There had been long drawn discussion on whether a person should be treated as an intermediary for the purposes of GST Act or not. The issue has been messed up with round of interpretations being done by the Central and State GST Authorities. The Board had also earlier issued one circular which further elevated the confusion and had to be withdrawn. This time, Board has come up with another Circular No: 159/15/2021 dated 20.09.2021, which to our mind will further mess up the issue and elevate litigation around the issue of Intermediary. Though the Board has tried its best to clarify the issue but circular certainly leaves room for discussion. Let us now understand what checks and balance can be applied to understand whether a person is an intermediary or not:
1. Was the person treated as intermediary under Service Tax Regime:
The Board has accepted the fact that the definition of intermediary under GST has been borrowed from legacy law of services tax. The only difference is that supply of securities is covered under the definition for the purposes of GST. The basic intent of the legislature remains the same. Hence, in cases where your client has not been treated as intermediary under Services Tax, the same treatment shall also be given under GST. For example, if your client was treated as exporter of services under Services Tax and was issued refunds, it shall be treated as exporter of services under GST as well. The para 2.3 of the circular expressly provides for the same. Such a clarification further raises an issue that whether the matters which were settled under legacy laws can become precedent under GST where the provisions have been borrowed from them. It would be interesting to see how such an understanding would play in future.
2. Checks and Balances whether a person is an intermediary or not:
(A): There must be three parties: In a transaction where intermediary is involved, there are always three parties involved. The very definition of intermediary states that intermediary is a person who facilitates or make arrangement for a supply between two or more persons. Hence there are three parties involved in such a transaction. The intermediary provides ancillary services whereas the supply between actual supplier and recipient is main supply.
(B): Two Distinct Supplies: The board clarified that in case of intermediary there shall be two supplies involved.
- Main Supply: The supply between two persons acting on principal-to-principal basis.
- Ancillary Supply: The supply of services of facilitating or arranging the main supply. This supply shall be treated as intermediary services which shall be separately identifiable from main supply.
Though the board has made an effort to clarify the issue, but such a distinction will lead to further litigation in the matter. For Instance, what would be the marketing services called where the person is finding the customers and helping the supplier increase it sales. Though in Illustration 1 as per para 4 of circular, board has treated the same as ancillary services, but it seems that the services of marketing agency are actually a principal to principal supply. What is Main and what is Ancillary shall now become a subjective matter and there shall be no set rules or checks to find out the nature of services. It looks that the circular has further divided the confusion around Intermediary between Main and Ancillary Supply.
(C): Intermediary to have character of an agent, broker or any other similar person: Board has clarified that the intermediary shall not be a main supplier, he merely acts as an agent, broker or any other similar person. Now the question is whether commission is necessary ingredient in case of intermediary or not. Because in case of agent or broker, consideration is usually discharged as a percentage of the value of main supplies. Further the circular clarifies that the agent or broker must be a person facilitating or arranging the main supply. Now what is facilitating or arranging, that also needs to be understood. Whether BPO and KPO which are providing ancillary services of Management Consultancy, Accounting, Sales procurement etc. would be an intermediary, though they provide the same on principal-to-principal basis. The recipient of such services usually has any other supply as its main supply which is supplied to its customer. The lesser important aspects of business are outsourced to third party. The circular does not clarify whether it will be treated as intermediary or not.
(D): Intermediary does not include the person who provides main supply on its own account: As discussed above, Board clarified that where the person is providing main supply on its own it will not be treated as intermediary. The question which has been left open is what comes within the ambit of Main Supply. It will be interesting to see how department interprets the term main supply and what would the fate of BPOs, KPOs and software companies rendering services outside India.
(E): Sub-contracting excluded from ambit of Intermediary: The Board has expressly excluded sub-contracting from the term intermediary on the pretext that the sub-contractor is providing services on its own account. The Board clarified that where a person outsources a main supply to third party which are rendered on principal-to-principal basis, it shall not be termed as an intermediary. Such sub-contractor must render the main supply and merely not facilitate or arrange a supply between two main persons.
(F): CBIC has further clarified that the provisions of place of supply of intermediary services under Section 13 of IGST Act shall be invoked only when either the supplier or recipient is located outside India.
3). Though CBIC has tried to solve the mystery around what is an intermediary service, it seems that instead of simplifying the concept, the circular has further complicated the issue. It would interesting to see how the trade and tax department solve this problem with their own set of interpretation or it will become another point of litigation.
