Are services for facilitating supply of products without supply on own account classified as intermediary service?
GST as a whole having vast coverage, it sometimes gets really strenuous to figure out the classification of services provided, what rates will apply so as to there is certainty in tax liability. Section 2(13) of the IGST Act defines the term “intermediary” as – “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 person but does not include a person who supplies such goods or services or both or securities on his own account.”
Let us refer to the case of Rajendran Santhosh (GST AAAR Karnataka) where the issue under consideration was whether services for facilitating supply of products without supply on own account was an intermediary service or not?
Facts of the Case
- The Appellant is an individual and an employee of an overseas company engaged in business of manufacturing and selling various categories of distribution transformer components and accessories.
- He was employed as the Regional Sales Manager for the Middle East and Indian markets by H-J Family of Companies having its office in the United States.
- The Appellant was required to make a presentation of the various categories of distribution transformer components and accessories offered by the company.
- The Appellant was required to report the status of the sales development (with customers in the Middle East and Indian Markets) to the Sales Manager based in the European Office on a weekly basis.
- The customers approached by the Appellant place their orders for the products with the Company and make payments to the Company’s account.
- The Appellant does not raise any invoice for the products ordered by the said customers.
- The Appellant is paid lump-sum compensation monthly for the aforementioned services.
- The Appellant does not raise any invoice to the Company for the said services.
- In addition to the aforementioned compensation, the Company provides a credit card (that has been issued in the name of the company) for the purpose of reimbursing reasonable travel expenses, office needs and other business expenses incurred by the applicant in performing the said services.
Appellant sought an advance ruling on the following questions:-
- What is the classification of the services rendered by the appellant to the company?
- Is the appellant required to be registered under the CGST Act, 2017?
- What is the liability of the appellant to pay tax on the services rendered by him to the Company?
- What is the time and value of the supply of services rendered by the Appellant to the Company?
The Karnataka Authority for Advance Ruling (AAR) held as follows:-
- The services provided by the applicant to the company would result in the supply of services within the meaning of that term.
- The services provided would be classifiable under HSN 9983.11 under the description “Other professional, technical and business services”
- The applicant is required to be registered under the Central Goods and Services Tax Act, 2017
- The rates of tax applicable for the service provided are-
- In case of inter-State supply at 18% under the IGST Act
- In case of intra-State Supply – Under CGST at 9%, Under KGST at 9%
- The time of such supply would be determined as per the provisions of section 13(2) of the CGST Act, 2017 and the value of such supply would be the amount received by the applicant from the recipient of services and also includes the amounts reimbursed to the applicant by the recipient of services for the expenses incurred
Appeal to the Appellate Authority for Advance Ruling (AAAR)
The Appellant was aggrieved by the ruling given and filed an appeal before the AAAR on the following grounds.
- The AAR was wrong in the finding that the appellant was an intermediary and not an employee within the meaning of the CGST Act
- The AAR was wrong in the appreciation of evidence (including the Appellant’s Income Tax returns and the marketing brochure of H-J Family of Companies) in determining the nature of services performed by the Appellant under the GST law and had erred in the application of the established principles of law in the classification of income under indirect tax legislation.
Observations of AAAR on the issue of the appellant
- The Appellant had admitted to the aspect of there being a supply of service by him to M/s H-J Family of Companies.
- AAR had classified the service under Service Code 9983.11 as “Other professional, technical and business services”.
- It was held by the AAR that the Appellant was providing management services as an intermediary.
- It was the case of the Appellant that he was rendering a market research service for the US Company and his service was not that of an intermediary as held by the lower Authority.
- AAAR found that the market research service was also classifiable under Service Code 9983 as “Other professional, technical and business services”.
- The explanatory notes to the classification of services explain the entry code 9983.11 provided that. “This service code also includes providing advice, guidance and operational assistance concerning the marketing strategy and marketing operation of an organization. Marketing management consulting assignments may deal with one or a combination of the following:
- analysis and formulation of a marketing strategy
- formulation of customer service programmes, pricing, advertising and distribution channels
- sales management and sales staff training
- organization of marketing channels (sale to wholesalers or directly to retailers, direct mail, franchise, etc.), package design and other matters related to the marketing strategy and operations of an organization “
- Therefore the only grievance of the Appellant was regarding the finding by the AAR that the management services were being provided in the capacity of an ‘intermediary’ as defined in Section 2(13) of the IGST Act.
Observations of the AAAR on the nature of services rendered by the appellant
- The nature of the transactions of the Appellant as explained by him in his appeal was examined.
- The Appellant was appointed as an “Independent Regional Sales Manager for the Middle East and Indian Markets” by the H-J Family of Companies, a company engaged in the business of manufacturing and selling various categories of distribution transformer components and accessories.
- The Appellant was required to make a presentation of the products offered by the H-J Family of Companies.
- The Appellant did not conclude contracts between H-J Family of Companies and the final customer and did not directly receive or deal with the products of H-J Family of Companies in any manner.
- The customers entered into contracts directly with H-J Family of Companies.
- It was evident from the above arrangement that the Appellant was merely doing sales presentations of the Company’s products to prospective customers in the Middle East and India.
- The sales presentations made by the Appellant to the prospective customers resulted in some customers directly entering into a purchase contract with the H-J Family of Companies for purchase of the Company’s products.
- The service of making the sales presentations regarding the product of the Company amounted to facilitating the sales and distribution of products by the H-J Family of Companies.
Observations of the AAAR on whether the appellant was an intermediary or not
- It was evident from the definition of ‘intermediary’ as contained in Section 2(13) of the IGST Act that, to be called an ‘intermediary”, a person must satisfy the following conditions:-
- He must be a ‘broker’ or an ‘agent’ or ‘any other person by whatever name called’, who arranges or facilitates the supply of goods or services or both or securities’.
- The supply arranged or facilitated must be between two or more persons.
- He is not the person who supplies such goods or services or securities on his own account.
- The terms ‘arrange’ and ‘facilitate’ used in the definition of ‘intermediary’ have not been defined in the Act. Merriam Webster Dictionary defines the two words as:-
- Facilitate: to make (something) easier; to help cause (something); to help (something) run smoothly and effectively.
- Arrange: to bring about an agreement or understanding concerning; to make preparations; to move and organize (things) into a particular order or position; to organize the details of something before it happens; to plan (something).
- Therefore, the terms ‘arranging’ or ‘facilitation’ covered a very wide range of activities ranging from marketing or sales promotion of the goods or services of the client, locating prospective buyers for the client’s products or locating sources of supply of the goods or services required by the client, price negotiation with the prospective buyer/ prospective supplier, procuring sales orders in respect of the goods or services of the client and like activities.
- When AAAR applied the general understanding of the term ‘arranging’ or ‘facilitation’ to the instant case, they found that the Appellant facilitated the sale of the products of the company by undertaking sales presentations to the prospective customers in the Middle East and India.
- Without the product, there was no purpose in the sales presentations made by the Appellant. It was only with the sole intention of facilitating the sales of the product of the principal that the Appellant provided the service.
- The definition of ‘intermediary’ as given in Section 2(13) of the IGST Act excluded a person who supplied such goods or services or both on his own account.
- It was the contention of the Appellant that the services of sales presentation were being provided to H-J Family of Companies on their own account and they did not directly receive or deal with the products of H-J Family of Companies in any manner.
- In this connection, AAAR analyzed the definition of the term “intermediary services” under the GST regime and pre-GST regime.
- In the pre-GST regime, an intermediary referred to a person who facilitated the provision of a main service between two or more person but did not include a person who provided the main service on his account.
- Similarly, in the GST regime, an intermediary referred to a person who facilitated the supply of goods or services or both between two or more persons but excludes a person who supplies such goods or services or both on his own account.
- The phrase ‘such goods or services’ used in the definition of ‘intermediary’ implied that the person should not be supplying on his risk and reward entirely, the very goods or services whose supply he was arranging or facilitating.
- In the instant case, the Appellant was facilitating the supply of the products of H-J Family of Companies.
- He was not supplying the products of H-J Family of Companies on behalf of the Principal.
- He was only facilitating the sales with the prospective customers.
- The actual supply of the products was done by the Principal directly to the customer.
- The service of facilitating a supply of goods between the Principal and the customers was provided by the Appellant to the overseas client (H-J family of Companies).
- The Appellant was not supplying such goods on his own account.
- The argument of the Appellant that they fall within the exclusion clause of the definition of intermediary was not a correct interpretation of the law.
- The language of the exclusion clause was such that it was applicable to those persons who supplied goods, services or both on their own account.
- If a person either ‘facilitated’ or alternately ‘arranged’ any supply of goods, services or both, between two or more persons, and did not supply such goods, services or both on his own account, he would be regarded as an ‘intermediary’.
- The Appellant was clearly facilitating the supply of the products of H-J Family of Companies directly to the latter’s customers and is not supplying such goods on his own account. Therefore, the Appellant did not fall within the ambit of the exclusion.
Therefore, AAAR upheld the decision of the AAR that the service of sales presentations of the products of H-J Family of Companies was classifiable as “Other professional, technical and business services” under Service Code 9983.11 and the same was being rendered as an ‘intermediary service’ as defined under Section 2(13) of the IGST Act.
Hence, services for facilitating supply of products without supply on own account are intermediary services.
What difference would it make if one classified this service as a market research service and not an intermediary service?
It is important to remember here that the assessee was providing services to an overseas client. As per Section 13 of IGST – The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services (in this case it is outside the taxable territory). Hence, if it was a market research service then it would not be taxable as recipient was outside India.
Now as per Section 13 of IGST – The place of supply of the Intermediary services shall be the location of the supplier of the service. Hence, if it was an intermediary service then it would be taxable as the supplier is located in India.