A PERSON WHO SUPPLIES THE GOODS AND SERVICES ON HIS OWN ACCOUNT CANNOT BE CONSIDERED AS AN ‘INTERMEDIARY’

[Mr. M. GOVINDARAJAN]

Intermediary

Section 2(13) of the Integrated Goods and Services Tax Act, 2017 defines the term ‘intermediary’ as 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.

Issue

The issue to be discussed in this article is as to whether a person who supplies the goods and services on his own account can be considered as an ‘intermediary’ with reference to deciding case law.

Case law

In M/S. ERNST AND YOUNG LIMITED VERSUS ADDITIONAL COMMISSIONER, CGST APPEALS -II, DELHI AND ANR. - 2023 (3) TMI 1117 - DELHI HIGH COURT, the petitioner is the Indian branch of ‘Ernst & Young Limited’, a company incorporate under the laws of the United Kingdom.  The petitioner company was incorporated in India by the permission granted by Reserve Bank of India on 04.04.2008.  The parent company entered into service agreements for providing professional consultancy services to its branches at US, Australia, New Zealand and UK on arm’s length basis.  The overseas entities had retained E&Y Limited, acting through its Indian Branch to provide certain professional services.

The terms and conditions for rendering services under the aforementioned agreements are broadly similar in material aspects.  The Services may be in the nature of, but not limited to, the following activities-

• assurance and business advisory services;
• technical assistance/ advice in relation to expatriate tax compliance services under the tax laws of the United States, including technical review and approval of US income tax returns and other related work products; and knowledge transfer on engagement specific matters to other firms that may be performing professional services for EY US in India;
• technical assistance/advice in relation to business tax compliance services under the tax laws of the United States, including technical review and approval of US tax returns and other related work products; and
• advice and technical assistance with respect to US audit processes required under appropriate accounting standards, including the review and analysis of the financial data of EY US’s audit clients.

The petitioner had provided various professional services to overseas EY Entities in terms of the agreements entered into between E&Y Limited and the respective overseas EY Entities. The invoices raised described the nature of services for the invoiced amount as ‘Professional Fees for Services’.

The petitioner applied for refund of the ITC availed for providing its professional services for the periods December 2017 to March 2020 to the tune of Rs.93,49,756/-. 

The Adjudicating Authority issued show cause notices to the petitioner dated 02.01.2020, 13.04.2020 and 23.04.2021 against the refund applications made by the petitioner.  The reasons indicated in the above said show cause notices by the Department as below-

• How the Output services are treated as Export of Services? Accordingly, kindly explain the nature of Output Services and provide copy of Agreement with overseas client along with annexure/schedule and copy of export invoices.
• How the input services have nexus with the provision of exported services and how they have been utilized for provision of the same? Accordingly, kindly explain the nature of input services and their nexus & utilization with the provision of exported services.

The petitioner filed reply to the said cause notice.  The petitioner contended that-

• The petitioner was involved in providing ‘business advisory services and technical assistance’.
• The Services are in the nature of management consultancy/professional consultancy services.
• It had provided the Services directly to the EY Entities located outside India in terms of the service agreements entered into between E&Y Limited (the head office of the petitioner) and the respective EY Entities.
• The petitioner had raised invoices for the Services rendered and the consideration was received directly from the overseas EY Entities in convertible foreign exchange.
• The petitioner’s input tax credit had accumulated on account of supplies availed by the petitioner for performing the Services which included services of chartered accountant, management and consultancy services, hotel accommodation services, bank charges and renting of immovable property.
• The supplies were directly related for providing professional services.

The Adjudicating Authority accepted that the petitioner was located in India.  On the basis of invoices raised by the petitioner it Adjudicating Authority found that the recipients are located outside India.  In respect of the place of services is concerned the Adjudicating Authority held that, in terms of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017, the location of supply of intermediary services is the location of the supplier of those services.

The Adjudicating Authority also referred to the letter dated 04.04.2008 issued by the Reserve Bank of India granting Ernst & Young Limited the permission to establish a Branch Office in India and noted that the activities that could be carried out by the Branch Office in India included ‘representing the parent company in India and acting as buying/selling agent in India’.  In terms of the service agreements, overseas EY Entities had retained the petitioner (Indian Branch of Ernst & Young Limited) to provide professional services in India.  The petitioner relied on an order passed by service tax authorities on 08.05.2018 in which it was held that the petitioner was not an intermediary. The petitioner further contended that the concept of an intermediary under the Finance Act, 1994 and the Rules made there under relating to service tax were the same as the concept of intermediary under the Integrated and Goods and Services Act.

The Adjudicating Authority did not accept the contentions of the petitioner and held that the petitioner is an intermediary of its parent company and branches at US, UK etc.

Against the order of Adjudicating Authority the petitioner filed an appeal before the Commissioner (Appeals).  The Appellate Authority upheld the decision of the Adjudicating Authority that the services rendered by the petitioner were intermediary services. The Appellate Authority reasoned that the services provided were at the instance of foreign based entities but the same were not provided in their respective foreign territories. Therefore, it could be construed that the subject services were provided in India. The Appellate Authority considered the Service Agreements and held that the appellant is providing subsidiary services in India for these foreign clients. In these circumstances, the activities of the appellant are classifiable as ‘intermediary service’. 

The petitioner filed the present writ petition before the High Court against the orders passed by the Authorities below.

The High Court framed the issue as to whether the services rendered by the petitioner to EY entities in terms of service agreement constitute services as ‘intermediary’, for its consideration. 

The High Court analyzed the definition of ‘intermediary’ in the Integrated Goods and Services Tax Act, 2017.   The High Court observed that a plain reading of the aforesaid definition makes it amply clear that an intermediary merely ‘arranges or facilitates’ supply of goods or services or both between two or more persons.  According to this definition a person who supplies the goods or services is not an intermediary.  In the present case, there is no dispute that the petitioner does not arrange or facilitate services to EY entities from third parties; it renders services to them.  The petitioner had not arranged the said supply from any third party.

The High Court observed that the reasoning of the Adjudicating Authority that the petitioner is an intermediary is fundamentally flawed.  The Adjudicating Authority has misunderstood the definition of ‘intermediary’.  The Adjudicating Authority has proceeded on the basis that since the service agreements were between EY Entities and the petitioner’s head office (E&Y Limited), the petitioner has rendered services on behalf of its head office (E&Y Limited) and therefore, the petitioner is an intermediary.  Even if it is accepted that the petitioner has rendered services on behalf of a third party, the same would not result in the petitioner falling within the definition of ‘intermediary’ it is the actual supplier of the professional services and has not arranged or facilitated the supply from any third party.

The High Court further observed that merely because one of the activities that could be carried on by the petitioner is to act as buying/selling agent in India does not mean that the petitioner had carried on such activities and the invoices raised were for services as a buying/selling agent.  In the present case, there is no dispute that the petitioner had, in fact, rendered professional and consultancy services, which is also one of the permissible activities.

The High Court analyzed the circular issued by the Department vide No. 159/15/2021-GST, dated 20.09.2021 discussing the scope of ‘intermediary’.  The services rendered by the petitioner to EY Entities, prior to roll out of the GST regime, were considered as ‘export of services’. The petitioner prevailed before the concerned service tax authorities in establishing that the professional services rendered by it cannot be considered as services as an ‘intermediary’. It is also material to note that the petitioner’s application for refund of input tax creditor for the period after March 2020 has also been accepted by the Adjudicating Authority.

There is no dispute that the recipient of Services – that is EY Entities – is located outside India. Thus, indisputably, the services provided by the petitioner would fall within the scope of the definition of the term ‘export of service’ under Section 2(6) of the Integrated Goods and Services Tax Act.

Therefore the High Court allowed the appeal filed by the petitioner and set aside the impugned orders.  The High Court further directed the department to process the refund application of the petitioner as expeditiously as possible.