Demystifying Intermediary concept with examples

[RASHI JAIN]

Demystifying Intermediary concept with examples

As per the latest Circular No. 159/15/2021-GST, the definition of an intermediary is

“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.”

And 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.

Thus there are two 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.

Sub-contracting for a service is not an intermediary service

For instance, ‘Amit enterprises’ and ‘Bhanu pvt ltd’ have entered into a contract as per which ‘Amit enterprises’ needs to provide a service of, say, Annual Maintenance of tools and machinery to ‘Bhanu pvt ltd’. ‘Amit enterprises’ subcontracts a part or whole of it to ‘Crystl pvt ltd’. Accordingly, ‘Crystl pvt ltd’ provides the service of annual maintenance to ‘Amit enterprises’ as part of such sub-contract, by providing annual maintenance of tools and machinery to the customer of ‘Amit enterprises’, i.e. to ‘Bhanu pvt ltd’ on behalf of ‘Amit enterprises’. Though ‘Crystl pvt ltd’ is dealing with the customer of ‘Amit enterprises’, but ‘Crystl pvt ltd’ is providing main supply of Annual Maintenance Service to ‘Amit enterprises’ on his own account, i.e. on principal to principal basis. In this case, ‘Amit enterprises’ is providing supply of Annual Maintenance Service to ‘Bhanu pvt ltd’, whereas ‘Crystl pvt ltd’ is supplying the same service to ‘Amit enterprises’. Thus, supply of service by ‘Crystl pvt ltd’ in this case will not be considered as an intermediary.

Now let us jump straight to the 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.

Some FAQs related to different sectors:

ITES Services-

1. There is an Indian company who makes software and sells it outside the country and it has hired a firm, not a related party, located abroad to facilitate the supply of software in Europe & the USA, would it be liable to pay GST on the payments that it makes to this firm abroad?

Answer – No. In this case, ‘C’ is covered by the definition of ‘intermediary’ [section 2(13) of the IGST Act, 2017]. The place of supply of such intermediary service is location of the supplier in terms of section 13(8) of the IGST Act, 2017. As ‘C’ is located outside India, GST is not payable in this case.

2.  I am an agent in India of a foreign IT/ITES provider (principal located outside India). For agency services, I bill the principal in convertible foreign exchange. Whether GST liability arises in this case?

Answer - You are an intermediary and the place of supply of the service provided by you to the principal is in India irrespective of the mode of payment. Hence, GST is payable on the services provided by you as an intermediary to the principal.

Financial Services-

1. Would intermediary services provided to an offshore client and services provided by a banking company to its offshore account holders be treated as an intra-State supply or an inter-State supply for payment of GST?

Answer- Under clause (b) of section 13(8) of the IGST Act, 2017 the place of supply of such services is the location of the provider of services. As the location of supplier and place of supply are in same State, such supplies will be treated as intra-State supply and Central tax and State tax or Union territory tax, as the case may be, will be payable.

2. Do stock brokers fall in the definition of “intermediary” under section 2(13) of the IGST Act, 2017?

Answer - Yes. Since stock brokers arrange the supply of securities between two or more persons, stock brokers would be covered by the definition of “intermediary”.

3. What is the scope of agency services provided by the Department of Posts mentioned in the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017?

Answer - The Department of Posts also provides services like distribution of mutual funds, bonds, passport applications, collection of telephone and electricity bills on commission basis. These services are in the nature of intermediary and generally called agency services. In these cases, the Department of Posts is liable to pay tax without application of reverse charge.

4. Clarification is sought for the following:- 1. Intermediary services and services provided by Banking Company to its Account Holders – Intra-state or Inter-state supply?

Answer - Place of supply provisions in sub-section (12) of section 12 of IGST Act may be referred to.

5. Cross border services provided by an Indian branch to offshore branch /HO which are not “Intermediary Services” – are they exempted?

Answer - Section 13 of IGST Act, 2017 may be referred. The place of supply is outside India but as the supplier is located in India, it is a case of inter-State supply and subject to IGST. It will be zero rated if the sale proceeds are realized in Convertible foreign exchange.

Conclusion- This clarification was indeed much awaited and I hope with the compilation of these examples, you will be in a better position to judge which service qualifies as an intermediary.

The author can be reached at jainrashi2008@gmail.com.