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“Intermediary” is a term which is widely used under GST and disputed on account of taxability specifically in case of international trade. In this article, an understanding on such term and its disputes are compiled.

Legal Background

Definition of “Intermediary”

Section 2(13) of IGST Act 2017 provides that 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.

As per said clause, a person shall be considered as intermediary if :-

  • he arranges or facilitates the SUPPLY OF GOODS OR SERVICES OR BOTH OR SECURITIES; and
  • two or more persons must be involved under such arrangement/facilitation; and
  • he is not supplying such goods or services or both or securities on his own account.

To further explain, CBIC has issued a Circular no. 159/15/2021-GST dated 20/09/2021 which provides that following should be pre requisites for the concept of Intermediary services :-

Minimum of Three Parties:

  • By definition, an intermediary is someone who arranges or facilitates the supplies of goods or services or securities between two or more persons.
  • It is thus a natural corollary that the arrangement requires a minimum of three parties, two of them transacting in the supply of goods or services or securities (the main supply) and one arranging or facilitating (the ancillary supply) the said main supply.
  • An activity between only two parties can, therefore, 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.

Two distinct supplies:  As discussed above, there are two distinct 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.

Illustration

‘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’.

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”.

Use of word “such” in the definition 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”.

Illustration

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.

Sub-contracting for a service is not an intermediary service:

An important exclusion from intermediary is sub-contracting.

The supplier of main service may decide to 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, and therefore, clearly is not an intermediary.

Illustration 1:-

‘A’ and ‘B’ have entered into a contract as per which ‘A’ needs to provide a service of, say, Annual Maintenance of tools and machinery to ‘B’. ‘A’ subcontracts a part or whole of it to ‘C’. Accordingly, ‘C’ provides the service of annual maintenance to ‘A’ as part of such sub-contract, by providing annual maintenance of tools and machinery to the customer of ‘A’, i.e. to ‘B’ on behalf of ‘A’.

Though ‘C’ is dealing with the customer of ‘A’, but ‘C’ is providing main supply of Annual Maintenance Service to ‘A’ on his own account, i.e. on principal to principal basis. In this case, ‘A’ is providing 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.

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.

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

The definition of “intermediary” itself provides that intermediary service provider means a broker, an agent or any other person, by whatever name called….”.

This part of the definition is not inclusive but uses the expression “means” and does not expand the definition by any known expression of expansion such as “and includes”.

The use of the expression “arranges or facilitates” in the definition of “intermediary” suggests a subsidiary role for the intermediary. It must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply.

Thus, the role of intermediary is only supportive.


Disputes

In the case of International trade, where recipient of intermediary services is out of India, the place of supply of intermediary services is the location of service provider.

For example, a person in Kolkata is providing intermediary services to a client in USA. In this case, place of supply shall be Kolkata. Hence, GST payable shall be CGST + SGST in this case. It shall not be considered as Export of Service.

The dispute arise here. In this case, people generally consider this as Export of Service, however, law says it is a local transaction for the purpose of levy of GST.

Dispute in the case of BPO services

One of the big dispute arise in the case of BPO services. In the circular as referred above, it is being clarified that said services shall be considered as sub-contracting instead of intermediary. So, the service shall be considered as Export of service.

In the abovesaid circular, an example is given to clarify the situation :-

‘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.


Where Main Supply of goods or services or securities does not form part of Supply as per Section 7 of CGST Act :-

As the definition of Intermediary provides that a person shall be considered as intermediary if :-

  • he arranges or facilitates the SUPPLY OF GOODS OR SERVICES OR BOTH OR SECURITIES; and
  • two or more persons must be involved under such arrangement/facilitation; and
  • he is not supplying such goods or services or both or securities on his own account.

As per the definition, there must be supply of some goods or services or both or securities. As per Section 7(2) of CGST Act, following activities shall be treated neither as a supply of goods nor a supply of services :-

  • activities or transactions specified in Schedule III (List of entries in Schedule-III); or
  • such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council.

Thus, in case a person is arranging or facilitating the supply of such goods/services which are mentioned in Schedule-III or notified through any notification, he shall not be considered as “Intermediary” for the purposes of GST.

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