GST On Intermediary Goods and Services

The concept of Intermediary was first introduced in any Indian legislation in the year
2012 by the Rule 2(f) of the Place of Provision of Services Rules, 2012. The provision
defines the term intermediary as “It 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 two or more persons, but does not include a
person who provides the main service or supplies the goods on his account;". 1 Later in the
year 2017, when the indirect regime of taxation was reformed and the concept of Goods and
Service Tax (GST) was introduced to the Indian Economy, an identical definition was used
for the term “ Intermediary” in Section 2(13) of the IGST Act , 2017. Hence, the
applicability which the law developed under the service tax regime would be squarely
applicable in GST as well. From the above definition we can assert that “the intermediary
arranges or facilitates supply of goods or services or both, or securities between two or more
persons and it does not include a person who supplies such goods or services or both or
securities on his own account.

For instance, if a bulk seller collects orders of a product and then arranges it to be
supplied to a manufacturer, in this case he will not be an intermediary as he is buying the
good first and then selling it to his customer, either retailer or the direct consumer, he is
selling his own goods and services. As held in the Re: Global Transportation Services Pvt.
Ltd. that “It is noticed that the definition of "intermediary" does not include a person who
provides main service on his own account”2. However, in a situation where an agent collects
orders on behalf of his principal, the service he provides of collecting orders, will be
considered as intermediary services under GST. In a similar manner, when a whole seller
appoints an agent to collect orders for him and in exchange pays a commission as
consideration for the work, that consideration would be taxed under GST, as it will be
regarded as an intermediary service. Consequently, it is safe to say that if the test of agency is
fulfilled the service will be consider as an intermediary services and the agent will become
liable to pay GST. The current rate of GST charged on the intermediary services is 18 per
cent.

2
Re: Global Transportation Services Pvt. Ltd. [ 2016 (45) S.T.R. 574 (A.A.R.)]
 The following are the factors that help in determining whether a person is an intermediary
or not:

 Intermediaries are not allowed to change the nature and value of the goods and
services in the transaction, he can only follow the instructions given by the principal.
Such a value and nature should be in the knowledge of the principle.
 Intermediaries can receive consideration either from the principal or the buyer or
both. The consideration can also be a percentage of the whole transaction. Even when
the buyer is paying the commission it would also be taxable as an intermediary
service.3

Another important aspect that comes to question in any transaction involving GST
liability would be to determine the place of service. Section 13(8)(b) of the IGST Act says
that the place of supply shall be the location of the supplier of the service.

Another body by the name Authority of Advance Ruling has been set up to resolve the
dispute, which has been criticised on many occasions for passing ill-conceived orders. 4 Since
the definition of intermediary has several loose ends, it means that all the different situations
came in front of AAR for further interpretation. As it happened in the case of Global Reach
Education Services Pvt. Ltd, the authority held that "marketing services" provided to global
universities are "intermediary" services. 5 In this case, they completely ignored the aspect of
checking the principal agent relationship, whether there is one or not? They did not even look
if the nature of the service provided by the principal and the agent are the same or different.
Such vague and inaccurate interpretations cause confusion among the taxpayers all the time.
These ambiguities often act as harassment to the taxpayers. This makes us remember that
AAR was run by the department officials whose main aim was to collect maximum revenue
for the Government. A uniform code of tax is the main motive of GST, to have a single
unified tax for all. Erroneous interpretations like above increase problems among the
economic players. Even though AAR’s ruling does not have any blanket applicability and is
applicable only on those who present their case to AAR, but it is commonly known that tax
practices are based on what is the routine of the market, and the trend of the market is set by
such rulings.

3
Modaq 1st
4

5
Global Reach Education Services Pvt. Ltd. [2018 (12) G.S.T.L. 387 (A.A.R. – GST)]
 The ambiguous interpretations of the intermediary services not only amounted to
confusion among taxpayers but also affected our foreign parties. To understand it, we first
need to consider the fact that intermediary services provided to someone outside India would
not be considered as export in GST, hence they would not get any benefits from law
pertaining to exports. Like, they are not allowed to get an input credit on that sale. Such a
differentiation has led to major litigations on this matter. While the same problem was
debated in the parliament in 2017, and again the same recommendation was given to the
council, but no action thus far has been taken by the council. It has been seen that through
various judgements that Tax authorities across the country have been inconsistent in
determining the type of "intermediary" service or collecting GST for advertising and
marketing services, back-end office support, networking, customer relationships, liaison
activities, accounting, and administration in managing various documentation requirements
for customers outside of India.6 As in the case of GoDaddy India Web Services Pvt. Ltd, in
which the organisation was handling various type of the services to support businesses, the
Authority for Advanced Ruling held that “it is not an intermediary service”. 7 Here the court
based their interpretation on the simple rule of sperate entity where both the organisation are
principal and the relationship established between them is that of a principal and principal.
Whereas, in V Serv Global Pvt Ltd the ruling was “back office support services to overseas
companies undertaken by the applicant are for and on behalf of the clients to facilitate
supply of goods and services between their clients and their customers. Applicant clearly is
covered and falls in the definition of “intermediary” as defined under the IGST Act and,
therefore, provisions pertaining to ‘place of supply’ in case of intermediary services as
provided in sub-section 8 of section 13 are relevant.”8 In this case, the deciding body ignored
the fact that the transaction was actually happening between two principals and no third party
was involved.

There are contradictions between different authorities which have resulted in a significant
negative impact on information technology / IT-enabled services (IT / ITES) companies
operating in India. According to the latest report by the National Association of Software and
Services Companies (NASSCOM), India ranks third among the top countries, for start-up’s
and is an outsourcing destination for top companies operating around the world. 9 Many
6

7
1
8
 V Serv Global Pvt Ltd [2018-TIOL-263-AAR-GST] 
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multinational companies (MNCs) venturing into India have made arrangements with Indian
companies to install their equipment, etc. in the form of work contracts. These agreements are
facilitated by the subsidiaries of these multinational companies. The rules are not clear as to
how they will apply to multinational companies in such situations, as in such cases the Indian
subsidiary would be involved in the facilitation of contracts for work, i.e., the provision of
services and of goods, i.e. the definition is limited only to those persons who facilitate the
provision of services. This leads to confusion as to the place of provision of the services
provided by this person, ie whether or not they can be regarded as an intermediary. In
Circular No. 107/26/2019-GST of July 18, 2019, the Indian government made it clear in
the context of ITES that a person provides a service independently for his / her own account
and not as a representative of a third party, he / she would not to be considered as a
"intermediary". This circular addresses the adverse effects on Indian companies
providing administrative support services on their own behalf to multinational
corporations (MNEs) outside of India. Given the various legislative changes, interpretation
issues and conflicting preliminary rulings and government circulars, the industry remains
concerned and awaits further clarification in this regard.10

Taking into account the confusion prevailing in the industry, CBIC issued an explanation
in Video Circular No. 107/26/2019-GST dated July 18, 2019, outlining the scope and impact
of the various scenarios in Information Technology Enabled Services ("ITeS "). CBIC tried to
solve the problem by issuing the above circular. However, in Scenario 1, it can be seen that
the circular explains why ITeS services are not covered by Mediation Services as they are the
services that you provide yourself. In scenario 2, however, it was not recognized that the
back-end services are also provided on their own account and do not fall within the scope of
the intermediary services. Also, with regard to scenario 3, in which the provider provides
services for its own account. In addition to providing other services, the circular does not
clarify either of the two, it remains open to interpretation so it can potentially lead to a
lengthy litigation. In conclusion, the circular issued by CBIC left the situation unresolved
instead of resolving it.

This method of taxation also causes the problem of double taxation. Let us understand
with an example that “A” a person works as an agent for “B” a foreign company which deals
in a specific type of electronic item. Now “A” sells that product to an Indian Resident for Rs

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1000 only excluding taxes and the tax rate on that good was 18 percent. The commission
received by A was Rs 100 excluding taxes. Now, if we calculate the total tax paid in this
transaction, it would be 180+18=198 Rs. The total amount that the government earns is
INR 198 (180 + 18). If we look at this from a macroeconomic perspective, the country has a
net import of INR 900 (1000-100) that is consumed. In the GST system which is based
upon the consumption tax system and value-added system, the net tax payable by the
government on the whole transaction should be 162 INR (900 * 18%) (this is based on the
assumption that the intermediary services were provided on a cost basis and there was no
value added). Although the above examples do not correspond to the real situation and
various other parameters have not been taken into account, one point that can be deduced
from the above is that the service provided by the broker is used by the foreign seller. Since
the service is ultimately used by the Indian buyer, as the value of the brokerage service is
included in the value of the imported goods, the imposition of taxes on that service would
result in double taxation once on the brokerage services and again on the value of the
imported goods, including the cost of intermediary services.

In the decision of Appellate Authority of Advanced Ruling, they have also included
ancillary services in the definition of the intermediary services.11 Since the AAR received the
information on this they blatantly started taxing every activity as intermediary services even
if there existed a separate agreement for that transaction. As happened in the case of M/s
Ansys Software PVT LTD they clubbed two separate agreements and amalgamated their
activities as one being principal service which is intermediary in nature and other services as
ancillary to it, making the whole transaction taxable under GST. 12 The Act maintains a very
thin line between the transactions that can be defined as an intermediary service or an export,
which is troublesome for the taxpayers in the market as they have to face unnecessary
harassment due to such ambiguities in the laws.

On 19th December 2017 in Rajya Sabha, the 139th report was submitted by the Department
Related Parliamentary Standing Committee on Commerce named Impact of Goods and
Services Tax (GST) On Exports. In the report they discussed the same problems with
intermediary services and as per para 15.2 it recommends that “In view of the fact that GST is
a destination-based consumption tax, the Committee is of the view that following steps may
be taken: Provide that Place of Supply of Indian Intermediaries of Goods will be the location

11
[2018 (15) G.S.T.L. 618 (App. A.A.R. – GST)]
12
M/s Ansys Software PVT LTD [2019-TIOL-321-AAR-GST]
of service recipient so that Intermediary Services will be treated as ‘Exports’; or Providing
an exemption to Indian Intermediaries of Goods from levy of IGST; or Notify such services
under Section 13(13) of the IGST Act to prevent double taxation (tax in India as well as in
the importing country) by treating place of effective use (foreign country) as place of
supply.”

They have also recommended to exclude the term intermediary servicers from section
13(8) of the IGST Act and as said earlier, these recommendations have not been
implemented. We all are aware of the fact that current government in under constant pressure
to prove their actions of implementing GST to be the great success which can only be done if
they show higher revenue generation. This seem to be the only reason of not excluding such
intermediary services to be termed as exports, as this would amount to downfall in revenue.
Only to protect their image, they are losing the big picture and are discouraging the
prospective foreign investors. This is not the only problem that are there with levying GST on
intermediary services as the entire intermediate industry is affected by the net tax factor, even
if the consideration is received in foreign exchange and the services are provided abroad.
Having such a tax policy which is creating double taxation problem is not in the line of the
best practices of EU.

Where on one hand India is dreaming to become a superpower and on the other side we
are making our contributors suffer with unjustified harassment. This has resulted into many
foreign investors moving out of the country and started to invest in the tax heavens country,
resulting depleting Foreign Direct Investments(FDI’s). In the current period of time, where
the whole nation Is facing a pandemic which is not only affecting the economy of the nation
but also thousands of people are dying daily, people are adopting latest method of work and
are upgrading themselves. People are forced to work from home. In this situation these
intermediary services given to the foreign organisations, which include professional skills and
can be done from home, could be the game changer for our economy. Outsourcing our
professional skills would lead us to become human resource capital of the world. Thus,
instead of creating more hurdles in the path of such intermediary service provider the law
makers should promote such activity. Not only would it reduce the unemployment but also
help in recovery of the economy.