GST has received reports highlighting the confusion surrounding the interpretation of the term “Intermediary services” in the GST Law. After careful examination of the matter, and considering the challenges faced by the trade and industry, as well as the need for consistent implementation of the law across different field formations, the Board, exercising its powers granted by section 168 (1) of the Central Goods and Services Tax Act, 2017 (referred to as the “CGST Act”), hereby provides clarifications on the issues discussed in the following paragraphs.
2. Scope of Intermediary services
2.1 The term “Intermediary” is defined in subsection (13) of section 2 of the Integrated Goods and Services Tax Act, 2017 (referred to as the “IGST Act”) as follows: “Intermediary means a broker, an agent, or any other person, regardless of the name used, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons. However, it does not include a person who supplies such goods or services or both or securities on their own account.”
2.2 The concept of “intermediary” was adopted from the Service Tax Regime into the GST framework. In the Service Tax law, the definition of “intermediary” was provided in Rule 2(f) of the Place of Provision of Services Rules, 2012, issued through notification No. 28/2012-ST, dated 20-6-2012, and it stated the following:
“intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;”
2.3 Upon careful examination of the definition of “intermediary” under both the IGST Act and the Service Tax law, it becomes apparent that the scope of intermediary services in the GST regime remains largely unchanged compared to the Service Tax regime, with the only addition being the inclusion of the supply of securities in the definition of intermediary under the GST Law.
3. Primary Requirements for intermediary services
The concept of intermediary services, as defined earlier, entails certain fundamental conditions, which are elaborated below:
3.1 Involvement of Three Parties: As per the given definition, an intermediary is an individual or entity that arranges or facilitates the exchange of goods, services, or securities between two or more parties. Therefore, it is inherently implied that such an arrangement necessitates a minimum of three parties: two parties engaged in the main supply of goods, services, or securities, and one party responsible for arranging or facilitating the said main supply. It is important to note that an activity involving only two parties cannot be considered as an intermediary service. The role of an intermediary primarily revolves around “arranging or facilitating” another supply (the “main supply”) between two or more other individuals or entities, rather than directly providing the main supply themselves.
3.2 Distinction between Two Supplies: As mentioned earlier, the provision of intermediary services entails two distinct supplies:
(1) Main Supply: This refers to the actual exchange of goods, services, or securities between the two principal parties involved.
(2) Ancillary Supply: This corresponds to the service of facilitating or arranging the aforementioned main supply between the two principal parties. The ancillary supply constitutes the intermediary service and can be clearly identified and differentiated from the main supply.
It is important to note that a person engaged in supplying the main supply directly on a principal-to-principal basis to another party cannot be regarded as a provider of intermediary services.
3.3 Qualification as an Agent, Broker, or Similar Person: The definition of “intermediary” itself states that an intermediary service provider is a broker, agent, or any other person, regardless of the name used. This aspect of the definition is not exhaustive but employs the term “means” instead of “and includes” to indicate its scope. The use of the phrase “arranges or facilitates” in the definition implies that the intermediary plays a supportive role. Their primary function is to arrange or facilitate another supply, which is the main supply, rather than directly providing the main supply themselves. Therefore, the role of an intermediary is subsidiary in nature.
3.4 Exclusion of Self-supply: The definition of intermediary services explicitly states that an intermediary “does not include a person who supplies such goods or services or both or securities on his own account.” The use of the word “such” in reference to the supply of goods or services pertains to the main supply of goods, services, or securities between two or more parties, which are arranged or facilitated by the intermediary. This implies that if a person supplies the main supply, either fully or partially, on a principal-to-principal basis, such supply cannot be classified within the scope of “intermediary” services.
3.5 Exclusion of Sub-contracting as Intermediary Service: An important exception to the concept of an intermediary service is sub-contracting. In certain cases, the supplier of the main service may choose to outsource the supply of the main service, either entirely or partially, to one or more sub-contractors. These sub-contractors directly provide the main supply, either in its entirety or a portion thereof. They do not merely arrange or facilitate the main supply between the principal supplier and their customers. Therefore, sub-contractors are not considered intermediaries. For example, let’s consider a scenario where ‘A’ and ‘B’ have a contract for Annual Maintenance of tools and machinery. ‘A’ sub-contracts a part or the entire task to ‘C’. In this case, ‘C’ directly provides the Annual Maintenance Service to ‘A’ on a principal-to-principal basis, and not as an intermediary, even though ‘C’ deals with ‘B’ (the customer of ‘A’). The supply of service by ‘C’ is not classified as an intermediary service.
3.6 Invocation of Place of Supply Provision for Intermediary Services: The specific provision regarding the place of supply for “intermediary services” under section 13 of the IGST Act will only be applicable when either the supplier of intermediary services or the recipient of intermediary services is located outside India.
4. Clarification through Illustrations:
Illustration 1: Let’s consider the following scenario: ‘A’ is a manufacturer and supplier of a machine. ‘C’ assists ‘A’ in selling the machine by identifying client ‘B’, who intends to purchase the machine. ‘C’ also aids in finalizing the contract for the supply of the machine from ‘A’ to ‘B’. ‘C’ charges ‘A’ for their services, which involve locating ‘B’ and facilitating the sale of the machine between ‘A’ and ‘B’. ‘C’ invoices ‘A’ for these services and receives payment from ‘A’. In this arrangement, while ‘A’ and ‘B’ are engaged in the main supply of the machinery, ‘C’ plays the role of facilitating the supply of the machine between ‘A’ and ‘B’. Therefore, ‘C’ acts as an intermediary, providing intermediary services to ‘A’.
Illustration 2: Let’s consider the following scenario: ‘A’ is a software company that develops customized software for its clients based on their specific requirements. ‘A’ has a contract with ‘B’ to provide customized software for their business operations. However, ‘A’ outsources the design and development of a particular module of the software to ‘C’. In this case, ‘C’ directly provides the main supply of the service, which is the design and development of the software, to ‘A’. Therefore, ‘C’ does not qualify as an intermediary in this scenario.
Illustration 3: An insurance company, ‘P’, located outside India, needs to process insurance claims for its clients who avail of the insurance services provided by ‘P’. To handle the claims processing work, ‘P’ decides to outsource this task to another firm. ‘P’ approaches ‘Q’, located in India, to arrange the insurance claims processing service from other service providers in India. ‘Q’ contacts ‘R’, a company specializing in insurance claims processing, and facilitates the supply of insurance claims processing service from ‘R’ to ‘P’. ‘Q’ charges ‘P’ a commission or service charge of 1% of the contract value of the insurance claims processing service provided by ‘R’ to ‘P’. In this case, the main supply of the insurance claims processing service occurs between ‘P’ and ‘R’. ‘Q’, on the other hand, is solely arranging or facilitating the supply of services between ‘P’ and ‘R’ and does not provide the main supply of services themselves. Consequently, ‘Q’ qualifies as an intermediary according to the definition provided in subsection (13) of section 2 of the IGST Act.
Illustration 4: Let’s consider the following scenario: ‘A’ is a computer manufacturer and supplier based in the USA, supplying its goods worldwide. As part of their supply, ‘A’ is also responsible for providing customer care services to address queries and complaints from their customers regarding the computers they supply. ‘A’ decides to outsource the customer care services to a BPO firm, ‘B’. ‘B’ interacts with ‘A’s customers, addressing and processing their queries and complaints. ‘B’ charges ‘A’ for providing this service. In this case, ‘B’ is directly involved in the main service of providing customer care services to ‘A’, and therefore, ‘B’ does not qualify as an intermediary.
- The illustrations provided in paragraph 4 are meant to give an indication and are not exhaustive. They are also of a general nature and should not be interpreted to suggest that the mentioned service categories are inherently classified as either intermediary services or otherwise. Whether a specific service falls under intermediary services, as defined in subsection (13) of section 2 of the IGST Act, would depend on the facts of the particular case. When examining the facts and the terms of the contract, the fundamental characteristics of intermediary services, discussed in paragraph 3, should be taken into consideration.
