GST on Intermediary Services

Intermediary is a person who helps to connect the two or more persons to execute a transaction between them and receives the commission from such persons as a consideration for such service. Thus the person, who enables the supply of goods/services between two persons, is considered as intermediary. The concept of intermediary was also available in the Service Tax Regime and the same was borrowed in GST from the Service Tax Regime. This article is about to discuss the intermediary services in details and the treatment of intermediary services under GST.

Before going into detailed discussion let us first know the definition of intermediary given in GST. The intermediary is defined under sub section (13) of section 2 of IGST Act 2017 which states that
“ 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”

Thus, from the above definition of intermediary it is clear that the person who supplies the goods or services or both on his own account would not be termed as intermediary. In simple words, the intermediary is a person who just facilitates the transaction between two persons. There were always ambiguities among the taxpayers in respect of the interpretation of the scope of "Intermediary services" under GST Law. To resolve such ambiguity and to ensure uniformity in the implementation of the provisions of the law across the field formations, the CBIC has issued a Circular No. 159/15/2021-GST. In para 3 of the said circular, some basic prerequisites are provided to understand the scope of intermediary services which are as follows;

3.1 Minimum of Three Parties: The intermediary service requires a minimum of three parties, two of them transacting in the supply of goods or services or securities (the main supply) and one arranging or facilitating (the ancillary supply) the said main supply. An activity between only two parties can, therefore, NOT be considered as an intermediary service and an intermediary himself can not provide the main supply.

3.2 Two distinct supplies: There are two distinct supplies in case of provision of intermediary services;
(1) Main supply, between the two principals, which can be a supply of goods or services or securities;

(2) Ancillary supply, which is the service of facilitating or arranging the main supply between the two principals. This ancillary supply is supply of intermediary service and is clearly identifiable and distinguished from the main supply.

A person involved in supply of main supply on principal to principal basis to another person cannot be considered as supplier of intermediary service.

3.3 Intermediary service provider to have the character of an agent, broker or any other similar person: The definition of "intermediary" itself provides that intermediary service provider means a broker, an agent or any other person, by whatever name called".". This part of the definition is not inclusive but uses the expression "means" and does not expand the definition by any known expression of expansion such as "and includes". The use of the expression "arranges or facilitates" in the definition of "intermediary" suggests a subsidiary role for the intermediary. It must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply. Thus, the role of intermediary is only supportive.

3.4 Does not include a person who supplies such goods or services or both or securities on his own account: The definition of intermediary services specifically mentions that intermediary "does not include a person who supplies such goods or services or both or securities on his own account". Use of word "such" in the definition with reference to supply of goods or services refers to the main supply of goods or services or both, or securities, between two or more persons, which are arranged or facilitated by the intermediary. It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal to principal basis, the said supply cannot be covered under the scope of "intermediary".

3.5 Sub-contracting for a service is not an intermediary service: An important exclusion from intermediary is sub-contracting. The supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors. Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers, and therefore, clearly is not an intermediary. For instance, "A" and "B" have entered into a contract as per which "A" needs to provide a service of, say, Annual Maintenance of tools and machinery to "B". "A" subcontracts a part or whole of it to "C". Accordingly, "C" provides the service of annual maintenance to "A" as part of such sub-contract, by providing annual maintenance of tools and machinery to the customer of "A", i.e. to "B" on behalf of "A". Though "C" is dealing with the customer of "A", but "C" is providing main supply of Annual Maintenance Service to "A" on his own account, i.e. on principal to principal basis. In this case, "A" is providing supply of Annual Maintenance Service to "B", whereas "C" is supplying the same service to "A". Thus, supply of service by "C" in this case will not be considered as an intermediary.

3.6 The specific provision of place of supply of "intermediary services" under section 13 of the IGST Act shall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India.

Thus after the clarification issued vide Circular No. 159/15/2021-GST in respect of the intermediary services the scope of intermediary services gets cleared to the some extent. Now, let’s discuss the other provisions relating to intermediary services given under IGST Act. As we know that any supply of service will be considered either as inter-state supply or intra-state supply which depends upon the place of supply of said service. Section 13 of IGST Act 2017 contains the provisions for the place of supply of services where location of supplier or location of recipient is outside India. As per clause (b) of sub section 8 of section 13 of IGST Act the place of supply of service in case of intermediary services would be the location of the supplier of services.

However, in case the intermediary services are provided in relation to supply of goods and where both the supplier of goods and the recipient is located outside India then such intermediary services would be exempt as per serial number 12AA of Notification No. 09/2017-Integrated Tax (Rate) IGST. The said serial number is laid down as follows:

Thus, the services provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory would be exempt from the GST subject to certain conditions. It is also important to note that such exemption is available only when the intermediary services are provided in relation to goods not in relation to services.

Sometimes the confusion also arises in respect of intermediary services and export of services. Let’s discuss an advance ruling of Telangana in this respect. In this case the applicant M/s. Center for International Admission and Visas entered into agreements with foreign universities/ colleges to provide referral services. The applicant provides referrals of the aspirants who wish to apply and study aboard to the universities/ colleges located outside India. The applicant is responsible to prepare the case of the aspiring student and refer it to the concerned foreign college and university. The applicant is not bound to refer student to a college or university, in particular. On the contrary, the applicant considering the merits of the aspiring student and particulars of the college/ university, refers the case. It is pertinent to note that the college/ university retains full and complete discretion about whether to accept a student applicant for enrolment. The applicant has no authority to accept an applicant or guarantee a student applicant’s acceptance by the college/ university. Thus, the Applicant works as an independent contractor providing its own service of ‘marketing/ recruitment/ referral’ to the foreign colleges and university.

The Telangana Authority for advance ruling stated that, it appears the services of marketing/ recruitment/ referral consultant are provided by the applicant to foreign colleges and university on principal to principal basis, with no contractual relationship with prospective students. The applicant is providing its main service of marketing/recruitment and referral consultant to the foreign colleges/universities, which is independent of the transactions between the foreign colleges/university, and their prospective students. The applicant cannot be construed to have been facilitating services of the foreign colleges and university to the prospective students as students cannot be construed as service recipients particularly in the absence of consideration flowing from them to the applicant. Therefore, we are of the considered opinion that, the applicant cannot be considered as ‘intermediary’ for the purpose of Section 2(13) of IGST Act.

The authority also held that the applicant (Supplier) is located in India while the recipient of services i.e. foreign colleges and university are located outside India. Since, the activity of the applicant is an independent service of marketing/ recruitment/ referral consultant, the same will fall under Section 13(2) of the IGST Act to determine its place of supply. Accordingly, the place of supply of the services of the applicant shall be location of recipient of it services i.e. location of foreign colleges and university which is outside India. Further, the applicant and foreign colleges and university are nowhere related to each other and thus, cannot be treated as establishment of a distinct person in accordance with Explanation 1 to Section 8 of IGST Act. Therefore, the activity of the Applicant for foreign college and university should qualify as ‘export of service’ in terms of Section 2(6) of IGST Act provided the payments are received in convertible foreign exchange.

Thus from the above discussion it can be stated that intermediary should be engaged in facilitating or arranging the main supply between the two principals. This ancillary supply is supply of intermediary service and is clearly identifiable and distinguished from the main supply.

Conclusion: To be covered under the scope of intermediary there should be minimum three parties and two distinct supplies i.e., one main supply between the two principals, which can be a supply of goods or services or securities and one ancillary supply which is the service of facilitating or arranging the main supply between the two principals.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.