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October 23, 2020

Gujarat HC to relook GST on Intermediaries

by CA Shivam Jaiswal in GST, Legal Court Judgement

Gujarat HC to relook GST on Intermediaries

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 persons, but does not include a person who supplies such goods or services or both or securities on his own account.

The most common issue which arises with ‘intermediary services’ is what services can be classified as intermediary services, especially when they are provided to an overseas client. Among many intricacies of GST moving around, one is about GST implication on the ‘export of services’ and ‘Intermediary Services’. Different GST treatment provided to these two supplies and lack of clarity in GST law dragged some taxpayers to the way of litigation.

It is also important to know that, as per section 2(6) of IGST Act, 2017 “export of services” means the supply of any service when:

  • the supplier of service is located in India
  • the recipient of service is located outside India
  • the place of supply of service is outside India
  • the payment for such service has been received by the supplier of service in convertible foreign exchange; and
  • the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.

For instance, Mr A is providing some market research services to an overseas client as a middle person. 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.

Gujarat High Court (HC) is now going to relook at GST on intermediaries. The controversy over the imposition of Goods and Service Tax on middlemen has surfaced again and the Gujarat High Court is planning to focus again on the dispute.

What is the issue that the Gujarat HC is looking into?

The issue is whether some Indian units or BPOs of multinational companies are actually supplying or exporting services. As per GST, 18% tax has to be levied if it is not an export. Many BPOs had requested the high court to review its stand. The court is now planning to accept the review petitions.

Gujarat HC had ruled that the provisions are constitutional but the court would now relook the issue. Many Indian exporters were already facing a lot of pressure due to COVID 19 and the GST burden made them uncompetitive due to the competition from neighbouring countries and the court’s stand would certainly give a huge break.

What is the plea of the petitioners?

Due to certain provisions in the current GST law, agents have to pay tax on services rendered in India but if they open an office outside India, they are exempted. The agents exporting services and earning foreign exchange feel they are being penalised for qualifying as “intermediary” under Section 2(13) of the CGST Act. This ruling could also impact the BPOs and several other captive units of multinationals.

Older Rulings

In the case of Rajendran Santhosh (GST AAAR Karnataka), 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 were intermediary services.

In the case of Material Recycling Association of India vs Union of India, the petitioner had challenged the constitutional validity of Section 13(8)(b) of the IGST Act, 2017 with a plea to the High Court to direct the respondent to refund of IGST paid on services provided by the members of the petitioner association and to their clients located outside India before the Gujarat High Court. However, Gujarat HC held that, it cannot be said that the provision of Section 13(8)(b) read with Section 2(13) of the IGST Act,2017 was ultra vires or unconstitutional in any manner. Gujarat High Court thus held that intermediary services in cross border transactions are liable to CGST & SGST and it is not ultra vires.

The Appellate Authority of Advance Ruling, Karnataka in the case of M/s Infineria India Pvt Ltd (2020), upheld the decision of the AAR that the pre-sale and marketing service provided by the Appellant of the products of the overseas client were in the nature of facilitating the supply of the products of the overseas client and was appropriately classified as an ‘intermediary service’ as defined under Section 2(13) of the IGST Act.

In 2018 Authority of Advance Ruling (AAR) ruled that back-office support services qualify as “intermediary” support services and not exports.

Tax department has been issuing notices to BPOs in this regard. The BPOs had first claimed that the tax department’s stand was unconstitutional. The High Court however ruled that the indirect tax department was within its rights and hence the stand was constitutional. The review requests are to relook into not only the constitutional aspect of the controversy but also that a reasoned order be passed by the GST council without being influenced by the court‘s observation on constitutionality and with the liberty to the applicant to approach the court again in case the representation is not dealt properly.



Industry trackers said the debate was also whether BPOs are commission agents and brokers. If so, they would not be considered exporters and their revenues would be subject to taxes as only exports are exempted from domestic taxes and receive certain benefits. So, services provided by Indian entities to foreign companies would not be treated as exports and hence taxable in India.

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