Intermediary Services to foreign entities are liable to CGST and SGST and cannot be considered as “Export of Services”

Intermediary Services to foreign entities are liable to CGST & SGST and cannot be considered as “Export of Services”

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.

In the case of Material Recycling Association of India vs Union of India, the petitioner has challenged the constitutional validity of Section 13(8)(b) of the IGST Act, 2017 with a plea to the High Court to direct the 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.

Facts of the Case:-

The petitioner is an association comprising of recycling industry engaged in manufacture of metals and casting etc., for various upstream industries in India.
The members of the petitioner association are registered as “Taxable Person” under the provisions of the CGST Act, 2017.
The petitioner also acts as an agents for scrape, recycling companies based outside India engaged in providing business promotion and marketing services for principals located outside India.
Thus, the members of the petitioner association not only deal with goods sold by foreign principals to customers in India but also facilitate sale of goods by foreign principals in non-taxable territory to their customers, who are also located in non-taxable territories.

The petitioner submitted that the member of the petitioner association receives only the commission upon receipt of sale proceeds by its foreign client in convertible foreign exchange.
Accordingly, IGST cannot be levied on the members of the petitioner association, who are engaged in the transaction of export of service, covered under the Section 16(1) of the IGST Act, 2017 which provides for “zero rated supply”.
The petitioner, has challenged the constitutional validity of Section 13(8)(b) of the IGST Act, 2017 and to hold the same as ultra vires with an appeal 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.

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Proceedings of the High Court (HC)

The question which arose before the Gujarat High Court was whether the provisions of Section 13(8)(b) read with Sections 2(13) and 8(1) of the IGST Act, 2017 were ultra vires and unconstitutional or not.

Observations of the HC on whether the services provided are intermediary services or not

Section 8 of the IGST Act, 2017 provides for intra-State supply so as to take care for the supply of goods to or by a special economic zone and the goods imported in the territory of India till they cross the Custom in India.
Section 8 is subject to provision of Section 10 where Section 12 provides for place of supply of services where the location of supplier and recipient is in India.
According to Section 12(2), the place of supply of services, except the services specified in sub-section (3) to (14):-
Made to a registered person shall be the location of such person
made to any person other than a registered person shall be:-
the location of the recipient where the address on record exists
the location of the supplier of services in other cases
Sub-section 3 to 14 of Section 12 stipulates the place of supply of service in various events. However, the same does not cover the case of intermediary.

Section 13 of IGST Act, 2017 stipulates that the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.
Section 13(2) stipulates that the place of supply of service except the services described in sub-section 3 to 13 shall be the location of the recipient of the services and if the location of recipient of service is not available in the ordinary course of business, the place of supply shall be location of supplier of service.
Thus, subsection 3 to 13 carves out an exception to the place of supply of services to be the place of recipient of services where the location of supplier or location of recipient is outside India.
On perusal of provision of Section 13, sub-section 3 to 13 provides different events to determine the place of supply of services. Sub-section 8 refers to place of supply of the services shall be the location of supplier of services in case of banking company, intermediary services and services consisting of hiring of means of transport.
Intermediary services is defined in Section 2(13) of IGST Act,2017 which 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 and accordingly, when intermediary services are provided by brokers, the place of supply could be either the location of service provider or the service recipient.

The petitioner tried to submit that the services provided by a broker outside India by way of intermediary service should be considered as “export of services” but the legislature thought it fit to consider such services as intermediary services whose place of supply would be the location of the supplier of the services.
The definition of “export of services” is contained in Section 2(6) of the IGST Act, 2017 which provides that export of service means the place of service of supply outside India.
Conjoint reading of Section 2(6) and 2(13), which defines export of service and intermediary service respectively, shows that a person who is an intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitate the supply of goods or services or both.

Observations of HC on the fact that services provided by an intermediary when location of both supplier and the recipient is outside the taxable territory then such services should be taxed at Nil rate of IGST as per Notification No. 20/2019- Integrated Tax (Rate).

In such circumstances, the respondent referred Notification No. 20/2019- Integrated Tax (Rate), which provides that in case of services provided by an intermediary when location of both supplier and the recipient is outside the taxable territory then such services should be taxed at Nil rate of IGST.
It therefore, appears that the basic logic of section 13(8)(b) of the IGST Act,2017 considering the place of supply in case of intermediary to be the location of supply of service is in order to levy CGST and SGST and such intermediary service therefore, would be out of the purview of IGST.

There is no distinction between the intermediary services provided by a person in India or outside India.
Only because, the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India.
Similar situation was also existing in service tax regime w.e.f. 1st October 2014 and as such same situation is continued in GST regime also. Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “export of services” under the IGST Act, 2017
Therefore, it was rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST

Observations of the HC on the contention of the petitioner that it would amount to double taxation

Such contention was also not tenable in eyes of law because the services provided by the petitioner as intermediary would not be taxable in the hands of the recipient of such service
On the contrary a commission paid by the recipient of service outside India would be entitled to get deduction of such payment of commission by way of expenses and therefore, it would not be a case of double taxation.
If the services provided by intermediary are not taxed in India, which is a location of supply of service, then, providing such service by the intermediary located in India would be without payment of any tax and such services would not be liable to tax anywhere.
In such circumstances, the contentions raised on behalf of the petitioner were not tenable in view of the Notification No.20/2019 issued by the Government of India, Ministry of Finance whereby Entry no.12AA is inserted to provide Nil rate of tax granting exemption from payment of IGST for service provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory i.e. India.

In view of the foregoing reasons, 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.

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