Principles emerging from recent Advance Rulings on the term ‘Intermediary’ under Place of Provision of Services Rules
The Place of Provisions of Service (POPS) Rules, 2012 is the thin line which divides taxability and non-taxability under the Service Tax Law. These rules were aimed to consolidate the endlessly dispute on the Export of Services and Import of Services Rules and also laid the foundation for the place of supply rules proposed in the Goods & Service Tax (GST) Law. In essence, the POPS rules adopted the well accepted principle i.e. tax the services in the jurisdiction of consumption. In the context of services, it is often difficult to establish conclusively that the consumption has taken place in a particular jurisdiction. Many a times place of receipt of service is different from the place of its consumption. There are also cases, where the place of consumption is distributed to various jurisdictions. These issues were sought to be addressed by the POPS rules.
Subsequent to the notification of these rules, certain ambiguities arose especially on the scope of the term ‘intermediary’ services. As per the rules, an intermediary was defined to mean any broker, agent or similar person who arranges or facilitates the provision of services or supply of goods (inserted w.e.f. 01.10.14) between two or more persons but excluded a person who provided the main service on his own account. The phrase ‘arranges or facilitates’ left scope for a loose interpretation by the revenue as well as the tax payer.
In consequence, there was a dispute wherein the revenue contended that the service provider being an intermediary, the service was within the scope of Rule 9 and hence taxable in India, while the assesse contended that since it was an independent service provider, the service fell within the scope of Rule 3 and hence not taxable in India as the service recipient was located outside India. The revenue sought to include the case of the tax payer under the term ‘intermediary’ in every case where three parties were involved ignoring that an intermediary is special class of person who functions in a representative capacity like a broker or agent and does not include an independent service provider.
In certain cases the tax payer pursued the option of an advance ruling before the Advance Ruling authority and seeks an answer to their queries. While an advance ruling is binding only on the applicant, their principles have persuasive value and could be relied upon in other cases. This article lays down some of the principles below:
Principle 1 – Provision of marketing support services, call centre services, payment processing etc does not amount to provision of ‘intermediary’ services
The applicant entered into an agreement to provide marketing support services, (including direct marketing, branding activites, offline marketing), call centre services, payment processing services to its parent company. The Applicant was not all concerned about the services provided by GoDaddy US directly to their Indian Customers, which related to domain name registration, transfer services, web hosting services, designing services etc.In this case, applicant was not in receipt of any remuneration/consideration from the Indian Customers of GoDaddy US. Applicant was to only receive a fee from GoDaddy US, being the operating cost incurred by the applicant plus mark up of 13% on such costs. It was noticed that applicant was to receive the said fees from GoDaddy US, even in respect of Indian Customers, who directly remitted the service charges to GoDaddy US through International Credit Card, wherein applicant is not in the picture. This fact further shows that the applicant is not providing any service to Indian Customers and hence could not be said to be an intermediary for the purpose of POPS rules.
Principle 2 – Customer support and payment processing services provided by the service provider does not make the service provider an intermediary, as long as the services are provided on own account.
In this case, the applicant proposed to assist WWD US with the processing of payments made by their customers in India through their internet banking facilities/ credit cards. The detailed facts were as follows – WWD US would provide its services and products to customers in India through its website. In respect of such services, the customers would make the payment to WWD US online. For making such payment, in case the customers used an international credit card, they would be making a payment directly to WWD US in US Dollars. The applicant would provide payment processing facilities in India and collect money from the customers of WWD US in India and remit the same to WWD US. Towards this, the applicant proposes to open a separate bank account in India wherein the payment collection gateway company appointed by the applicant will deposit the money so collected from the customers of WWD US. The applicant would charge a fee equal to the operating costs incurred by the applicant plus a mark-up of 13% on such costs. The applicant is not authorized to enter into any contract or arrangement on behalf of WWD US or which bind it in any manner whatsoever. WWD US will directly contact and provide services to customers in India. The Advance Ruling Authority held that from the facts, the applicant would not be receiving any fees in respect of processing the payments of the customer remitted directly through the payment gateway. Since the service is being provided on own account, the service is not covered by Rule 9 (intermediary services) but covered under Rule 3 of the POPS rules, 2012. The Advance Ruling Authority relying on the CBEC Education Guide dated 20th June, 2012 issued by Ministry of Finance, Department of Revenue, Tax Research Unit (‘TRU’) held that normally a service receiver is the person is legally entitled to receive the service and is therefore obliged to make payment of the service received whether or not he actually makes the payment or someone else makes the payment on his behalf. In the facts of the present case, even though the applicant processed the payment of the customer, the service was being rendered to WWD US who was legally entitled receive the service and obliged to make payment for the same.
Principle 3 – Reimbursements of salary and other emoluments of employees under deputation contracts with Group companies is not a service itself. Incidentally it can inferred that mere presence of three parties involved (individual, group company and subsidiary company) does not make the service as an intermediary service
In this case, certain employees of the US company were sent on deputation to its Indian subsidiary. The salary payment of US Company’s employee were continued to be paid in the US and were recovered from the Indian company. The issue was on the levy of service tax on such recoveries by the US Company. The Advance Ruling authority held that the agreement is very clear to suggest that so long as individual is serving in India, he will be treated to be the employee of the applicant (i.e Indian company) though his interests as the employee of NAC, US, insofar as the social security interests are concerned, will be taken care of by NAC, US. It is trite that he does not get the salary from NAC, US when he is offering services to NAC, India in that behalf, the benefits are mutually exclusive, at least so far as, they are concerned with the salary. The only obligation on NAC, US is regarding the social securities which are not reimbursed by NAC, India to NAC, US – merely because the social security of Mr. Sloan while he is in India is being taken care of by the NAC, US. The service of the individual with NAC, India cannot be viewed otherwise in view of the clear language of the provisions of law. There shall be no liability to pay service tax on the salary and the allowances payable by the applicant to the employee in terms of the dual employment agreement and such salary will not be eligible to levy the service tax as per the provisions of the Finance Act.
M/s North American Coal Corporation India Pvt. Ltd. V. Commissioner of Central Excise, Pune-III, Advance Ruling No. AAR/ST/13/2015, Application No. AAR/44/ST/2/2014
(The author can be reached as email@example.com)