Clarification
on Meaning of Intermediary Services
under Sec.2(13) of IGST Act, 2017
· Main
Supply between Principals and Ancillary Supply of Intermediate Distinguished
for GST Purposes
[Circular No.
159/15/2021-GST dated 20 September, 2021]
·
Scope
of
Intermediary services
·
Primary Requirements for intermediary services
Subject: Clarification on doubts related to scope of
“Intermediary”.
Representations have been received
citing ambiguity caused in interpretation of the
scope of “Intermediary services” in the GST Law. The matter has been examined.
In view of the difficulties being faced by the trade
and industry and to ensure uniformity in the
implementation of the provisions of the law across field formations, the Board, in exercise
of its powers conferred by section 168 (1) of the Central Goods and Services
Tax Act, 2017 (hereinafter referred to as “CGST Act”),
hereby clarifies the issues in succeeding paragraphs.
2.
Scope of Intermediary services
2.1
‘Intermediary’ has been defined in the sub-section (13) of section 2 of the Integrated Goods and Services
Tax Act, 2017 (hereinafter referred to as “IGST” Act) as under–
“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.”
2.2
The concept
of ‘intermediary’ was borrowed in GST from the Service
Tax Regime. The definition of ‘intermediary’ in the
Service Tax law as given in Rule 2(f) of Place of Provision of Services Rules, 2012 issued vide notification No. 28/2012-ST, dated 20-6-2012 was as
follows:
“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;”
2.3
From the perusal of the definition of “intermediary” under IGST Act as well as under Service Tax law, it is evident that there is broadly no change in
the scope of intermediary
services in the GST regime
vis-à-vis the Service
Tax regime, except
addition of supply of
securities in the definition of intermediary in the GST Law.
3. Primary Requirements for intermediary services
The concept
of intermediary services, as defined above,
requires some basic
pre- requisites, 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, does 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.
3.3
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.
4.
Applying the abovementioned guiding
principles, the issue of intermediary services is
clarified through the following illustrations:
Illustration 1
‘A’ is a manufacturer and supplier of a machine. ‘C’ helps ‘A’ in selling the machine by identifying client ‘B’ who wants to purchase this machine and helps in finalizing the contract
of supply of machine by ‘A’ to ‘B’. ‘C’ charges ‘A’ for his services of locating ‘B’ and helping in finalizing the sale of machine between
‘A’ and ‘B’, for which ‘C’ invoices ‘A’ and is paid by
‘A’ for the same. While
‘A’ and ‘B’ are involved
in the main supply of the machinery, ‘C’, is facilitating the supply of machine between
‘A’ and ‘B’. In this arrangement, ‘C’ is providing the ancillary supply of arranging or facilitating
the ‘main supply’ of machinery between ‘A’ and ‘B’ and therefore, ‘C’ is an intermediary and is providing intermediary service to ‘A’.
Illustration 2
‘A’ is a software
company which develops
software for the clients as per their requirement.
‘A’ has a contract
with ‘B’ for providing some customized software
for its business operations.
‘A’ outsources the task of design and development of a particular
module of the software to
‘C’, for which “C’ may have to interact
with ‘B’, to know their specific requirements. In this case, ‘C’ is providing
main supply of service of design and development
of software to ‘A’, and thus,
‘C’ is not an intermediary in this case.
Illustration 3
An insurance company ‘P’, located outside
India, requires to process insurance
claims of its clients in respect of the insurance service being provided by ‘P’ to the clients. For processing
insurance claims, ‘P’ decides to outsource
this work to some other firm. For this purpose,
he approaches ‘Q’, located
in India, for arranging insurance
claims processing service
from other service providers in India. ‘Q’ contacts ‘R’, who is in business of providing
such insurance claims processing
service, and arranges supply of insurance claims processing
service by ‘R’ to ‘P’. ‘Q’ charges P a commission
or service charge
of 1% of the contract value of insurance claims processing service provided by ‘R’ to ‘P’. In such a case, main supply of insurance claims processing service is between ‘P’ and ‘R’, while ‘Q’ is merely
arranging or facilitating the supply of services
between ‘P’ and ‘R’, and not himself
providing the main supply of services. Accordingly, in this case, ‘Q’ acts
as an intermediary as per definition of sub-section (13) of section 2 of the
IGST Act.
Illustration 4
‘A’ is a manufacturer and supplier of computers based in
USA and supplies its goods all over the
world. As a part
of this supply, ‘A’ is also required to provide customer
care service to its customers to address their queries and complains related
to the said supply of computers.
‘A’ decides to outsource
the task of providing customer
care services to a BPO firm, ‘B’. ‘B’
provides customer care service to ‘A’
by interacting with the
customers of ‘A’ and
addressing / processing their
queries / complains. ’B’ charges ‘A’ for this service. ‘B’ is involved
in supply of main service
‘customer care service’
to ‘A’, and therefore, ’’B’ is not an intermediary.
5.
The illustrations given in para 4 above are only indicative and not exhaustive. The illustrations are also generic
in nature and should not be interpreted to mean that the service categories mentioned therein are inherently either intermediary
services or otherwise. Whether or
not, a specific service would fall under
intermediary services within
the meaning of sub-section (13) of section 2 of the IGST Act, would depend
upon the facts of the
specific case. While examining the facts of the case and the terms of contract, the basic characteristics of intermediary services,
as discussed in para 3
above, should be kept in consideration.
6.
It is requested that suitable
trade notices may be issued to publicize
the contents of this
Circular.
7. Difficulty, if any, in the implementation of this Circular
may be brought to the notice of the Board.
F.No. CBIC-20001/8/2021-GST