GST on intermediary service is often met with raised eyebrows, since taxpayers expect zero-rated benefit in cases where the inflow for such service is in convertible foreign exchange. Hence, the object of this post is to appraise the taxpayers about GST implications on intermediary services, exemption available, and differentiate it from ‘Export of Service’ which is eligible for zero-rating.

According to Section 2(13) of the Integrated Goods and Services Tax (IGST) Act, 2017, intermediary means a broker, an agent or any other person (by whatever name called) who arranges or facilitates the supply of goods / services / securities between two or more persons. However, intermediary does not include a person who supplies such goods / services / securities on his own account.

Irrespective of whether the intermediary arranges supply of goods or services, perusal of definition of the terms "goods" and "services" would point that an intermediary is a supplier of services. On the other hand, the recipient of intermediary service could be either supplier or recipient of goods or services (but on own account).

Note 1 (referred in the table above): http://vsrca.in/gst/services-to-foreign-customer-location-of-supplier-place-of-supply-in-same-state-inter-or-intra-state-supply/

If the location of supplier of intermediary service is in India and the location of recipient of such intermediary service is outside India, taxpayers find it hard to digest that such supply becomes taxable merely since the Place of Supply is in India (i.e., the same as location of supplier of intermediary service).

In fact, taxpayers often confuse such transaction with "Export of Service". Little do they realise that the Place of Supply (as determined under Section 13 ibid) should be outside India to qualify as "Export of Service" under Section 2(6) ibid.

Entry 12AA to Notification No.9/2017-Integrated Tax (Rate) dated June 28, 2017 (as amended till date) exempts services provided by an intermediary when the supplier of goods and recipient of goods are both located in non-taxable territory. That is, the recipient of intermediary service should be located in non-taxable territory.

However, this exemption is subject to the condition that supplier of intermediary service (located in India) should maintain the following documents at least for five years:

• Copy of Bill of Lading;
• Copy of contract executed between supplier of goods and buyer of goods;
• Copy of certificate of origin issued by recipient of intermediary service;
• Copy of commission debit note raised on recipient of intermediary service; and
• Declaration by the supplier of intermediary service that the commission debit note relates to contract where both supplier of goods and recipient of goods are outside the taxable territory.

It is interesting to note that the aforesaid exemption entry does not appear in Notification No.12/2017-Central Tax (Rate) dated June 28, 2017 (as amended till date), which lists the exempt services under the Central Goods and Services Tax Act, 2017.

• Does it imply that supply of intermediary service to a recipient located outside the taxable territory attracts only IGST (instead of CGST + SGST)?
• On the other hand, GSTN portal compels the taxpayers to treat such supply as intra-state supply.
• Taxpayers can take refuge under Section 19(2) of the IGST Act and avoid payment of interest, if the supply is subsequently held to be an inter-state supply. Similarly, Section 77(1) of the CGST Act helps the taxpayer to get refund of CGST + SGST wrongly paid after paying IGST thereon.
• However, working capital could get blocked till the time refund is credited to the taxpayer’s account.

The following ancillary points crop up in this regard:

• Practically, it is a herculean task for the supplier of intermediary service to get copies of bill of lading and contract executed between the supplier of goods and buyer of goods.
• It is a bit perplexing that the term “Commission debit note” is used in the aforesaid exemption notification instead of “Bill of supply” when read considering Sections 31 and 34 of CGST Act.
• When the copy of contract evidences that both supplier of goods and buyer of goods are located in non-taxable territory, such declaration by the supplier of intermediary service appears redundant.
• Usage of the term “… on company letter head …” in the notification appears to be a case of loose drafting.

The constitutional validity of Section 13(8)(b) of IGST Act was challenged before the Hon’ble High Court of Gujarat^[1]. Section 13(8)(b) ibid read with Section 2(13) ibid was held to be not unconstitutional vide judgment dated July 24, 2020.

In paragraph 59 of the judgment, the following submission(s) on behalf of the Revenue for fixing the Place of Supply of intermediary service under Section 13(8)(b) ibid as location of supplier of such service are worth noting:

• That an intermediary acts as an agent of the principal, thereby the former provides service to the latter; and
• The place of effective use and enjoyment of such service is in the territory where the agent represents the principal.

However, when the vires of this provision was challenged before the Hon’ble High Court of Bombay^[2], judges of the Division Bench differed vide judgments dated June 09, 2021 and June 16, 2021. Consequently, the matter has been referred to the Chief Justice therein.

[1] R/Special Civil Application Nos.13238 & 13243 of 2018

[2] Writ Petition No.2031 of 2018