigation and if proven that it falls under the category of intermediary, they would lose the export benefit and incur additional cost.
When these transactions are subject to audit/investigation, there are certain standard checks made by the department to determine the intermediary status. Thus let’s now look at the possible arguments that maybe in favour of the department and precautionary safe guard measures required from the tax payer’s perspective.
1. Primary nature of transaction:
Usually, the terms of contract between the parties provide for rendition of a set of services. For example, it may include identification of customers, enabling sale, tax compliance and ensuring final payment. Although this may not seem merely like an agency arrangement and is rather a sales support contract, the department may refer to it as a bundled service. They would argue that the principal service provided is that of enabling sale between two parties and all other services are ancillary to the main service. As the tax rate applicable is dependent on the principal supply, the whole contract would be taxed as intermediary service.
It is suggested that companies should review their existing agreements and ensure that it is worded such that the core essence of the contract is any kind of business support service and not mere sale enablement. When proved that enabling sale is only an outcome due to the other services provided and the principal nature of service is business support, the place of provision of supply applicable would be the place of the service recipient as per sec 13(2) of IGST Act and export benefits can be availed.
2. Calculation of consideration:
Many a times. the consideration is given as a percentage of sale made in the form of commission. However, if a foreign company sets up its establishment in India to support its business, most commonly the consideration is provided on cost plus basis or any other rational method. When consideration is directly linked to the sale made like commission, it transforms into a stronger argument for the department to prove it to be an intermediary service.
Rather, the Companies could amend the consideration clause of the agreement in a manner that each component of the total service provided is assigned certain portion of total consideration. Thereby, the fact that the revenue generated is not merely due to connecting two parties should get emphasised.
3. Description in invoice:
There have been litigations in the past wherein despite all factors including the agreement being in favour of the assesse, mere negligence while providing the description of service on the invoice has invited long term trouble. It is essential to ensure that phrases like “Commissioner/Sales Commission” is not mentioned outright on the invoice and exact description pertaining to each of the service provided is specified clearly.
Although the above are the most important action points to be noted, there are other aspects that are business specific. It is important for each company to analyse their existing and potential transactions from GST perspective and devise them strategically so that they are not unnecessarily dodged by GST implications.
Due to its lower cost of capital, India has always been a sweet spot for the ITeS industry that has contributed immensely towards national growth. Depriving it of export benefit in the name of intermediary is against the fundamental GST principal of ease of doing business. It is necessary in the interest of the nation that the departmental officials provide for wiser Advance Rulings and Government comes up with Circulars that would be reduce the stress on the tax payers. Although GST is an infant law and ambiguities are inevitable, the GST Council should specifically address such issues that are most commonly faced by many industries. Thus, all we can do is hope for clarity in future from the Government as to what squarely constitutes an intermediary.