Query 1

Nature of Tax for intermediary service.

We find that there is burning controversy about nature of supply under GST Act for intermediary services, when recipient is out of India. What is the correct position, whether tax payable as intra-state or inter-state?

Reply :-

Deciding place of supply is required for deciding nature of supply i.e. whether intra-state or inter-state. As per bare provisions of CGST/IGST Act, the taxable person (TP) is expected to pay correct tax i.e. CGST/SGST or IGST as may be applicable. If tax is paid under wrong head then the TP is liable to pay correct tax and take refund of the wrong tax paid. Therefore paying correct tax for intermediary services is important.

Sections 7 and 8 of the IGST Act are relevant for deciding nature of Inter-state/ Intra-state supply. Relevant portions of above sections are reproduced below for ready reference.

“Section 7.

1. …………..

2. …….

3. Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in––

   1. two different States;

   2. two different Union territories; or

   3. a State and a Union territory, shall be treated as a supply of services in the course of inter-State trade or commerce.

4. ……

5. Supply of goods or services or both,––

   1. when the supplier is located in India and the place of supply is outside India;

   2. to or by a Special Economic Zone developer or a Special Economic Zone unit; or

   3. in the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.”

“Section 8

1. ……

2. Subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply: Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.

Explanation 1.— For the purposes of this Act, where a person has,– (i) an establishment in India and any other establishment outside India; (ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or (iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.

Explanation 2.— A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory”

It can be seen that if the location of supplier of service and place of supply of service are in different states, then it will be inter-state supply. However if the location of supplier and place of supply of service are in same state it will be intra-state supply.

Place of supply of service is to be ascertained as per provisions of Sections 12 and 13 of IGST Act. The relevant portions of said sections are reproduced below for ready reference.

12. “(1) The provisions of this section shall apply to determine the place of supply of services where the location of supplier of services and the location of the recipient of services is in India……..

13. (1) The provisions of this section shall apply to determine 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.

(1) to (7)………

8. The place of supply of the following services shall be the location of the supplier of services, namely:––

   1. services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;

   2. intermediary services”

From above provisions it can be seen that Section 12 for deciding place of service is applicable when both, the supplier and the recipient are within India. Section 13 will apply when one of the parties i.e. either supplier or recipient is out of India.

As per section 13(8)(b), in relation to intermediary services, the place of supply of service is the location of the supplier. In other words, by above deeming provision the location of supplier and place of supply will always be within one state. Having this situation there is one view, wherein it is felt that the transaction will be intra-state in light of provisions of section 8(2).

However, there is another view which believes that provisions of section 8(2) are subject to provision of section 12. In other words it is believed that if section 12 is not applicable to the given facts and situation then section 8(2) will also not apply. Since one of the parties to the transaction is in foreign country, section 13 is only applicable and therefore section 8(2) will not apply and it cannot be intra-state supply. Pursuant to above, the further thinking is that section 7(5)(c), which provides that if the supply is not falling in the category of intra-state supply then it will fall in the category of inter-state supply will apply. In the present query, though, both, location of supplier and place of supply are in same state still it will not be covered by section 12 and hence it cannot be intra-state as per section 8(2). Therefore, by default, it falls under Inter-state category as per Section 7(5)(c). If so the supplier should pay IGST.

Advance Ruling

As on today there is advance ruling which throws light on the issue. Reference can be made to AR in case of Micro Industries (No GST-ARA-23/2018-19/B-87 Mumbai,dt 10.08.2018)

In application, following contention was made regarding payment of tax, if the transaction of the applicant is held to be intermediary services.

7. “Now, therefore, the CGST/SGST will be payable in the Taxable Territory on account of the ‘place of supply’, being the place where the Supplier, i.e. Micro, is registered, that is in the State of Maharashtra.

8. In the context of the case on hand, the aforesaid interpretative process makes taxable “intermediary services” rendered by Micro to the recipient abroad in non-taxable territory, liable tax in Maharashtra State, which is the place where the Supplier (Micro) is Registered and happens to be the place of supply;

   and fortunately further also the “destination state” or “consumption State”; because the Laboratory Equipment imported by M/S Panama Laboratory, Mumbai, would be used by the Purchasing Customer, who is also residing in the State of Maharashtra.

9. Before looking at another example, a few words on new taxation Policy. Effective July 1, 2017 there has been a paradigm shift in taxation Policy, now, adopting the destination based tax. The basic difference between the Destination based tax and origin based tax lies in the fact that origin based taxation seeks to levy and collect tax on the basis of location of production and destination based taxation seeks to levy and collect tax on the basis of location of consumption. Further, a fundamental proposition under the new GST regime is that the concept of “place of consumption” also called and known as the “Place of supply”, merely determines that the tax would accrue to the State of consumption (jurisdictional aspect).

10. Now, look at another case, in which Micro procures the P.O. from the Customer at Vadodara (formerly known as Baroda), in the State of Gujarat, for purchase of Laboratory Equipment from the same Germany seller. By virtue of section 13 (8) (b) read with 2(13) of IGST Act, the place of supply” remains the same i.e. “the place of Supplier”, State of Maharashtra. But the destination based or consumption based taxation Policy would get a jolt; because the actual use of the goods imported would be in the State of Gujarat, whereas the tax will accrue to the state of Maharashtra, where the place of supplier and the place of supply synchronize.

11. The matter needs to be examined further.

12. Actually, the “nature of supply” is determined under Section 7 and 8 of the IGST Act, 2017 which reads:

CHAPTER IV
 DETERMINATION OF NATURE OF SUPPLY

7. Inter-State supply. – (1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in –

   1. two different States;

   2. two different Union territories; or

   3. a State and a Union territory,

   shall be treated as a supply of goods in the course of inter-State trade or commerce.

2. Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.

3. Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in –

   1. two different States;

   2. two different Union territories; or

   3. a State and a Union territory,

   shall be treated as a supply of services in the course of inter-State trade or commerce.

4. Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.

5. Supply of goods or services or both, –

1. when the supplier is located in India and the place of supply is outside India;

2. to or by a Special Economic Zone developer or a Special Economic Zone unit; or

3. the taxable territory, not being an intra-State supply and not covered elsewhere in this section, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

13. It is manifestly clear from the conjoint reading of section 7 (5) of the IGST Act read with Section 13 (8)(b) that the nature of transaction on hand is taken out of the IGST Act and by virtue of the Supplier’s Location and the Place of Supply make the transaction fall into the trap of the “intra-state” service and hence would attract 9% CGST+ 9% SGST, in the aggregate 18%, the services being Classifiable under the Residuary Tariff Classification, namely, 1997”

After noting above submission, the learned AAR, Maharashtra observed as under :-

“14. With the result that the benefit of “Zero rated tax” defined under Section 16 of the IGST Act, 2017 is unavailable, simply because the role played by the Micro is treated as “Intermediary Services” under section 13 (8) (b) of the IGST Act.

Since the applicant, being the supplier of service is located in India and the recipient of Service i.e. supplier of goods is located outside India, Section 13 of the IGST Act, 2017 would be applicable to determine the place of service. As per Section 13 (8) (b) of the said Act, the place of supply of Intermediary Services shall be the location of the supplier of services, in this case, the applicant. Since the place of supply of services in the instant case is in taxable territory, the said intermediary services cannot be treated as export of services under the provisions of the GST laws.

In order to classify as ‘export of service’, as per section 2(6) of the Integrated Goods and Service Tax Act, 2017, one of the crucial condition as contained under sub-clause (iii) requires that the place of supply of service should be outside India. In the subject case, the place of supply shall be location of the supplier of services and therefore such ‘intermediary services’ cannot be classified as ‘export of services’.

Further, we find that their contentions that though they are covered under the definition of ‘Intermediary’, the services being provided by them are not ‘Intermediary Services’ are not tenable for the reason that they are very clearly covered under the definition of Intermediary’ and the services being provided by them are clearly the services as given in the definition of ‘Intermediary’, as referred in the discussions above.We now discuss Inter-state provisions as well as Intra State provisions under the GST laws as follows:

Inter-state provisions are contained under section 7 of the Integrated Goods and Service Tax Act, 2017 and since none of the specific provisions are applicable, residuary provision contained under section 7 (5) (c) shall be made applicable in the case of intermediary service, which states that inter-state supply of goods or services or both in the taxable territory shall be treated to be a supply of goods or services or both in the course of inter-state trade or commerce, however, the same should not be an intrastate supply and should not be covered elsewhere in section 7 of the IGST Act.

Section 8 of the Integrated Goods and Service Tax Act, 2017 deals with the provisions of intra-state. Applying the provisions of section 8 (2) which states that ‘subject to the provisions of section 12, in case where the location of the supplier and the place of supply of services are in the same state or in the same union territory, the supply of service shall be treated as intra-state supply’.

The above provisions of inter-state supply and intra-state supply have clarity when both the recipient and the supplier of services are located in India. However as in the subject case, when the recipient is located outside India provisions of section 7(5)(c) shall be applicable. Section 7(5)(c) is reproduced as follows:-

Supply of goods or services or both

1. When the supplier is located in India and the place of supply is outside India.

2. To or by a Special Economic Zone developer or a Special Economic Zone unit; or

3. In the taxable territory, not being an intra-State supply and not covered elsewhere in this section.shall be treated to be a supply of goods or services or both in the course of inter-State-trade or commerce.

As per intra-state provisions contained in Section 8(2), the said provisions are subject to the provisions of section 12 of the IGST Act. As per section 12, the provisions of section 12 would be applicable only for determining the place of supply of service where the location of supplier of services and the location of recipient of the services is in India. When recipient is located outside India the said provisions of section 12 cannot be made applicable and since provisions of section 8(2) are inter-linked with provisions of section 12, the same cannot be made applicable in case the recipient of service is located outside India.

Thus we find that in case the intermediary services are provided to the recipient located outside India, the inter-state provisions as contained under section 7(5) (c) shall be applicable and hence IGST is payable under such transaction.”

Thus, the legal position that emerges is that if the intermediary services fall under section 13(8)(b) the tax should be paid under IGST and not CGST/SGST.