Ever since the Service Tax based on negative list is introduces there is lack of clarity on intermediary and its taxability. Initially intermediary were liable to be taxed if those are provided for services. However in 2014 supply of goods are also added in definition of Intermediary services. This meant that Intermediary in relation to goods and services are liable to be taxed under current regime of Service Tax.
In the current article we have tried to address issues by way of legally interpreting the law using the help of various advance rulings accorded in this regard.
Ideally Service tax is now payable on all services rendered in the taxable territory except the services as mentioned in the negative list and those granted exemption from the levy of Service tax. The essence of Service tax is that a service should be taxed in the jurisdiction of its consumption. The new charging section, Section 66B of the Finance Act, enables taxation of such services as are provided in the taxable territory. Thus, the services that are provided in a non-taxable territory would not be chargeable to Service tax. At this juncture it, therefore, becomes essential to determine the “place” where the services have been provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided.
Intermediary Services: As per Sub-rule (f) of Rule 2 of the place of provisions of Services Rules, 2012, ‘Intermediary’ means
“a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods between 2 or more persons but does not include a person who provides the main service
Rule 9 of The Place of Provision of Supply Rules, 2012, rules states that for the following services:
1. Services provided by a banking company, or a financial institution, or a non- banking financial company, to account holders;
2. Online information and database access or retrieval services
3. Intermediary services;
4. Service consisting of hiring of means of transport, up to a period of one month.
the place of provision of service shall be the location of the service provider :
In terms of Rule 9, in case of intermediary, following conditions should be met –
a. Should arrange or facilitate a service between two persons
b. Does not include a person who himself provides the main service on his own account
c. Two services get involved –
i. main service by principal to customer (airlines, hotel, tour operator etc.)
ii. own service to customer or principal (hotel booking, ticket booking, travel agent etc.)
Does not influence any of the two –
i. characteristics of main service
ii. price of main service.
Clarification and Legal nemesis
An Education Guide (‘Guidance Note’) on June 20, 2012 issued by the Central Board of Excise and Customs clarifying the meaning of intermediary states:
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 at any one time: (i) the supply between the principal and the third party; and (ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged;
3. 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;
4. 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;
5. 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’;
6. 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.
Advance Ruling Related to Intermediary Services:
1. Provision of marketing support services, call centre services, payment processing etc does not amount to provision of ‘intermediary’ services (M/s GoDaddy India Web Services Pvt. Ltd. Versus Commissioner of Service Tax, Delhi-IV, Ruling No.AAR/ST/08/2016, Application No. AAR/44/ST/15/2014)
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. (M/s Universal Services India Pvt. Ltd. v.The Commissioner of Service Tax, Gurgaon, Ruling No. AAR/ST/07/2016 in Application No. AAR/44/ST/14 /2014)
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(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)
Conclusion: Thus, it appears that in the present Service tax regime, the agreement between the parties deserves a paramount importance; hence, proper attention should be given while arranging the transactions. We recommend that utmost care must be taken while preparing agreement so that litigation can be avoided.
(Disclaimer: The Views Expressed in the article is personal opinion of author. The author is CA and CS by profession and one can reach him on @hemanshow79 on twitter or mail queries on firstname.lastname@example.org. The article can be said as reference material. However courts can take different opinion based on nature and circumstances of each case.)