Intermediary Services Nexus with Export of Services

[DAMINI TALWAR]

By Rachit Gandhi

Introduction

Intermediary services are always a point of discussion and deliberation in cases where services are provided by an Indian entity to a Foreign company. The department looks at all such services through the lens of Intermediary services. In case services fall under the definition of intermediary services, then the Place of supply becomes the location of the Service supplier, and the supply is not treated as an Export of services. So, while entering any service arrangement with a Foreign company it becomes of utmost importance to test the Principle of Intermediary services. In many cases, it happens that an Indian entity provides a bouquet of services to its foreign counterpart as per business need and some services fall under intermediary services but others are not Intermediary services, but when consideration is combined and services are provided under a single agreement then it becomes a composite supply and is obvious for tax authorities to consider the supply as intermediary Services.

Important definitions

Section 2(30)  "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

Section 2(74) "mixed supply" means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration.- A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;

Section 2(86) "place of supply" means the place of supply as referred to in Chapter V of the Integrated Goods and Services Tax Act;

Section 2 (6) "export of services" means the supply of any service when,-

1. the supplier of service is located in India;

2. the recipient of service is located outside India;

3. the place of supply of service is outside India;

4. 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

5. 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;

Section 2(13)  "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;

Section 13(8) The place of supply of the following services shall be the location of the supplier of services, namely: -

………………………………………………………………………………

(b) intermediary services;

Important Case Laws

Provisions of Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”) are legal, valid and Constitutional

The constitutional validity of Section 13(8)(b) read with Section 8(2) of the IGST Act, was challenged before The Hon’ble Bombay High Court in DHARMENDRA M. JANI VERSUS THE UNION OF INDIA CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS (ERSTWHILE CBEC) , GOODS AND SERVICE TAX COUNCIL, PRINCIPAL COMMISSIONER OF GOODS AND SERVICE TAX, MUMBAI, STATE OF MAHARASHTRA - 2021 (6) TMI 563 - BOMBAY HIGH COURT  and honourable court held that the provisions of Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”) are legal, valid and Constitutional. However, the said sections are confined to the provisions of the IGST Act only and the same cannot be made applicable for the levy of tax on services under the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and the Maharashtra Goods and Services Tax Act, 2017 (“the MGST Act”).

Marketing/Support services can't be treated as Intermediary Services

In the case of CSG SYSTEMS INTERNATIONAL (INDIA) PVT LTD VERSUS COMMISSIONER OF CENTRAL TAX, BENGALURU SOUTH COMMISSIONERATE - 2021 (3) TMI 1202 - CESTAT BANGALORE, held that Marketing/Support services on Principal to Principal basis to group companies can't be treated as Intermediary Services; the tribunal observed that sales marketing and support services provided to group companies are export of service because said services provided on principal-to-principal basis with no element of principal-agent relationship.

Principal to Principal basis Service not intermediary Service

In case of LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, BELAPUR - 2019 (1) TMI 720 - CESTAT MUMBAI , Custom, Excise & Service Tax Tribunal Mumbai observed that (Para 6)  I find that the learned Commissioner (Appeals) has denied the benefit of export with effect from 1.10.2014 under the Place of Provision of Services Rules, 2012, holding that the appellant had facilitated supply of goods between its foreign counterpart and processing of goods and thus, it should be considered as an intermediary. On perusal of the contracts, 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. It is an admitted fact on record that the consideration received by the appellant for providing the services was based upon cost plus markup and is nowhere connected with the main supply of goods. In other words, the main supply may or may not happen and thus, cannot be directly correlated with the service provided by the appellant.

Sales promotion Services not intermediary Services

In case of  M/S CHEVRON PHILLIPS CHEMICALS INDIA PVT. LTD. VERSUS COMMISSIONER OF CGST & CENTRAL EXCISE, MUMBAI EAST - 2019 (12) TMI 1066 - CESTAT MUMBAI observed that , On a simple reading of the agreement analyzed as above, it is clear that the appellants are appointed by their overseas counterpart CPC Global for sales promotion of the goods for their client in the defined territory. The appellant has no role in fixation of price nor they negotiate in any manner between CPC Global and their clients relating to sales promotion of the goods sold. Therefore, in my view, the appellant cannot be called as an intermediary. Consequently, fall outside the amended definition of 'intermediary' under Rule 2(f) and Rule 9 of the POPS Rules, 2012.

Market Research not intermediary Services

In the case of M/S. OHMI INDUSTRIES ASIA PRIVATE LIMITED VERSUS ASSISTANT COMMISSIONER, CGST - 2023 (4) TMI 425 - DELHI HIGH COURT, the Delhi high court held that the petitioner is rendering the Market Research Services directly to OHMI, Japan. Therefore, insofar as providing Market Research Services is concerned, the petitioner cannot be held to be an intermediary.

Discussion

From a reading of the definition of Intermediary and analyzing cases referred to above, it can be understood that for a service to be classified as an intermediary there must be three parties involved i.e. First Principal supplier, Second Principal Buyer and Third intermediary, who facilitate buyer and seller in supply. In cases where a person is providing any services to another person on Principal to Principal basis then the service, cannot be considered as an Intermediary service.

In many cases Indian company provides market research services, support services for go-to-market strategy, and Support in marketing products and services of foreign companies these services are provided to foreign companies on Principal to Principal basis as there is no third party in these cases.  In addition to these services, Indian companies may also facilitate selling goods and services to prospective buyers by taking orders from Indian customers negotiating prices with Indian customers, and supporting in execution of transactions between foreign companies and Indian customers. In these cases, this may be covered under intermediary services as three parties are involved.

Conclusion

Companies need to carefully analyse the scope of services to be provided and if services are Principal to Principal basis then the same will not fall under Intermediary services and in cases where bouquet of services are provided, separate nature of services to be identified and accordingly tax treatment to be decided.

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