Cross-border supplies (import and export) of goods and services generally entail the presence of an intermediary. Such an intermediary is usually a subsidiary of the foreign principal which undertakes facilitation as well as provision of various services on behalf of the principal. Each such case involves provision of two independent supplies, i.e., one from the principal to the ultimate customer and another from the agent to the principal.
The concept of intermediary is old, which was originally introduced in the service tax law in July 2012 when the negative list scheme was introduced. Since then the industry and its members who are dealing in cross border transactions are struggling with litigation on the question as to whether the said services provided to overseas entities is an export of service or intermediary service. The definition of intermediary under GST law and under erstwhile Service Tax law is identical.
With the advent of modern technologies and increased requirements of businesses, there are growing opportunities in India to provide back office services such as administrative, accounting, customer service, technical support services, etc., by Indian entities to many overseas clients and in a few cases, to its parent company located outside India. India is a hub for technical and software personnel and, the foreign companies are outsourcing back office operations to Indian entities as a cost cutting measure.
In view of the above background, let us try and understand this very taxing concept of intermediary service under GST.
Section 2(13) of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the ‘IGST Act’) provides that an "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.
The aforesaid definition of ‘intermediary’ emphasizes the following points:
- An intermediary must be a ‘broker’ or 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.
Thus, an intermediary is a person who merely arranges or facilitates supply of goods or services or both, belonging to the other person. A person can arrange or facilitate supply of goods or services belonging to some other person (‘principal’), only when he has been authorized by the principal. An intermediary cannot alter the nature or value of supply, which he facilitates on behalf of his principal. The intermediary service providers generally receive consideration in the form of commission or brokerage in respect of the services rendered by them. However, the person who supplies goods or services or both on his own account (on principal to principal basis) is not an intermediary. Under GST law, if supplier qualifies as an intermediary, then his services would not qualify as an export in terms of Section 13(8) of the IGST Act. Consequently, he would not be eligible for export benefits. In such a case, entities, being intermediaries, may be liable to pay GST at the rate of 18% despite earning foreign exchange.
In the case of V Serv Global Private Limited1, the Maharashtra Authority for Advance Ruling (‘AAR’) has held that the back-office support services (liaising with client's buyers/suppliers with respect to delivery, transportation of goods and settlement of payment between them etc.,) provided to foreign clients are intermediary services as the applicant is arranging or facilitating the supply of goods between the overseas client and its customers. The applicant is not providing the goods or services to its client’s buyers or its client’s suppliers on his own account. The said ruling was upheld by the Appellate Authority for Advance Ruling (AAAR)2 as well. This ruling indeed sparked the controversy in the industry.
The aforesaid ruling has undisputedly created serious concerns amongst several multinational companies engaged in providing back-end support services from India to overseas clients.
It is relevant to refer the case of GoDaddy India Web Service Private Limited3 under the erstwhile service tax regime, wherein the applicant had entered into an agreement with the parent company (Godaddy US) for providing services viz., advising marketing situation prevailing in India, advising marketing staff of Godaddy US regarding events and places wherein advertisements can be displayed, supervising third party customer care services, taking part in seminars and events to spread awareness about Godaddy US. The Authority for Advance Ruling had held that the services proposed to be provided by the applicant were support services to marketing and applicant was not an intermediary.
However, there is a marked difference with respect to the scope of services agreed in the above two cases. In the case of V Serv Global, the scope included arranging certain services and also liaising with services providers whereas in the case of Godaddy, the applicant only provided support services relating to marketing like, brand promotion, etc.
Considering the confusion prevalent in the industry, CBIC issued a clarification vide Circular No. 107/26/2019-GST, dated 18 July 2019 elaborating the scope and implications of different scenarios under Information Technology-enabled Services (‘ITeS’). The three scenarios discussed in the said circular are as follows:
|1. The supplier of ITeS services supplies back end services (back office operations, call centres or contact centre services, payroll, support centres, etc.,).||The supplier of these services will not qualify as intermediary where these services are provided on his own account by such supplier.|
|2. The supplier of back-end services located in India arranges or facilitates the supply of goods or services or both by the client located abroad to the customers of client. Such back-end services may include support services, during pre-delivery, delivery and post-delivery of supply.||The supplier of these services will fall under the ambit of intermediary as these services are merely for arranging or facilitating the supply of goods or services or both between two or more persons.|
|3. The supplier of ITeS services supplies back end services on his own account along with arranging or facilitating the supply of various support services during pre-delivery, delivery and post-delivery of supply for and on behalf of the client located abroad. Here, the supplier is supplying two set of services, that is, ITeS services and various support services to his client or to the customer of the client.||Whether the supplier of these services would fall under the ambit of intermediary under sub-section (13) of section 2 of the IGST Act will depend on the facts and circumstances of each case keeping in view which set of services constitutes the principal / main supply.|
An attempt was made by CBIC to address the issue by issuing the above circular, however, it can be observed from the Scenario 1, that the circular explains why ITeS services are not covered by intermediary services as these are the services provided on their own account. But in respect of Scenario 2, it failed to acknowledge that back-end services are also provided on their own account and are outside the purview of intermediary services. Further, in respect of Scenario 3, wherein supplier is providing services on his own account as well as facilitates other services, the circular does not clarify either way. It is left open to interpretation, therefore, it may eventually end-up in prolonged litigation. Thus, the Circular issued by CBIC kept the situation unsettled rather than settling it.
Due to the above reasons, the circular created more confusion than clarity. Facing backlash from the various members of industry, instead of amending the circular, the CBIC has chosen to withdraw the Circular No. 107 /26/2019-GST dated 18 July 2019, ab-initio, vide Circular No. 127/46/2019-GST dated 04-12-2019.
On one hand, it is well settled fact that circulars are not binding on the courts and on the other hand, withdrawal of the circulars like in the present case by CBIC would lead the industry nowhere, but to confusion. Therefore, whether members of industry can take tax positions based on the circulars issued by the CBIC is itself a big question now.
It is imperative for the Government to ensure that companies providing back office support services remain globally competitive. Therefore, in order to avoid unwarranted litigation and financial repercussions on Indian industries, we may expect the much needed clarity from the Government on this issue in the coming Union Budget 2020-21.
Be that as it may, it is essential for all membersof industry who are providing services to its parent companies or to foreign clients on principal to principal basis, to ensure that the agreements or contracts entered with the foreign clients clearly describe the nature and scope of service from this perspective since, under the current GST regime, the agreements between the parties have paramount importance with respect to payment of taxes.
[The authors are Principal Associate and Senior Associate, respectively, in GST practice in Lakshmikumaran and Sridharan, Hyderabad]