GST on Intermediary, its Constitutional validity & proposed changes to term intermediary as exports

20-11-2020 Harish P Devda


Under GST, tax is levied on the taxable supply of goods/services. Tax is applicable on the taxable services supplied in India.

In the GST regime, intermediary services by Indian suppliers to foreign principals are taxed to GST. In common parlance, any person who enables the supply of goods/services between two persons, is considered as intermediary.

There has been a lot of confusion regarding tax implications on the pre-sales and post-sales services vs intermediary services done by Indian suppliers to foreign customers. 


The paper writer has examined the recent High court ruling which analyses the constitutional validity of deeming fiction of place of supply to be location of supplier i.e. in India and consequently not an export of services


The paper writer has made efforts to discuss on the proposed change to term intermediary services as exports and why GST should not be levied on Intermediary services?


The Author have also examined different models by which Indian suppliers are providing services to foreign principals and GST implications. Further examined the tax implications in light of the advance rulings such as in Micro Instruments, V serv Global Pvt Ltd, NES Global Specialist Engineering Services Pvt Ltd and in M/s Ansys Software Pvt Ltd


Who is an intermediary?

In the terms of section 2(13) of IGST Act, “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;  


In short, “intermediary” essentially involves 3 or more persons

  1. Supplier of service/goods,
  2. Principal on whose behalf service is rendered/goods supplied and
  3. Persons who actually receives the service/goods (i.e., customers of the principal).


However, where a person is providing services or supplies goods on his own account to his customers, it cannot be termed as an intermediary in accordance with section 2(13) of IGST Act.


Hence it is clear from the above definition, that there is required to be an arrangement or facilitation of the supply of goods, services or securities. In addition to the definition, in order to qualify as an intermediary; there should be two supplies at any one time:

    • The supply between the principal and the third party; and
    • The supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.


However, it may be noted that a person acting as an intermediary cannot change the nature of supply provided by person on whose behalf he is acting as an intermediary.


Place of supply of intermediary service provided to a person outside India

In terms of Section 13(8)(b) of IGST Act, 2017, the place of supply for the intermediary services would be the location of the supplier of such services (i.e. location of intermediary service provider)


In the recent Gujarat HC Decision, it analyzed the constitutionality validity of deemed place of supply as location of supplier and levy of GST on intermediary

In case of Material Recycling Association of India (2020-TIOL-1274-HC-AHM-GST) the HC held that it cannot be said that the provision of section 13(8)(b) read with section 2(13) of the IGST Act are ultra vires or unconstitutional in any manner - it would, however, be open for the respondents to consider the representation made by the petitioner so as to redress its grievance in suitable manner.


Contentions of the Petitioners w.r.t validity of deeming Place of supply as location of supplier for intermediary services [Section 13(8)(b)] are as under

        1. Petition have been filed under Article 226 and challenged the constitutional validity of Section 13(8)(b) and it is ultra vires under Articles 14, 19, 265 and 286
        2. Violating Article 286(1)(b) of the Constitution of India:
  • Article 286(1)(b) provides that “No law of a State shall impose the imposition of, a tax on the supply of goods or of services or both in the course of export of the goods or services out of, the territory of India.
  • Petitioner submitted that the parliament is not authorized to legislate and artificially assign the place of supply to be within India when clearly the services are being exported out of India
  • Further service to a non-resident service recipient such services is clearly for the benefit of recipient located outside India and therefore, such transaction can be said to have been executed in the course of export and consequently export of services read with S. 2(6) of IGST Act
        1. Violating Article 14 of the Constitution of India:
  • As it renders differential treatment when services supplied within territory of India and when supplied outside the territory of India, intermediary services located in the territory of India, then as per Section 12 of the IGST Act,2017 there is no separate provision carved out which prescribes a special treatment for intermediary services.
  • When the services remained, the same there does not appear to be any reason as to why intermediary services should be treated differently from the support services and such different treatment would result into violation of Article-14 of the Constitution
        1. Destination based tax:
  • The GST is a destination-based tax system whereas, Section 13(8)(b) of the IGST Act,2017 which prescribes the place of supply for intermediary service is nothing but aberration and therefore, in order to preserve the basic foundation of scheme of GST as a levy as emphasized
  • Place of supply for a transaction involving a resident supplier of services providing intermediary services to a nonresident shall be deemed to be India, which is a clear export of service, which is contrary to the object of GST law would lose the basic principle of destination-based tax
        1. Definition of Intermediary is vague: What is to be construed as trading on one’s account requires a clear explanation in order to determine what is specifically included within the domain of an intermediary. It was therefore, submitted that such definition of intermediary is vague.
        2. Double Taxation: Intermediary services would be subject to GST when the service provider is situated in India and the same service shall be subject to tax in the country where service recipient is located as it would be an import of service for such recipient.
  • It was therefore, submitted that the transaction would suffer GST in India and tax in the country outside India where the recipient of service is located which would result in transaction being subjected to double taxation and would affect the margin or commission earned by the members of the petitioner association, who are working as intermediaries


Arguments by the Respondents [department]

  1. Levy of taxes - Deeming provision
  • Parliament has exclusive power under Article 246A which begins with non-obstante clause stipulating that notwithstanding anything contained in Article 246 and 254 to frame laws for inter State supply of goods or services.
  • Parliament has got wide amplitude to create deeming fiction/s under taxation matters and to levy tax thereon
  1. Deeming place of supply:
  • Intermediary are taxed under a deeming fiction and migration of Indian exporters because of unfair provisions is concerned, the place of provision of service of an intermediary being the location of the service provider is a purposeful and considered as policy decision of the Government of India
  • A policy decision of the Government to levy tax and safeguard the principles of indirect taxation cannot be said to be unlawful or violating the tenets of the Constitution of India
  1. VAT under international best practices: It was submitted that when the service is not considered as export of service, the contention of the petitioner that exporting taxes is against principles of VAT under international best practices is not tenable
  2. Article 14: It was pointed out that contention of the petitioner that differential treatment is accorded to intermediary service, which is violative to Article 14 of the Constitution is also not tenable because one service cannot be compared with other service so as to justify the violation of Article 14 of the Constitution such as comparing support services with intermediary services involving arrangement of supply of goods
  3. Destination based tax: GST is a destination-based tax and in case of inter-state transaction where supplier or recipient of service is located in taxable and non-taxable territory, Intermediary services S. 13(8)(b) exceptions have been provided to the default place of supply such as place of supply could be the location of the supplier of service and these exceptions are governed by the revenue considerations and based on catena of Judgments of the Apex Court, are within the legislative competence as the legislature is free to pick and choose the supply that it intends to tax and the manner in which it intends to tax. It was therefore submitted that there is no violation of Article 14 of the Constitution Further departure from default rule is also legally permissible and tenable.
  4. Article 19: Levy of tax on such intermediary service does not infringe the right of the members of the petitioner from practicing any profession or carrying out any occupation or trade or business and as such does not violate Article 19(1)(g) of the Constitution
  5. Why distinct treatment to intermediary service?:  If general rule is applied to such service, the intermediary services availed for the purposes of exports would be taxed whereas any intermediary service used for imports of services into India would be outside the tax net which would bring distortion in the tax regime and therefore intermediary services are to be accorded distinctive treatment.


Ruling by the High Court

  1. There is no distinction between the intermediary services provided by a person in India or outside India.
  2. 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.
  3. No deeming provision as tried to be canvassed by the petitioner, but there is stipulation by the Act legislated by the parliament to consider the location of the service provider of intermediary to be place of supply
  4. No Double taxation:
  • Double taxation is also not tenable in eyes of law because the services provided as intermediary would not be taxable in the hands of the recipient of such service, but 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 is 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
  1. Tax Levy on intermediary is not ultra vires: it cannot be said that the provision of Section 13(8)(b) r.w. Section 2(13) are ultra vires or unconstitutional in any manner and petition is disposed.


In many countries, including in the EU, the intermediary service whether for goods or services has been based on the place of the recipient.


Many representations were done by industry/consultants that in line with international best practices all services. There was no relief given and the only option for intermediary service provider would have to include the cost of indirect taxes to him to be borne and being the less competitive in the international markets to overcome such competition such Indian intermediaries have to compromise on their profits to be more competitive without having an support from the Governments which they have ignored from years and more to go until the policies have been changed to benefit them to consider intermediary as exports.


Proposed change to term intermediary services as exports

Rajya Sabha - In the 139th report laid by Department Related Parliamentary Standing Committee on Commerce - Impact of Goods and Services Tax (GST) On Exports on 19th December 2017

In para 15 proposed the following amendments for the benefits of intermediaries

Para 15.1

The Committee noted that service providers providing services to overseas suppliers of goods earn commission in convertible foreign exchange. IGST @ 18% is leviable on such commission because the Government does not recognize their services as “Export of Services”.

Para 15.2

In view of the fact that GST is a destination-based consumption tax, the Committee is of the view that following steps may be taken:

  • Provide that Place of Supply of Indian Intermediaries of Goods will be the location of service recipient so that Intermediary Services will be treated as ‘Exports’; or
  • Providing an exemption to Indian Intermediaries of Goods from levy of IGST; or
  • Notify such services under Section 13(13) of the IGST Act to prevent double taxation (tax in India as well as in the importing country) by treating place of effective use (foreign country) as place of supply.

Para 15.3

The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available.


However, all the three recommendation by the committee are still on the papers and no interests have been taken it taken in the favors of intermediaries. However, there is a hope maybe in 2-3 years such proposed amendments would be effective thereafter intermediary services could be termed as exports as place of supply would be recipient place i.e. outside India.


Why GST should not be levied on Intermediary services?

  • Representation made in ST & GST era have landed on deaf ears for intermediary to be considered as exports from India This is not in line with the EU best practice which seeks to avoid double taxation.
  • Unfortunately, concept c/f in GST. Joint Parliamentary suggestion ignored by GST Council
  • The entire intermediary industry has been suffered into factor of tax net even when the consideration is received in CFE and services are rendered to foreign countries
  • Discussion in 37th GST Council Meeting held in September 2019 and reliance was placed on the following minutes of the meeting with regard to definition of ‘intermediary’ however there was no favorable outcome and it again landed into benefits leaving the entire intermediary services to suffer for tax net and either be less competitive or reduce the profit margins in order to be competitive in the international markets
  • Intermediary are taxed under a deeming fiction and migration of Indian exporters because of unfair provisions is concerned, the place of provision of service of an intermediary being the location of the service provider is a purposeful and considered as policy decision of the Government of India
  • However, the government need to re-consider policy and the fact that there is CFE earned and due to levy of GST on intermediary various FDI investors in India have shifted their bases to other countries in EU, Middle east, Hong Kong, Singapore etc. which resulted in huge loss of income tax, exports from India and CFE
  • Budget speech of Hon’ble Finance Minister of India Smt. Nirmala Sitharaman, “Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.” The levy of GST on intermediary when receipts are in CFE is also a kind of harassment faced by such service provider and they had to shift their bases from India be more cost competitive in the international markets as in other countries like EU, Middle east, Singapore etc. as there is no such treatment of burden taxes. 
  • The 139th report of Rajya Sabha which proposes for intermediary services to be exports, however such proposal was made in December 2017 and its still on papers and GST council have ignored till date and only worried about tax collections without being concerned about other factors if treated as exports there could be investments in India, CFE earnings, increase in income tax collections etc.


Current scenario

When the essential character of services provided by service provider to foreign principal/foreign customer is that of commission agent for enabling sourcing or sale of goods such as machine/garments to outside India along with support services. As per the composite supply concept, the principal supply is that of intermediary service.


Therefore, such service to be treated as intermediary services, being services of commission agent for goods covered in section 13(8)(b), and the place of supply of service is location of supplier in India and liable to GST


However, the supplier could be doing presale activities of nature of recommending suitable suppliers, maintain supplier list, and post order activities such as supplier order status, guidance to manufacturers on trends/developments, communicate deviation in quality and delivery schedule, advise on international norms and standards.


The dominant nature of service appears to be that of outsourced business support services, which in normal course could be done by foreign client but outsourced to Indian supplier. Consequently, this is a composite supply of service in which the essential nature of services is that of outsourced support services, such services could get covered in section 13(2), whereby place of supply of service is location of foreign client of Indian supplier.


Further if all the conditions set out in section 2(6) of IGST Act as extracted in further paras are fulfilled by supplier. Then such services would be treated as exported services and eligible credit pertaining to such exports can be availed. Alternately go for refund.


Single agreement for providing both services namely support service plus intermediary service:

When the supply of intermediary and other support services including inspection, testing, design, consultancy, etc. are done under single agreement., the view maybe taken that it is a composite supply by supplier, wherein facilitation/ intermediary services is the principal supply therefore, not an export and GST payable. This could be view favoured by dept as well.


Separate agreements for providing support service and intermediary service:

There could be a separate agreement for provision of intermediary service. The services of enabling purchase/sale of goods/services done to the foreign clients could be said to be facilitating the supply of goods/services to foreign clients and considered as intermediary to that extent. Such services are covered in section 13(8)(b) of IGST Act. The place of provision of service is location of supplier of service in India and taxable to GST.

The support service agreement could get covered in section 13(2) of IGST Act and place of supply of service is location of foreign client outside India. Further if all conditions of export of services are satisfied such services could be treated as exports.


Export of services under GST

In accordance with section 2(6) of the IGST Act, 2017” Export of Services” means the supply of any Service when

  1. The supplier of Service is located in India;
  2. The recipient of Service is located outside India
  3. The place of supply of service is outside India -
  4. The payment for such service has been received by the supplier of service in convertible foreign exchange and
  5. The supplier of service and the recipient of service are not merely establishments of a distinct person but distinct legal entities in accordance with Explanation 1 in section 8;


In order to treat an export of services all the conditions mentioned above has to be satisfied However in case of Intermediary due to deeming place of supply would be location of supplier [i.e. India] and consequently not an export of services – Supplier would have to borne GST by charging CGST+SGST and include such tax in its cost thus increasing its price.


Recent advance rulings

Case 1: In the case of Micro Instruments (Vishakhar Prashant Bhave), (GST-ARA-23/2018-19/B-87) Mumbai dated 10.08.2018 Maharashtra authority for advance ruling (MAAR)


Facts: Micro Instruments (In short ‘MI’) is providing services to its Principals at Germany, by way of procuring Purchase Orders (P.O.) from the parties in India, for which MI receives commission in CFE. After the negotiations are concluded, the prospective customer in India places the order directly on the Principals at Germany, arranges for remittance of purchase price arrived at and the material is directly supplied to customers by the foreign Principals.


Issue: Whether the commission received by MI as an “intermediary” in International/cross border transaction, for acting as a Broker or facilitator, in procuring from an Indian Customer/s purchase order/s (P.O.) for importing Laboratory Equipment from Germany is liable to GST either under CGST/SGST Act, 2017 or the IGST Act, 2017?


Ruling: Commission received by MI in CFE for rendering services as an ‘Intermediary' between an exporter abroad receiving such services and an Indian importer of an equipment is not an export of service. Said supply will be treated as inter-state supply and IGST will be levied @18.


Case 2: In V Serv Global Pvt Ltd [2018-TIOL-263-AAR-GST] it was held that back office support services to overseas companies undertaken by the applicant are for and on behalf of the clients to facilitate supply of goods and services between their clients and their customers. Applicant clearly is covered and falls in the definition of "intermediary" as defined under the IGST Act and, therefore, provisions pertaining to 'place of supply' in case of intermediary services as provided in sub-section 8 of section 13 are relevant.

Comments: The AAR has not considered the aspect of main service provided by applicant to overseas company on its own account. The service provided on principal to principal basis and not acting as an agent is completely ignored in the above said AAR.


Case 3: In the recent advance ruling in case of M/s Ansys Software PVT LTD [2019-TIOL-321-AAR-GST]

The applicant is providing two type of services in separate agreements with its parent co.

1. Marketing & pre sales technical support services – In this applicant undertakes the understanding of customer’s requirement, presentations, demonstrations, explores business opportunity, once the order is placed applicant used to co-ordinate with the customers, helps in follow up for collection of invoice value from customers in India, applicant receives consideration fixed as a percentage sale of the order value

Held: The services provided is intermediary services falling under purview of S. 2(13) of IGST Act.

Comments: The authority has notedly grasped the actual nature of transaction which are required to be treated separately rather than treating them as ancillary services with conjunction to the principal supply as different contracts were entered for the transactions and concluded accordingly.

2. Post sales technical services - In this applicant used to provide technical support (such as support through email, telephone, web etc.)  to the customer of parent company and in return parent co. to pay consideration for the same

Held: The services provided is classified as Information technology support services

Comments: The services may fall under export of services provided satisfied conditions, the authority has analyzed the terms the supplier [person supplying goods or services] and recipient of services [the person liable to pay consideration]


Case 4: NES Global Specialist Engineering Services Pvt Ltd [2019-TIOL-64-AAR-GST].

NES is supplier of manpower services to highly technical industries such as Oil & Gas, Power etc. NES India and NES Abu Dhabi have proposed to enter into a Master service agreement (MSA) through which NES India will provide support service in respect of the foreign business carried on by NES Abu Dhabi

Held: Transaction covered under the MSA between the applicant and NES Abu Dhabi is a Zero-rated supply and is to be considered as an export of service under the GST Act

Comments: The transaction between group companies NES India and NES Abu Dhabi is for pure services for providing support services to co. and accordingly considered as an export of services and not an intermediary service.


Note: Advance ruling is applicable to assessee who seeks it and to his set of facts. It is not applicable to others. It may be followed only when it is in line with GST provisions.



Hence, from the above discussion, it is evident that there is only a thin line of difference  in case of ‘intermediary’ and such services provided by supplier located in India would be taxable as Intra State supply requiring to charge CGST and SGST on such transactions and it cannot be treated as export of services.


A separate remuneration/agreement could be set out for acting as intermediary and separate for providing support services, whereby intermediary for enabling sale of goods/supply of services is liable to GST. On such remuneration applicable GST could be collected and paid and support services to qualify as export of services [provided all conditions are satisfied] support services are covered in section 13(2) of IGST Act, 2017 which provides the place of supply of service is location of service receiver outside India. Drafting of separate agreements would be better providing exact scope with the actuality of the services which would be helpful in avoiding litigations.


It is suggested that drafting of the agreement in detail with the segregation of the scope of intermediary services and any others support services to be provided by such persons and also it would be better if intermediary person bifurcates the method of charging remuneration to fixed basis for the outsourced support effort to capture the reason for the assignment for the cost-plus part on actual basis.


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