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The author is Tejaswini Kaushal, third year student at Dr. Ram Manohar Lohiya National Law University, Lucknow.
1. Introduction
Implementing the Goods and Services Tax (GST) in India has brought forth intricate challenges, particularly regarding intermediary services and determining the place of supply. This article critically examines two significant cases, M/S Ernst and Young Limited v. Additional Commissioner of Delhi High Court and Dharmendra M Jani v. Union of India of Bombay High Court, which recently shed light on these complex issues. Through comprehensive analysis, this article aims to provide an understanding of the interpretation of relevant provisions and the constitutional validity of Section 13(8)(b) of the Integrated Goods and Services Tax (IGST) Act, 2017. This analysis delves into the implications and practical significance of these cases in navigating the complexities surrounding intermediary services, determining the place of supply under the GST law, and analyzing how they stand in a conflicting position when juxtaposed.
2. Intermediary Services and the Definition of ‘Intermediary’ under the IGST Act
The primary aspect to be considered and analyzed is the definition of an ‘intermediary’ to further delve into its interpretation under Section 2(13) of the IGST Act, 2017. It explains the scope and nature of intermediary services, emphasizing that an intermediary’s role is to arrange or facilitate the supply of goods or services between two or more parties. The analysis focuses on the M/S Ernst and Young Limited case, providing a detailed examination of the Court’s interpretation of the definition of an intermediary and its applicability to the services provided by the petitioner.
2.1. Concept of an Intermediary
2.1.1. ‘Intermediary Services’ prior to the GST Regime
In Pre-GST India, intermediary services were introduced in 2012, initially covering service supply. In 2014, it was expanded to include goods and services within the taxable jurisdiction. This aimed to reverse prior Tribunal rulings that treated certain agency and business promotion services for foreign recipients as ‘exports of services.’ The Service Tax Education Guide further clarified intermediaries as facilitators between parties, not providing the main service or supplying goods themselves. Their service value had to be identifiable and distinguishable from the main service. The place of provision was based on the location of the intermediary.
2.1.2. Intermediary Services Post GST Implementation
Following the implementation of GST, the definition of intermediary services and determining the place of supply have been carried forward from India’s previous Service Tax regime. The term intermediary has been defined in Section 2(13) of the IGST as under:
“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.”
The definition of intermediary services under the IGST Act remains substantively unchanged from the earlier service tax provisions. Similarly, the place of supply for intermediary services is deemed to be the service provider’s location, aligning with the regulations under the previous Service Tax laws. Additionally, the GST levy does not apply to intermediary services when both the supplier and recipient of goods are located outside the taxable territory of India.
2.1.3. Test for determining ‘intermediaries’
Intermediary services involve facilitating the supply of goods or services between two parties without altering them. The intermediary is involved in two supplies simultaneously: the supply between the principal and the third party and the supply of their agency service to the principal, for which they charge a fee or commission. Intermediaries like commission agents, buying agents, selling agents, and stockbrokers, are excluded from this definition.
Previous judgments may be referenced to clarify intermediary services. For instance, back-end services provided by GoDaddy India Web Services Private Limited to American entities were determined to be support services, not intermediary services. CESTAT rulings, including Commissioner of Service Tax v. Gupshup Technology India Pvt. Ltd., and Evalueserve.com Pvt. Ltd. v. Commissioner of Service Tax, Gurgaon, also established that services provided on a principal-to-principal basis without direct contact with the customer do not qualify as intermediary services. Subsequent CESAT rulings, however, caused confusion as they established that services provided on a principal-to-principal basis without direct contact with the customer qualify as intermediary services, as seen in cases like In Re: Vservglobal Private Limited and In Re: Global Reach Education Service Pvt Limited. Similarly, in In re Airbus Group India Pvt. Ltd., it was ruled that support functions related to procuring goods were categorized as intermediary services.
A circular was then issued on September 20, 2021, outlining the primary requirements for an activity to be considered an ‘intermediary.’ Firstly, an intermediary must “arrange or facilitate” a supply between two or more parties; secondly, not provide the main supply themselves; and lastly, have the characteristics of an agent, broker, or similar person. It also clarified that the provision of the place of supply for intermediary services under Section 13 of the IGST Act applies only when the supplier or recipient of intermediary services is located outside India. Despite the circular, certain legal issues related to intermediary services remain unresolved.
2.2. Analysis of the M/S Ernst and Young Limited Case
The recent case of M/S Ernst and Young Limited v. Additional Commissioner, CGST highlights interpretational flaws in the definition of an intermediary and emphasizes that an actual supplier of professional services cannot be categorized as an intermediary.
2.2.1. Brief facts
Petitioner’s request for a refund of unutilized input tax credit was rejected as the Department considered the professional, business advisory, and technical assistance services provided to foreign entities were intermediary services, not exports. However, the Appellate Authority ruled that since the services were not rendered within the foreign territories, they were deemed to be provided within India, thus not qualifying as exports.
2.2.2. The Interpretation of ‘Intermediary’ and its Applicability to the Services Provided
The High Court concluded that interpreting the aforementioned definition indicates that an intermediary solely “organizes or facilitates” the provision of goods or services between multiple individuals. A person directly supplying goods or services is not considered an intermediary. The role of an intermediary is limited to the arrangement or facilitation of the supply of goods or services from the original supplier. In the present case, it is undisputed that the petitioner does not arrange or facilitate services from third parties to EY entities. Instead, it directly provides services to them. The petitioner did not organize the mentioned supply from any external third party.
2.2.3. Flaws in the Adjudicating Authority’s Reasoning
The Honourable Court clarified the correct understanding of the definition of an intermediary under Section 2(13) of the IGST Act, disagreeing with the Adjudicating Authority’s flawed interpretation. The Court pointed out that the last portion of the definition, which states “but does not include a person who supplies such goods or services or both or securities on his own account,” is not intended to control the definition but rather restrict its application. The primary definition of an intermediary, as stated in the opening lines of Section 2(13), focuses on a person who “arranges or facilitates the supply of goods or services or both or securities between two or more persons.” This definition clearly highlights the role of intermediaries in organizing or facilitating the supply of goods or services.
2.2.4. The Court’s Clarification on the Definition of an Intermediary
The Court emphasized that the crucial distinction lies in whether the service provider acts on their own account or connects a third party with the service recipient and facilitates the supply. In the case at hand, it was evident that the petitioner directly provided services to E&Y entities rather than arranging or facilitating services from third parties. The petitioner was not involved in the services supply chain between E&Y entities and third parties. Therefore, the Court concluded that even if the petitioner rendered services on behalf of a third party, it did not fall within the definition of an intermediary under Section 2(13) of the IGST Act. The petitioner acted as the actual service provider and did not arrange or facilitate the supply of services from any third party.
2.2.5. The Implications of the Court’s Judgment
The judgment clarifies that the role of an intermediary is limited to arranging or facilitating the supply of goods or services between parties. A person directly supplying goods or services cannot be considered an intermediary. The judgment also emphasizes that even if a person provides services on behalf of another entity, they cannot be categorized as an intermediary if they are the actual service provider and do not arrange or facilitate the supply from third parties. This interpretation clarifies the definition and scope of intermediary services under the IGST Act, ensuring a more accurate classification of service providers in line with their roles and activities.
The next part will analyze the position of the intermediaries, conceptualization of the phrase ‘place of supply’ in the context of the Dharmendra M. Jani case, and the implications of the two cases on GST applicability for intermediary services.