Intermediary for Supply of Goods

[Smitesh Desai]

Unlike the B2B segment, Consumer Durables Industry does not have an identified customer, when goods are dispatched, from the factory. The latter’s Business Model is therefore different from the former. Let me explain.

Smyth Bikes India Limited is a reputed manufacturer of motorcycles in India. They also have export potential in South Africa, where they may need to ride piggy back on a reputed mobike dealer. So, how do they do it?

1. Smyth have identified a dealer, say, ABC South Africa Enterprises, in Joburg.

2. The two parties execute an agreement.

3. The agreement offers 10% commission on sales, to ABC.

4. The agreement provides for opening a bank account: Smyth a/c ABC, to be operated by ABC for deposits and by Smyth for withdrawals.

5. The agreement provides that Smyth will dispatch bikes to ABC on consignment basis, for sale @ ₹ 2.00 lacs each, in local currency.

6. ABC is obliged to receive the bikes, exhibit them and “sell” them “for and on behalf of Smyth”. This operation is better termed as “supply by ABC”.

7. When a customer walks into the showroom and buys a bike against cheque payment, three transactions happen practically simultaneously.

8. The local currency equivalent of ₹ 2.00 lacs is deposited into the bank account. 10% commission is paid from the account to ABC and the major chunk 90% is repatriated to Smyth, India. Let’s ignore VAT and minimum bank balance for the moment.

The essence of this modality is that, ABC is an agent. He never owns the bikes. He always holds them “for and on behalf of Smyth”. Smyth remains the owner of the bikes until “supplied” by delivery to the customer by ABC.

Did ABC provide Service to Smyth? Yes. Is it taxable under the Reverse Charge Mechanism in India? Let’s find out.

According to Rule 2(1)(d)(G) of the Service Tax Rules, 1994, Person Liable for Paying Service Tax is defined as follows:

“in relation to any taxable service provided or agreed to be provided by any person which is located in a non-taxable territory (ABC Enterprise, Joburg, South Africa) and received by any person located in the taxable territory (Smyth, India), the recipient of such service”

But Budget 2014 has exempted this service from tax by an amendment:

The definition of “Intermediary” in Place of Provision of Services Rules, 2012, reads as follows:

Wef – 1/x/2014

(f) “intermediary" 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;

The underlined portion is added by Budget 2014.

Read alongwith Place of Provision of Service Rules (POS):

Place of provision of specified services.-

09. The place of provision of following services shall be the location of the service provider:-

(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) Online information and database access or retrieval services;

(c) Intermediary services;

(d) ..........

A combined reading of these provisions leads to the inescapable conclusions that ABC, Joburg, South Africa, the agent is deemed to provide service in South Africa. Accordingly he is out of Reverse Charge Mechanism, as far as Smyth is concerned.

The definition of Intermediary excludes “....a person who provides the main service or supplies the goods on his account”

Back home, when Smyth provides Consignment Agency Services to a foreign client, say, Harley, after 1/x/2014, Smyth will be exposed to Service Tax, (earlier exempt upto 30/9-export of service), by virtue of inclusion of Intermediary Services in Rules 9 of POS Rules.

Ditto for FMCG segment.