The Goods and Services Tax (GST) regime in India has streamlined the indirect taxation structure and brought uniformity across states. Within this framework, the taxation of intermediary services has been a critical area of discussion due to its implications for determining the place of supply and, consequently, the applicable tax components-Central GST (CGST) and State GST (SGST) or Integrated GST (IGST).
Definition of Intermediary Services
An Intermediary is defined under Section 2(13) of the IGST Act, 2017, which states :
'Sec 2(13) of IGST Act, 2017
"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'
From this definition, it is clear that to classify for intermediary, three parties must be involved:
- Principal Service Provider
- Principal Service Receiver
- Intermediary
If a person provides any services to another person on principal-principal basis, then the service cannot be considered as an Intermediary service.
Therefore, if a service is provided on principal-principal basis, the provider cannot be considered an intermediary and according Sec 13(8)(b) won't be applicable.
Principal-to-Principal Basis Services not considered as Intermediary Service
Following are few cases wherein Principal to Principal basis Service was not considered as Intermediary service
1. CSG SYSTEMS INTERNATIONAL (INDIA) PVT LTD VERSUS COMMISSIONER OFCENTRAL TAX, BENGALURU SOUTH COMMISSIONERATE - 2021 (3) TMI 1202 - CESTATBANGALORE
'Held that Marketing/Support services on Principal to Principal basis to group companies can't be treated as Intermediary Services'
2. LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VERSUS COMMISSIONER OFCENTRAL EXCISE, BELAPUR - 2019 (1) TMI 720 - CESTAT MUMBAI
'I find that the service fee charged by the appellant to its overseas group entities for provision of service has no direct nexus with the supply of goods by the overseas group entities to its customers in India. Further, the appellant had provided the service to the overseas entities on principal to principal basis. Thus, the appellant cannot be termed as an intermediary between the overseas entity and the Indian customers'
Place of Supply for Intermediary Services
Section 13 of IGST Act, 2017 addresses the place of supply of service where either location of service provider or service recipient is outside India, and Intermediary service is specifically covered under section 13(8)(b) of the IGST Act, which overrides the general provision of Sec 13(2) for determining place of supply of service.
'Sec. 13(8) The place of supply of the following services shall be the location of the supplier of services, namely:-
…..
(b) intermediary services;
…
…
enjoyment of a service.'
This specific provision often creates confusion and complexities, particularly in cases involving cross-border transactions, as it overrides the general recipient-based place of supply principle. As a result, the intermediary service provider's location becomes crucial for determining the applicable tax i.e. to consider as Inter-state supply or Intra-state supply.
Will Intermediary Service be considered as Inter-State Supply?
To determine whether intermediary services qualify as inter-state supply, Section 7 IGST Act, 2017, is relevant.
Lets look at the Original text of the Sec. 7
'Sec. 7. Inter-State supply
(1) Subject to the provisions of section 10….
(2) Supply of goods imported into the territory of India,……
(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in-
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
(5) Supply of goods or services or both,-
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(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.'
Let us take an example to understand the provisions of Section 7 of YGST Act, 2017 wherein,
- Location of Service Provider - Maharashtra
- Location of Service Recipient - Dubai
- Place of Supply as per Section 13(8)(b) - Maharashtra
As per Section 7(3), supply of service will be considered as Inter-state supply if Location of service provider and Place of Supply determined as per Section 12 of IGST Act falls under different states, different Union Territory or between a state and a Union Territory. As in our example the place of supply is determined as per Section 13, it will not fall under Sec 7(3).
As per Section 7(4), service Imported in India will be considered as Inter-state supply, so our transaction does not fall under Sec. 7(4) as well.
Now let us break down Section 7(5)(c); Supply will be deemed to be Inter-state supply if following conditions are fulfilled:
i. Supply should be in Taxable Territory
ii. Supply should not be Intra-State Supply
iii. Supply should not be covered anywhere else under Section 7
From the above example, we can say that supply is in Taxable territory as Place of supply is in Maharashtra (India) so, condition (i) is fulfilled, and as we have discussed other provisions of Section 7 related to supply of service so intermediary service is not covered anywhere else in Section 7, so condition (iii) is also fulfilled, therefore only condition left is (ii), for that we need to understand few other sections of the Act.
Section 8(2) deals will Intra-State Supply
'Sec. 8(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:'
Section 8(2) starts with the words subject to provisions Section 12 i.e. place of supply of services where location of supplier and recipient is in India. So we can hereby say that Intermediary service in above example do not fall definition of Intra-state supply defined under Section 8, as to quality for Intra-Supply of services, location of supplier and recipient should be in India as mentioned in Section 8(2) read with Section 12 Hence we can conclude that condition (ii) of Section 7(5)(c) is also fulfilled and Intermediary services is not Intra-State Supply.
So Intermediary services is to be considered as Inter-state supply and accordingly IGST is to be charged on such transaction.
Will the scenario change in case the Service Recipient is from India?
Technically speaking if the Location of the Service Provider and Location of Service Recipient are in India, then Section 13 will not come into play as the Place of supply will be determined as per Section 12 and accordingly can be classified as Inter-state supply or Intra-state supply depending of Location of Service Provider and Place of Supply.
Will Intermediary Service be considered as an 'Export of Service'?
As we concluded that Intermediary service will be treated as Inter-state supply in case of service recipient being outside India, another question arises 'Export of Service'? , so to understand this we simply need to refer Section 2 (6) of IGST Act, 2017 i.e. definition of 'Export of Service'
'Sec 2 (6) "export of services" means the supply of any service when,-
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange 1[or in Indian rupees wherever permitted by the Reserve Bank of India]; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;'
Since Sec 13(8)(b) places the location of the supplier as the place of supply, intermediary services fail to meet condition (3). Therefore, intermediary services cannot qualify as export of services, even if all other conditions are met
Conclusion
The taxation of intermediary services under the IGST Act is a subject requiring a clear understanding of the place of supply rules and their interplay with the definitions of Inter-State and Intra-State supplies. Businesses involved in intermediary services must consider various factors basically the nature of service whether supply is carried out on agent-principal basis or principal-principal basis, the location of the supplier and recipient.
Disclaimer: The views expressed in this article are those of the author and should not be considered as professional advice or opinion. We strongly recommend that readers seek professional advice before arriving at any decision or conclusion based on the content of this article. We shall not be held responsible for any loss or damage incurred by anyone relying on the information provided herein. The above views are based on our understanding of the provisions and should be independently verified for accuracy
The author can be reached at office.bhavikco@gmail.com
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