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Intermediary and Export of Services under GST Harish P Devda

Dec ‘19

Background

Under GST, tax is levied on the taxable supply of goods/services. Tax is applicable on the

taxable services supplied in India.

In the GST regime, intermediary services by Indian suppliers to foreign principals are

taxed to GST. In common parlance, any person who enables the supply of

goods/services between two persons, is considered as intermediary.

There has been a lot of confusion regarding tax implications on the pre-sales and post-

sales services vs intermediary services done by Indian suppliers to foreign customers.

The paper writer has examined different models by which Indian suppliers are providing

services to foreign principals and GST implications. Further examined the tax

implications in light of the advance rulings such as in V serv Global Pvt Ltd [2018-TIOL-

263-AAR-GST] and in NES Global Specialist Engineering Services Pvt Ltd [2019-TIOL-64-

AAR-GST].

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Who is an intermediary?

In the terms of section 2(13) of IGST Act, “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;

In short, “intermediary” essentially involves 3 or more persons

(1) Supplier of service/goods,

(2) Principal on whose behalf service is rendered/goods supplied and

(3) Persons who actually receives the service/goods (i.e., customers of the

principal).

However, where a person is providing services or supplies goods on his own account to

his customers, it cannot be termed as an intermediary in accordance with section 2(13)

of IGST Act.

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Hence it is clear from the above definition, that there is required to be an arrangement

or facilitation of the supply of goods, services or securities. In addition to the definition,

in order to qualify as an intermediary; there should be two supplies at any one time:

The supply between the principal and the third party; and

The supply of his own service (agency service) to his principal, for which a fee or

commission is usually charged.

However, it may be noted that a person acting as an intermediary cannot change the

nature of supply provided by person on whose behalf he is acting as an intermediary.

Next, we examine concept of composite supply under GST.

Concept of composite and Mixed supply under GST.

Composite supply: In GST, a supply is said to be a composite supply where the following

conditions are satisfied:

a. consisting of two or more taxable supplies of goods or services or both, or any

combination thereof,

b. which are naturally bundled,

c. supplied in conjunction with each other in the ordinary course of business

d. one of which is a principal supply

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 it does not constitute a composite supply.

The tax liability on a composite or a mixed supply would be determined in the following

manner, namely:

a. composite supply comprising two or more supplies, one of which is a

principal/predominant supply, would be treated based on the supply of such

principal supply; and

b. mixed supply comprising two or more supplies would be treated as a supply of that

particular supply which attracts the highest rate of tax.

Place of supply of intermediary service vs. Support service

The place of supply of service, whether within or outside India is determined by applying

Section 13 of IGST Act, 2017 where the location of supplier or location of recipient is

outside India.

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Section 13(1) would apply to determine the place of supply of services where the

location of the supplier of services or the location of the recipient of services is outside

India.

Default Section 13(2) states that the place of supply of service except the services

specified in sub-sections (3) to (13) shall be the location of recipient of service.

In terms of Section 13(8)(b) of IGST Act, 2017, the place of supply for the intermediary

services would be the location of the supplier of such services (i.e. location of

intermediary service provider)

When the essential character of services provided by service provider to foreign

principal/foreign customer is that of commission agent for enabling sourcing or sale of

goods such as machine/garments to outside India along with support services. As per

the composite supply concept, the principal supply is that of intermediary service.

Therefore, such service to be treated as intermediary services, being services of

commission agent for goods covered in section 13(8)(b), and the place of supply of

service is location of supplier in India and liable to GST

However, the supplier could be doing presale activities of nature of recommending

suitable suppliers, maintain supplier list, and post order activities such as supplier order

status, guidance to manufacturers on trends/developments, communicate deviation in

quality and delivery schedule, advise on international norms and standards.

The dominant nature of service appears to be that of outsourced business support

services, which in normal course could be done by foreign client but outsourced to

Indian supplier. Consequently, this is a composite supply of service in which the

essential nature of services is that of outsourced support services, such services could

get covered in section 13(2), whereby place of supply of service is location of foreign

client of Indian supplier.

Further if all the conditions set out in section 2(6) of IGST Act as extracted further paras

are fulfilled by supplier. Then such services would be treated as exported services and

eligible credit pertaining to such exports can be availed. Alternately go for refund.

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Single agreement for providing both services namely support service plus

intermediary service:

When the supply of intermediary and other support services including inspection,

testing, design, consultancy, etc are done under single agreement., the view maybe

taken that it is a composite supply by supplier, wherein facilitation/ intermediary

services is the principal supply therefore, not an export and GST payable. This could be

view favoured by dept as well.

Separate agreements for providing support service and intermediary service:

There could be a separate agreement for provision of intermediary service. The services

of enabling purchase/sale of goods/services done to the foreign clients could be said to

be facilitating the supply of goods/services to foreign clients and considered as

intermediary to that extent. Such services are covered in section 13(8)(b) of IGST Act.

The place of provision of service is location of supplier of service in India and taxable to

GST.

The support service agreement could get covered in section 13(2) of IGST Act and place

of supply of service is location of foreign client outside India. Further if all conditions of

export of services are satisfied such services could be treated as exports.

Export of services under GST

In accordance with section 2(6) of the IGST Act, 2017” Export of Services” means the

supply of any Service when

(i) The supplier of Service is located in India;

(ii) The recipient of Service is located outside India

(iii) The place of supply of service is outside India

(iv) *The payment for such service has been received by the supplier of service in

convertible foreign exchange and

(v) The supplier of service and the recipient of service are not merely establishments of

a distinct person but distinct legal entities in accordance with Explanation 1 in

section 8;

In order to treat an export of services all the conditions mentioned above has to be

satisfied. When export of services done under LUT, GST need not be paid and the

corresponding eligible credit maybe availed/alternately go for refund.

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*The condition has been amended with effect from 1st February 2019 as the payment

for such service has been received by the supplier of service in convertible foreign

exchange or in Indian rupees wherever permitted by Reserve bank of India.

When above conditions are satisfied and export done under LUT then there is no need

to pay GST on such exported services.

Note: Explanation 1 to Section 8 of the IGST Act, 2017 provides that where a person has

an establishment in India and any other establishment outside India then such

establishments would be treated as establishments of distinct persons.

Exemptions – notification 09/2017 IT(R)

Entry 10F: Provides exemption for Services supplied by an establishment of a person in

India to any establishment of that person outside India, which are treated as

establishments of distinct persons in accordance with Explanation 1 in section 8 of the

IGST Act.

Condition:

The place of supply of the service should be outside India as per S. 13 of IGST Act

Comments:

The said exemption is effective from 27th July 2018 vide notification no. 15/2018 -

IT(R)

The exemption provides only for the services between establishments i.e. to say the

branches of same co.

The supplier branch of co. supplying services would be exempted when place of

supply is outside India, the exemption provided a relief for the branches when

supplying services as it would not be considered as an export of services [condition

no 5 in such cases would be dissatisfied] and the supplier branch in India would be

liable to pay tax under forward charge.

The supplier branch in India would be required to reverse its ITC of such common

goods and services proportionate to the exempted services.

Illustration: Let’s say company ‘ABC’ has 2 establishments *‘A’ and ‘B’+ ‘A’ located in

India is supplying support management services [for which place of supply is outside

India as per S. 13(2)+ to ‘B’ located outside India, as it is an establishments of distinct

persons the conditions of export of services are not satisfied and it would be exempted

as per above entry in the hands of ‘A’

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Entry 12AA: Provides exemption for the Services provided by an intermediary when

location of both supplier and recipient of goods is outside the taxable territory provided

- 20/2019- IT (R) dt. 30.09.2019

Conditions:

Following documents shall be maintained for a minimum duration of 5 years:

a. Copy of Bill of Lading

b. Copy of executed contract between Supplier/Seller and Receiver/Buyer of goods

c. Copy of commission debit note raised by an intermediary service provider in taxable

territory from service recipient located in non- taxable territory

d. Copy of certificate of origin issued by service recipient located in non- taxable

territory

e. Declaration letter from an intermediary service provider in taxable territory on

company letter head confirming that commission debit note raised relates to

contract when both supplier and receiver of goods are outside the taxable territory

Comments:

The said exemption is effective from 01st October 2019 and it is a conditional

exemption under GST.

The exemption is applicable only for intermediary services when

facilitating/arranging goods and not services.

This is a welcome move from the government also it is to be noted government

exempted such intermediary services where both location of supplier and recipient

of goods is outside India then in such a case intermediary service provider is not

required to pay GST on the same.

Wherever any goods and/ or services are used for making taxable supplies as well as

exempted supplies under GST [common goods or services] it would be required to

reverse its ITC of such common goods and services proportionate to the exempted

turnover.

The intermediary service provider is required to maintain the said above documents

for period of 5 years.

Note:

It could be understood from the above exemption entry that intermediary services

would be exempt when all the following conditions are satisfied:

The supplier of goods is located outside India,

The recipient of goods is located outside India,

Certificate of Origin of the non-taxable territory [outside India]

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Illustration:

Let’s say ‘A’ is located in USA and he is supplying goods to ‘B’ located in UK through a

person ‘C’ of India and the certificate of origin of such goods in India.

Then in such a case the above exemption would not be applicable as and it would be

taxable under the hands of ‘C’ as intermediary services.

Based on the above discussion, the place of supply of the intermediary services would

be the location of the ‘C’ and he has to discharge CGST and SGST as place of supply and

location of ‘C’ is in same State.

Recent advance rulings

Case 1: In the case of Micro Instruments (Vishakhar Prashant Bhave), (GST-ARA-

23/2018-19/B-87) Mumbai dated 10.08.2018 Maharashtra authority for advance ruling

(MAAR)

Facts: Micro Instruments (In short ‘MI’) is providing services to its Principals at Germany,

by way of procuring Purchase Orders (P.O.) from the parties in India, for which MI

receives commission in CFE. After the negotiations are concluded, the prospective

customer in India places the order directly on the Principals at Germany, arranges for

remittance of purchase price arrived at and the material is directly supplied to

customers by the foreign Principals.

Issue: Whether the commission received by MI as an “intermediary” in

International/cross border transaction, for acting as a Broker or facilitator, in procuring

from an Indian Customer/s purchase order/s (P.O.) for importing Laboratory Equipment

from Germany is liable to GST either under CGST/SGST Act, 2017 or the IGST Act, 2017?

Ruling: Commission received by MI in CFE for rendering services as

an ‘Intermediary' between an exporter abroad receiving such services and an Indian

importer of an equipment is not an export of service. Said supply will be treated as

inter-state supply and IGST will be levied @18.

Case 2: In V Serv Global Pvt Ltd [2018-TIOL-263-AAR-GST] it was held that 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"

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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.

Comments: The AAR has not considered the aspect of main service provided by

applicant to overseas company on its own account. The service provided on principal to

principal basis and not acting as an agent is completely ignored in the above said AAR.

Case 3: In the recent advance ruling in case of M/s Ansys Software PVT LTD [2019-TIOL-

321-AAR-GST]

The applicant is providing two type of services in separate agreements with its parent

co.

1. Marketing & pre sales technical support services – In this applicant undertakes the

understanding of customer’s requirement, presentations, demonstrations, explores

business opportunity, once the order is placed applicant used to co-ordinate with the

customers, helps in follow up for collection of invoice value from customers in India,

applicant receives consideration fixed as a percentage sale of the order value

Held: The services provided is intermediary services falling under purview of S. 2(13) of

IGST Act.

Comments: The authority has notedly grasped the actual nature of transaction which

are required to be treated separately rather than treating them as ancillary services with

conjunction to the principal supply as different contracts were entered for the

transactions and concluded accordingly.

2. Post sales technical services - In this applicant used to provide technical support

(such as support through email, telephone, web etc.) to the customer of parent

company and in return parent co. to pay consideration for the same

Held: The services provided is classified as Information technology support services

Comments: The services may fall under export of services provided satisfied conditions,

the authority has analyzed the terms the supplier [person supplying goods or services]

and recipient of services [the person liable to pay consideration]

Case 4: NES Global Specialist Engineering Services Pvt Ltd [2019-TIOL-64-AAR-GST].

NES is supplier of manpower services to highly technical industries such as Oil & Gas,

Power etc. NES India and NES Abu Dhabi have proposed to enter into a Master service

agreement (MSA) through which NES India will provide support service in respect of the

foreign business carried on by NES Abu Dhabi

Held: Transaction covered under the MSA between the applicant and NES Abu Dhabi is a

Zero-rated supply and is to be considered as an export of service under the GST Act

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Comments: The transaction between group companies NES India and NES Abu Dhabi is

for pure services for providing support services to co. and accordingly considered as an

export of services and not an intermediary service.

Note: Advance ruling is applicable to assessee who seeks it and to his set of facts. It is

not applicable to others. It may be followed only when it is in line with GST provisions.

Conclusion

Hence, from the above discussion, it is evident that there is only a thin line of difference

in case of ‘intermediary’ and such services provided by supplier located in India would

be taxable as Intra State supply requiring to charge CGST and SGST on such transactions

and it cannot be treated as export of services.

Further certain AAR’s have adversely given the rulings in the favour of revenue by

ignoring the support services done on own account by supplier creating a confusion in

the industry.

A separate remuneration/agreement could be set out for acting as intermediary and

separate for providing support services, whereby intermediary for enabling sale of

goods/supply of services is liable to GST. On such remuneration applicable GST could be

collected and paid and support services to qualify as export of services [provided all

conditions are satisfied] support services are covered in section 13(2) of IGST Act, 2017

which provides the place of supply of service is location of service receiver outside India.

Drafting of separate agreements would be better providing exact scope with the

actuality of the services which would be helpful in avoiding litigations.

It is suggested that drafting of the agreement in detail with the segregation of the scope

of intermediary services and any others support services to be provided by such persons

and also it would be better if intermediary person bifurcates the method of charging

remuneration to fixed basis for the outsourced support effort to capture the reason for

the assignment for the cost-plus part on actual basis.

This article was published in Taxguru at the below link:

https://taxguru.in/goods-and-service-tax/intermediary-export-services-gst.html

For any further queries/comments please write to harish@hiregange.com.

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