Intermediary, for Service Tax Law

[Smitesh Desai]

Imagine a situation when an Indian Manufacturer has appointed an agent for carrying out certain functions such as Sales or Sales Promotion etc. The Manufacturer is located in India. If the agent is also located in India, then the agent is liable for service tax. Obviously he would pass on the tax burden to the Manufacturer. If the agent is located abroad (say UK), then the Indian Manufacturer is liable for service tax under Reverse Charge Mechanism. Tax burden and Tax payment, both fall upon the Indian Manufacturer.

This happens because, under 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 (UK agent) and received by any person located in the taxable territory (India), the recipient of such service (Indian Manufacturer)”

Now let’s complicate this picture further.

The UK agent wants to appoint a sub-agent. If he appoints the sub-agent by himself, the Indian Manufacturer is not bothered – financially speaking. The Indian Manufacturer may or may not know about the appointment or the identity of the sub-agent. This is known as a bipartite arrangement between the UK agent and his sub-agent. Since the sub-agent does not render service to the Indian Manufacturer directly, Reverse Charge Mechanism does not set in.

Further complexity:

The UK agent appoints the sub-agent with the concurrence of the Indian Manufacturer. The arrangement is now tripartite, in nature. The Indian Manufacturer makes payment of sub-agency commission. Reverse Charge Mechanism comes into play.

But Budget 2014 has played a master stroke:

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 (addition by Budget 2014), between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;

This is the master stroke, when read alongwith Place of Provision of Service Rules.

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 (sub-agent);

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

A combined reading of these provisions leads to the inescapable conclusions that the sub-agent is deemed to provide service in UK. Accordingly he is out of Reverse Charge Mechanism, as far as the Indian Manufacturer is concerned.

What about the UK agent?

The Indian Manufacturer remains liable for service tax in relation to this service, under Reverse Charge Mechanism.

Isn’t the UK agent also an Intermediary? And hence out of Reverse Charge Mechanism? Like the sub-agent?

No. Because the definition of Intermediary excludes “....a person who provides the main service or supplies the goods on his account”

What is the objective of such an elaborate taxing (UK agent) and exempting (sub-agent) amendment? To set right situations such as Paul Merchants Limited v/s CCE Chandigarh 2012 (12) TMI 424 - CESTAT, DELHI (LB).

Back home, when an Indian Agent provides Business Auxiliary Services to a foreign client, even after 1/x/2014, he will remain exempt, by virtue of “export”. But if the Indian Agent appoints a sub-agent, whether under bipartite agreement or tripartite agreement, that sub-agent will be liable for service tax – by himself.

You should also read:

(h) “location of the service provider” means-

(a). where the service provider has obtained a single registration, whether centralized or otherwise, the premises for which such registration has been obtained;

(b). where the service provider is not covered under sub-clause (a) (sub-agent):

(i) the location of his business establishment; or

(ii) where the services are provided from a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or

(iii) where services are provided from more than one establishment, whether business or fixed, the establishment most directly concerned with the provision of the service; and

(iv) in the absence of such places, the usual place of residence of the service provider.

Place of provision generally.-

03. The place of provision of a service shall be the location of the recipient of service (Indian Manufacturer vis-vis UK agent):

Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service.