PLACE OF PROVISION OF INTERMEDIARY SERVICES

[Dr. Sanjiv Agarwal]

Determination of taxability of a service in terms of Place of Provision of Service Rules, 2012

A service is taxable only when, inter alia, it is “provided (or agreed to be provided) in the taxable territory”. Thus, the taxability of a service will be determined based on the place of its provision. For determining the taxability of a service, therefore, one needs to ask the following questions sequentially:—

1. Which rule applies to the service provided specifically? In case more than one rules apply equally, which of these come later in the order given in the rules?
2. What is the place of provision of the service in terms of the above rule?
3. Is the place of provision in taxable territory? If yes, tax will be payable. If not, tax will not be payable.
4. Is the provider ‘located’ in the taxable territory? If yes, he will pay the tax.
5. If not, is the service receiver located in taxable territory? If yes, he may be liable to pay tax on reverse charge basis.
6. Is the service receiver an individual or government receiving services for a non-business purpose, or a charity receiving services for a charitable activity? If yes, the same is exempted.
7. If not, he is liable to pay tax.
8. It both are in non-taxable territory, no Service Tax is applicable.
   

Place of Provision of Intermediary Services [Rule 9]

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.

What are "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 accordance with the above guiding principle, service provided by any intermediary in relation to services such as arranging or facilitating transportation of cargo, sales promotion, marketing of goods and services etc will qualify as intermediary services. As such, the commission charged and earned out of such activity shall get covered under Service Tax net based on Rule 9 of Place of Provision of Services Rules, 2012 as the place of location of such service provider shall be in India, i.e., taxable territory.

Rule 3 – General Rule / Main Rule / Default Rule

The main rule or the default rule provides that a service shall be deemed to be provided where the receiver is located.

The main rule is applied when none of the other later rules apply (by virtue of Rule 14 governing the order of application of rules). In other words, if a service is not covered by an exception under one of the later rules, and is consequently covered under this default rule, then the receiver’s location will determine whether the service is leviable to tax in the taxable territory.

The principal effect of the main rule is as follows:

(a) Where the location of receiver of a service is in the taxable territory, such service will be deemed to be provided in the taxable territory and service tax will be payable.

(b) However, if the receiver is located outside the taxable territory, no service tax will be payable on the said service.

Service tax is required to be paid by the provider of a service, except where he is located outside the taxable territory and the place of provision of service is in the taxable territory. Where the provider of a service is located outside the taxable territory, the person liable to pay service tax is the receiver of the service in the taxable territory, unless of course, the service is otherwise exempted.  taxmanagementindia.com

Rule 14 – Order of application of Rules

Rule 14 provides that where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration.

This Rule covers situations where the nature of a service, or the business activities of the service provider, may be such that two or more rules may appear equally applicable. Hence, if more than one rule is applicable in any situation, the later rule shall apply.

Thus, in case of intermediary services rule 9 will be applicable but where it cannot be said that the service provider is not an intermediary, rule 3 will be applicable.