Fathoming the scope of an ‘Intermediary’ as clarified under CBIC Circular No. 159/15/2021-GST dated

Taxability of Intermediary Services is one of most contentious issues till date in the GST regime. The scope of ‘intermediary services’ is critical in view of the fact that if a service is held to be an ‘intermediary service’, the place of supply would be the location of supplier and consequently, the same would not qualify as ‘export of service’, although all other ingredients, except the place of supply of service, to qualify as export of service are present. An interpretation enlarging the scope of ‘intermediary’ has very adversely affected the export of business support services from India. This term was defined under Section 2(13) of the IGST Act, 2017, as under:

“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.

2. The interpretation of scope of ‘activity of facilitation of supplies’, under Intermediary services has been a bone of contention between industry and revenue department. The confusion on the scope of ‘intermediary’ got compounded after the issue of Circular No. 107/26/2019-GST dated 18.07.2019 (clarification on doubts related to supply of Information Technology enabled Services).

2.1 Without elaborating on what amounts to arranging or facilitating a (main) supply, the circular simply sought to clarify in para 5.2 that support services provided by a supplier of backend services located in India for arranging or facilitating the supply of goods or services or both by the client located abroad would amount to intermediary service. The clarification contradicted the basic principles of operation of an intermediary. The clarification implied that even if the support services relating to pre-delivery, delivery, post-delivery, logistical support, post-sale support are provided to the customers of the client located abroad on behalf of the client located abroad, the same would constitute ‘intermediary service’, notwithstanding the fact that the supplier of backend services is not a conduit between the seller and the buyer for sale/purchase of a supply i.e. for occurring of the main supply. In other words, the clarification implied that even if the support services provided by the supplier of backend services are independent of the main supply, the support services would amount to ‘intermediary service’.

2.2 Para 5.3 of the Circular simply put the onus on the registered person to identify the ITeS supplied on his own account and support service supplied in the capacity of an intermediary in terms of para 5.2 of the Circular. Resultantly, instead of clarifying on the issue, the Circular ended up in creating more confusion. However, after representation from the trade, this circular was rescinded vide Circular No. 127/46/2019-GST dated 04.12.2019.

2.3 In the absence of clear guidelines regarding the scope of the services of an intermediary, some of the tax authorities across the country were guided by the principles explained in the Circular dated 18.07.2019, which was subsequently withdrawn ab-initio and held a view that intermediary services would cover a host of business support/promotion services such as promotion and marketing services, networking, back-end office support, customer relations, accounting, administration, liaising activities, and on managing various documentation requirements provided to clients located outside India.

3. Intermediary is an established business term that refers to a person who (i) makes arrangements for, or (ii) facilitates a supply to be made between at least two other persons. Under the erstwhile service tax regime, ‘intermediary’ was defined under rule 2(f) of Place of Provision of Services Rules, 2012 to mean

“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 on his account”.

This definition was on the lines of globally recognized definition of intermediary. HMRC internal manual – VAT Place of Supply of Services defines Intermediary Services: Intermediaries as under:

(https://www.gov.uk/hmrc-internal-manuals/vat-place-of-supply-services/vatposs09100 )

VATPOSS09100 - Intermediary services: Intermediaries The term intermediary refers to a person who makes arrangements for, or facilitates, a supply to be made between two other persons. They can provide services to customers who may be either the supplier or the recipient of the supply which is being arranged, or to both. Intermediaries may be referred to as brokers, buying or selling agents, or go-betweens. Payments in respect of supplies made by intermediaries are often described as commissions, but this is merely consideration for the services and in no way indicates the type of supply being made.

3.1 With the shift to GST regime, the definition of Intermediary Services, as in Service Tax regime, was borrowed and introduced more or less as it is in the Integrated Good and Service Tax Act, 2017 (the IGST Act).

3.2 It may be seen that there is no material difference in the scope of intermediary services as understood Global VAT Laws or in the Indian GST regime or the Service Tax regime, except the addition of supply of securities in the definition of intermediary in the GST Law, which also stands clarified in para 2.3 of the CBIC Circular No. 159/15/2021-GST dated 20.09.2021, which is as follows: -

“2.3 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 the addition of supply of securities in the definition of intermediary in the GST Law”.

3.3 It may be seen that after the introduction of the negative list regime in 2012, with the purpose or aim to facilitate a better understanding of the changes brought by the new service tax system, to both, taxpayers as well as tax administrators, the CBEC on June 20th, 2012 came out with an Education Guide on Taxation of Services (for short “Education Guide”). Therefore, while elucidating on the scope of the intermediary under GST regime, reliance can be placed on the said Education Guide. In particular, attention is drawn to Para 5.9.6 to Guidance Note 5 of the Education Guide, which elucidates on the scope of ‘intermediary’. Para 5.9.6 of the Education Guide is extracted as follows:

Generally, an “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:

1. the supply between the principal and the third party; and

2. the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered: - Nature and value: An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal. Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”. Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable.

3.4 The above principles governing the scope of intermediary services were reiterated in Circular No. 159/15/2021-GST dated 20, September 2021. It has been clarified in the aforesaid Circular that business support service could qualify as intermediary service only when the following conditions are fulfilled:

(i) Minimum of Three Parties:

(ii) Two distinct supplies:

(iii) Intermediary service provider to have the character of an agent, broker, or any other similar person:

3.5 The Circular clarifies that an ‘intermediary’ does not include a person who supplies such goods or services or both or securities on his own account. Also, sub-contracting for a service is not an intermediary service.

4. It is viewed that this circular has recognized and endorsed the position in the Service Tax Education Guide that there must be two supplies - main supply and supply of intermediary services. Further, the intermediary services should be related and dependent on the main supply. There must be three parties involved in the supply of the main service. An intermediary must be present as an agent or broker or in a similar capacity arranging or facilitating the main supply between the supplier and recipient of the main supply. If the support service could be supplied independently of the main supply, then the business support service could not be treated as an intermediary supply. In other words, if the support service does not necessarily and invariably result in arranging or facilitating the main supply as an agent or broker etc., the support service could not be considered as an intermediary service.

5. On a careful perusal of Para 5.9.6 of the Education Guide, CBIC Circular No. 159/15/2021-GST dated 20, September 2021 and the definition of "intermediary" provided in IGST Act, it is clear that an intermediary is involved with two supplies at any one time i.e., the main supply arranged or facilitated by him between the principal and the third party and the supply of his own service to his principal must occur at the same time.

5.1 Another very important attribute is that the value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. Further, equally important is the attribute that the service of the intermediary on behalf of the principal should be clearly identifiable.

5.2 It is noted that an intermediary’s job is to arrange or facilitate supply between two or more persons i.e. an ‘intermediary’ is a facilitator of supply of goods or services or both between two or more persons. Thus, there must occur a supply between two or more persons as a consequence of the supply of services of an intermediary. It may be noted that the supply of business promotion/support service by itself would not result in arranging or facilitating the supply of the recipient of support services. As per the Merriam-Webster dictionary, ‘facilitator’ is defined as under:

“: someone or something that facilitates something especially: someone who helps to bring about an outcome (such as learning, productivity, or communication) by providing indirect or unobtrusive assistance, guidance, or supervision”

5.3 It may be noted that an important attribute of a ‘facilitator’ is that he is someone who helps to bring about an outcome i.e. who helps in completing the main supply between the two or more parties. As per the definition of facilitator under US State law (https://www.mass.gov/service-details/re51r06-facilitator), a Facilitator is also known as a Non-Agent or Transaction Broker/Salesperson. The Facilitator works to complete the transaction. Thus, the overwhelming attribute of a facilitator is that he is someone who helps to bring about an outcome- completion of the main transaction.

6. It is evident from the Education Guide that an intermediary is involved with two supplies at any one time. The use of the phrase “at any one time” is very significant as it implies that the main supply is being arranged or facilitated and the intermediary’s own supply should occur at the same time. It requires that both the supplies must be mutually interdependent. Both the supplies must occur 'at any one time’ or should be supplied simultaneously. It is viewed that intermediary service would immediately flow from the occurrence of the main supply. If the main supply and the support services are not provided at any one time or simultaneously, the support services cannot be considered as intermediary services. This view is in line with the meaning and scope of a facilitator in para 5 above.

6.1 Thus, it is clear that the supply being facilitated by the intermediary i.e. the main supply must complete with his own supply at the same time i.e. both the supplies must occur simultaneously. If the main supply is completed between two parties after the supply of support service, the support service would not constitute ‘intermediary service’. In nutshell, the supply of ‘intermediary service’ is always dependent on the occurrence of the main supply and both the supplies i.e. ‘intermediary service’ and the main supply are interdependent and occur simultaneously.

6.2 The aforesaid view is also corroborated by the illustrations given in the CBIC Circular No. 159/15/2021-GST dated 20, September 2021. The essence of the situation in illustration I is that the support service culminates in the completion of the main supply i.e. both the supplies happen simultaneously. Similarly, the essence of the situation in illustration III is that the value of the support service is computed on the basis of the completed main supply and both the supplies happen simultaneously.

7. It has been clarified in the Service Tax Education Guide under the principle ‘Separation of value’ that the value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging and it can be based on an agreed percentage of the sale or purchase price. However, if both the supplies i.e. ‘support service’ and the ‘main service’ are not interdependent and are not occurring simultaneously, the ‘support service’ cannot be categorized as ‘intermediary service’. Mere determining the value of the support service as a percentage of the sale or purchase price would not suffice. If the main supply is completed after completion of the support service, determining the value of the support service as a percentage of the sale or purchase price of the main supply would only constitute a measure for valuation of the support service. It cannot be construed as an indication of the support service being an intermediary service. For being an ‘intermediary’, he must indulge in completing the main supply. This view is also supported by the decision of the Hon’ble CESTAT in appeal No. ST/52205/2015 vide Final Order No. 62221/2018 dated 16.03.2018 in the case of M/s Sunrise Immigration Consultants Pvt. Ltd. Vs. CCE & ST, Chandigarh, wherein the Hon’ble CESTAT has held that: -

“The appellant is only facilitating the aspirant students and only introduced them to the college and if these students get admission to the college, the appellant gets commission which is in the nature of promoting the business of the college and for referring investors to borrow loan from foreign-based banks to the people who wish to settle in Canada and on that if the deal matures, the appellant is getting a certain commission. So the nature of service provided by the appellant is the promotion of business of their client, in terms, he gets commission which is covered under Business Axillary Service which is not the main service provided by the main service providers namely banks/university”.

8. A contrary view taken by the Appellate Authority for Advance Ruling under GST, West Bengal in the matter of Global Reach Education Services Pvt. Ltd., reported in 2018 (15) G.S.T.L. 618 (App. A.A.R. - GST) does not appear to be correct. In the said ruling the AAAR has observed that the appellant promotes courses of Foreign University, finds suitable prospective students to undertake the courses, and, in accordance with University procedures and requirements, recruits, and assists in the recruitment of suitable students and held that the appellant is to be considered as an intermediary in terms of Section 2(13) of Integrated Goods and Services Tax Act, 2017 particularly when he would not be paid any consideration for services provided if no student admitted in the university. It was also held that the scope of the term ‘intermediary’ under IGST is much wider than the scope of ‘intermediary’ under the erstwhile Service Tax regime. The relevant para of the ruling is extracted below: -

23. From the above two definitions it is amply clear that the issue of ‘main service’ decided by the Hon’ble Customs, Excise & Service Tax Appellate Tribunal, Chandigarh, in the matter of M/s. Sunrise Immigration Consultants Private Ltd. v. CCE & ST, Chandigarh, cannot be imported into “intermediary”, as defined under the IGST Act, 2017, as the definition of “intermediary” under Section 2(13) of the IGST Act, is not the same as that under Rule 2(f) of the POPS Rules, 2012, inasmuch as under GST an “intermediary” is an entity who arranges/facilitates for the supply of services of another entity, which may include ancillary services, whereas under POPS Rules, 2012, the intermediary arranges/facilitates for provisions of services of the main service provider.

8.1 It is viewed that the finding of authority that the definition of the intermediary under the service tax law is different from the definition under GST law is primarily based on the use of words “main service” in the definition under service tax regime. It is seen that the finding of the authority does not appear to be a true appreciation of the material similarity between the two definitions in view of the clarification issued by CBIC vide Circular No. 159/15/2021-GST dated 20.09.2021, cited supra. The words “main service” only refer to the service provided by the principal, otherwise, there is no material difference between the definition of the intermediary under both the laws. Thus, a different interpretation adopted by the AAAR regarding the scope of the intermediary and not applying the ratio of the law held in the Sunrise case basis the same does not appear to be correct.

9. To summarize and to further elaborate on the scope of intermediary service as clarified by the Board vide Circular No. 159/15/2021-GST dated 20, September 2021, business support service could qualify as intermediary service only when the following conditions are fulfilled:

(i) Minimum of Three Parties;

(ii) Two distinct supplies i.e. principal supply and intermediary’s own supply;

(iii) Both, the principal supply and intermediary’s service, though distinct, are inter-dependent and occur simultaneously;

(iv) For being an ‘intermediary’, he must indulge in completing the main supply.

(v) Intermediary service provider to have the character of an agent, broker or any other similar person:

9.1 An ‘intermediary’ does not include: -

(i) a person who supplies such goods or services or both or securities on his own account.

(ii) Sub-contracting for a service is not an intermediary service.

(iii) Mere determining the value of the support service as a percentage of the sale or purchase value of the principal supply may not necessarily indicate towards support service being an intermediary service. This could be a measure for the valuation of support services.

10. Evaluating against the aforesaid principles, it can be deduced that the support services which only enhance the prospects of the main supply without ensuring the main supply may not qualify as ‘intermediary service’, even if the value of the support service is computed on the basis of the actual main supply. An intermediary service would only occur with the occurring of the main supply i.e. intermediary service flows from the main supply.