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TMI BlogDirect Engagement in Service Provision Should Not Be Confused with Intermediary StatusX X X X Extracts X X X X X X X X Extracts X X X X ..... Direct Engagement in Service Provision Should Not Be Confused with Intermediary Status - By: - Kamal Aggarwal - Goods and Services Tax - GST - Dated:- 15-11-2024 - In a recent matter of M/S. ATLAN TECHNOLOGIES PRIVATE LIMITED VERSUS ASSISTANT COMMISSIONER, COMMISSIONERATE-SOUTH DELHI - 2024 (10) TMI 1308 - DELHI HIGH COURT , the hon'ble Delhi High Court, in light of the Service Level Agreement, held that since the petitioner provided IT services directly to an entity outside India, rather than facilitating between two or more persons, it cannot be classified as an intermediary. The petitioner, providing Software Development and Engineering Support Services (ITS), entered into a Service Level Agreement with its parent company in Singapo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. The petitioner claims its services qualify as an 'export of services' under the Integrated Goods and Services Tax Act, 2017 (IGST Act). It filed two refund applications for unutilized Input Tax Credit (ITC). However, these applications were rejected on the grounds that the petitioner was considered an intermediary , thus disqualifying the services as export . The learned counsel for the petitioner contended that the services of the petitioner fall within the scope of Section 13(2) of the IGST Act and cannot be categorized as 'intermediary services' under Section 13(8) of the IGST Act . Moreover, the agreement entered into suggests a detailed payment structure, which includes direct and indirect costs along with a market- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based markup, reflecting a legitimate commercial transaction consistent with export activities. The relevant extract of the agreement is reproduced below: - 2. Service Fees. 2.1 In consideration of the Services rendered by the Service Provider to the Service Recipient, the Service Recipient shall pay the Service Provider, a service fee of an amount equal to all direct and proportionate indirect costs incurred by the Service Provider in provision of Services to the Service Recipient plus a markup at such percentage as may be considered to be at arms' length basis ( Service Fees ). 2.3 The Parties hereby agree and acknowledge that the payment of the Service Fees shall be promptly made by the Service Recipient SGD/USD/INR denomination to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he designated bank account of the Service Provider. It is further agreed between the Parties that the Service Fees shall be adjusted in order to cover any loss incurred by the Service Provider on account of foreign exchange fluctuation and all the risk relating to foreign exchange fluctuation shall be borne by the Service Recipient. Similarly, any gain on account of foreign exchange fluctuation shall be adjusted by the Service Provider in the subsequent invoice. Reliance has been placed on Circular No. 159/15/2021-GST dated 20.09.21 , which clarified the doubts raised with respect to the scope of intermediary services. The relevant extract is reproduced below: - 3. Primary Requirements for intermediary services The concept of intermediary s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices, as defined above, requires some basic prerequisites, which are discussed below: 3.1 Minimum of Three Parties : By definition, an intermediary is someone who arranges or facilitates the supplies of goods or services or securities between two or more persons. It is thus a natural corollary that the arrangement 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. An intermediary essentially arranges or facilitates another supply (the main supply ) between two or more other persons and, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not himself provide the main supply. 3.2 Two distinct supplies: As discussed above, 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. 3.4 Does not include a person who supplies such goods or services or both or securities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 . 3.6 The specific provision of place of supply of 'intermediary services' under section 13 of the IGST Act s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India. From perusal of the above, the hon ble court has held that it clearly indicates that an entity engaged in the 'main supply' of goods or services in its own right does not qualify as an 'intermediary'. For an entity to be considered an intermediary, there must be a contract involving at least three parties, with the intermediary facilitating the supply. Additionally, the provisions regarding the place of supply for 'intermediary services' under Section 13 of the IGST Act only apply if either the supplier or the recipient of those services is located outside India. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hon ble High court held that the petitioner could not be classified as an intermediary under Section 2(13) of the IGST Act , as it was directly providing IT services to an entity outside India rather than facilitating supply between multiple parties. The court found that the decision of respondents lacked evidence supporting the claim of intermediary and that the petitioner consistently operated on a principal-to-principal basis. The court ruled that the argument about the petitioner s markup was misconceived as the service fee was at arm s length. Providing services to a holding company did not disqualify the petitioner from receiving a markup, and this alone did not justify classifying it as an intermediary. Ultimately, the court deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the impugned orders unsustainable and allowed refund of unutilized ITC to petitioner. The present judgement emphasizes that for a party to be labeled an intermediary, there must be a clear arrangement involving at least three parties, with the intermediary merely facilitating the transaction. Moreover, being related to a parent company does not inherently alter the nature of service delivery or justify imposing intermediary status. The court's clear delineation between direct service provider and intermediary facilitation strengthens the integrity of the tax system, ensuring that businesses engaging in legitimate exports are not penalized by misinterpretations of their operations. The acknowledgment of fair market pricing, irrespectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of corporate relationships, promotes a culture of accountability and encourages companies to pursue legitimate avenues for international trade. Lastly, it highlights the necessity for tax authorities to rely on substantive evidence rather than presumptions when making determinations about intermediary status. - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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