In pre-GST regime and under GST regime, scope of “Intermediary” service has always been a matter of dispute, and various applications are filed before Authority of Advance Ruling (“AAR”) or various judicial authority to obtain clarification that specified service is covered under “Intermediary” Service or not.
The GST council received various representations to clarify scope of “Intermediary” service and therefore, in the 45th GST Council meeting, the GST council recommended CBIC to issue the necessary clarifications to resolve this matter to the extent possible. Therefore, CBIC issued clarification on doubts related to scope of “Intermediary” vide Circular No. 159/15/2021-GST dated 20th September, 2021.
1. Definition of Intermediary Service
- Term “Intermediary Service” is defined under Section 2(13) of IGST Act, 2017, which is reiterated below:
“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.”
- Concept of “Intermediary Service” was applicable under service tax regime and the same has been borrowed under GST regime. Scope of “Intermediary Service” under pre-GST regime and GST regime is broadly same except “supply of securities” is also covered under GST law.
2. Prerequisite for Intermediary Services
To check whether any service is covered under “Intermediary Service”, it must qualify following prerequisites
2.1. Minimum of Three Parties
- As per definition, an intermediary is someone who arranges or facilitates the supplies of goods or services or securities between two or more persons.
- Thus, It is natural that the arrangement requires a minimum of three following parties:
- Supplier of goods or services or security (The main supply)
- Recipient of goods or services or security (The main supply)
- Person arranging or facilitating such main supply (The Ancillary Supply)
- Therefore, An activity between only two parties can NOT be considered as an intermediary service.
- An intermediary essentially “arranges or facilitates” another supply (the “main supply”) between two or more other persons and does not himself provide the main supply.
2.2. Two distinct Supplies
- As discussed above, an intermediary service involves 2 different supplies, i.e., the main supply and the ancillary supply.
- The Main supply:
The main supply takes place between two principals and it can be a supply of goods or services or securities;
- The Ancillary Supply:
The Ancillary supply is the service of facilitating or arranging the main supply between the two principals. This ancillary supply is the 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.
2.3. Intermediary service provider must have the character of an agent, broker or any other similar person
- As per definition of “intermediary”, intermediary service provider means “a broker, an agent or any other person, by whatever name called….”.
- Definition of Intermediary is not an inclusive definition, rather, it uses the expression “means” and does not expand the definition by any known expression of expansion such as “and includes”.
- Further, use of the expression “arranges or facilitates” in the definition of “intermediary” suggests a subsidiary role for the intermediary. An intermediary must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply.
- Therefore, role of intermediary is only supportive.
2.4. Does not include a person who supplies such goods or services or both or securities on his own account
- The definition of intermediary services specifically mentions that intermediary “does not include a person who supplies such goods or services or both or securities on his own account”.
- Word “such” in the definition of intermediary is given with reference to supply of goods or services refers to the main supply of goods or services or both, or securities, between two or more persons, which are arranged or facilitated by the intermediary.
- It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal to principal basis, the said supply cannot be covered under the scope of “intermediary”.
2.5. Sub-contracting for a service is not an intermediary service
- An important exclusion from scope of intermediary is sub-contracting.
- The supplier of main service may outsource the supply of the main service, either fully or partly, to one or more sub-contractors. Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers.
- Therefore, service of sub-contractor is clearly not an intermediary.
- ‘A’ and ‘B’ have entered into a contract wherein ‘A’ needs to provide a service of Annual Maintenance of tools and machinery to ‘B’.
- ‘A’ subcontracts a part or whole of such a contract to ‘C’.
- Accordingly, ‘C’ provides the service of annual maintenance to ‘A’ as part of such sub-contract. “C” is providing service of annual maintenance of tools and machinery to the customer of ‘A’, i.e. to ‘B’ on behalf of ‘A’.
- Even though ‘C’ is dealing with the customer of ‘A’, but ‘C’ is providing the main supply of Annual Maintenance Service to ‘A’ on his own account, i.e. on a principal to principal basis.
- In this case, ‘A’ is providing a supply of Annual Maintenance Service to ‘B’, whereas ‘C’ is supplying the same service to ‘A’.
- Thus, supply of service by ‘C’ in this case will not be considered as an intermediary.
2.6. “Place of supply” for intermediary service
- Provisions of “Place of Supply” of intermediary service is given under Section 13 of IGST Act.
- Section 13 is applicable to determine “place of supply” only when either the supplier of the service or the recipient of the service is located outside India.
- CBIC has provided some illustrations to provide a clear picture of “Intermediary Service”. However, kindly note that these illustrations are only indicative and not exhaustive and also services mentioned in illustrations are not intermediary in each case. While determining Whether service is intermediary service or not, all facts of the case and terms of contracts are required to be analyzed on the basis of provisions.
- ‘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 “C” also helps in finalizing the contract of supply of machines between A and B.
- ‘C’ charges ‘A’ for his services of locating potential customers and also helping in finalizing the sale of machines. For this service, ‘C’ raises invoices on ‘A’ and is paid by ‘A’ for the same.
- In the given case, ‘A’ and ‘B’ are involved in the main supply of the machinery, and ‘C’ is facilitating the supply of machine between ‘A’ and ‘B’.
- Therefore, ‘C’ is providing the ancillary supply of arranging or facilitating the ‘main supply’ of machinery between ‘A’ and ‘B’ and accordingly, ‘C’ is an intermediary and is providing intermediary service to ‘A’.
- ‘A’ is a software company which develops software for the clients as per their requirement.
- ‘A’ enters into 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 providing such service, “C’ may have to interact with ‘B’, to know their specific requirements.
- In this case, ‘C’ is providing the 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, “P” 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’.
- For this service, ‘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’.
- “Q” is 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.
- ‘A’ is a manufacturer and supplier of computers based in the USA. A 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 complaints related to supply of computers.
- For this purpose, ‘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 / complaints. ’B’ charges ‘A’ for this service.
- ‘B’ is involved in supplying the main service of ‘customer care service’ to ‘A’, and therefore, ’’B’ is not an intermediary.