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TAXATION OF INTERMEDIARY'S SERVICES |
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TAXATION OF INTERMEDIARY'S SERVICES |
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Place of Provision of Services Rules, 2012 The place of provision of service rules will determine the place where the services shall be deemed to be provided. It’s taxability will be determined based on the location of its provision. In the following specified services, place of provision shall be the location of the service provider- (i) Services provided by a banking company, or a financial company, or a non-banking financial company to account holders; (ii) Telecommunication services provided to subscribers; (iii) Online information and database access or retrieval services; (iv) Intermediary services; (v) Service consisting of hiring of means of transport, up to a period of one month. Intermediary Services An 'intermediary' is a person who arranges or facilitates a provision of service between two persons. Thus, an intermediary is involved with two supplies at any one time: (i) the supply between the principal and the third party; and (ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged. Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as "the main service"), but provides the main service on his own account. For the purpose of this rule, an intermediary in respect of goods (commission agent i.e, a buying or selling agent) is excluded by the definition itself. In terms of Rule 9, in case of intermediary, following conditions should be met - • Should arrange or facilitate a service between two persons • Does not include a person who himself provides the main service on his own account • Concept does not apply to goods • Two services get involved - (i) main service by principal to customer (airlines, hotel, tour operator etc.) (ii) own service to customer or principal (hotel booking, ticket booking, travel agent etc.) • Does not influence any of the two – (i) characteristics of main service (ii) price of main service. Amendments by Finance Act, 2014 The definition of intermediary as defined under Rule 2(f) of the Place of Provision of Services Rules, 2012 has been amended vide Notification No. 14/2014-ST, dated 11.07.2014. This notification shall come into force from 01.10.2014. By virtue of this amendment, the scope of rule 9 has been widened and will cover supply of goods also. While prior to such amendment, only agent or intermediary who is engaged for providing of services are covered under the definition, w.e.f. 01.10.2014 any broker, agent or any other person whatever name called arranges or facilitates supply of goods between two or more persons shall also be covered under the scope of 'intermediary'. The amended definition is as follows – "(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" Accordingly, w.e.f. 01.10.2014 any intermediary who is engaged in supply of goods, such as a commission agent or consignment agent shall also be covered under the scope of term 'intermediary'. In case of intermediary services for supply of goods, place of provision of service shall be the location of service provider, as stipulated in Rule 9(c) of the POP Rules, 2012 instead of Rule 3 thereof.
By: Dr. Sanjiv Agarwal - September 23, 2014
Discussions to this article
Sir, In one of your previous article on a similar subject , in reply to my query specifically on services provided by an Indian distributor(a public limited company) as per agreement between a foreign principal and themselves, whose job was to prospect orders from Indian organisations in India in favour of the foreign principals, you replied that the commissions earned in foreign convertible currency directly from the foreign principals will also get attracted by the new Rule of intermediary . I am sorry but could not clearly understand the real reason for the same and would be much obliged if you kindly give a more insightful explanation to the above. It is deemed that the foreign principals do not have any PE in India and that the Indian distributor has no other job but only to get the tenders replied to by the foreign principals and for that the former, even though does only the liaisoning work with Indian enterprises has no other locus standi when a Purchase Order is placed by the latter on the foreign principals. Previously I presume when the Export of Service Rules were functional this same activity could have got the benefit of the exemption under it. Regards. Kohinoor Mitra..
This is a pure revenue augmentation measure and against all the good practices of developed nations. EU classifies such services based on location of the customer as it brings in CFE.
Is this amendment, in definition of Intermediary, to override the decision of AAR in case of Tandus Flooring India Pvt. Ltd. 2014 (33) STR 33 (AAR) = 2013 (8) TMI 806 - AUTHORITY FOR ADVANCE RULINGS?
Many intermediaries who facilitate the ultimate sale of goods in India by exporter abroad are now trying to bifurcate the services into technical support or business support services and post sale activities to limit the 12.36% impact. In our opinion this maybe risky as delinking a composite service or trying to bundle a service in the course of sale as technical/ sale related could be decided either way. The only exclusion could be services provided to the exporter. The planning of location of the service however is something which many intermediaries are opting. Maybe shifting the business to Singapore of Dubai. It is sad that in the eagerness to collect revenue the best practices across the world of B2B - the customers location being most important has not been followed. Maybe representations to MOF is needed to reverse this.
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