Intermediary Services – Legal Overview under Service Tax Act
Intermediary Services – Legal Overview under Service Tax
Background: Ever since the Service Tax based on negative list is introduces there is lack of clarity on intermediary and its taxability. Initially intermediary were liable to be taxed if those are provided for services. However in 2014 supply of goods are also added in definition of Intermediary services. This meant that Intermediary in relation to goods and services are liable to be taxed under current regime of Service Tax.
Ideally Service tax is now payable on all services rendered in the taxable territory except the services as mentioned in the negative list and those granted exemption from the levy of Service tax. The essence of Service tax is that a service should be taxed in the jurisdiction of its consumption. The new charging section, Section 66B of the Finance Act, enables taxation of such services as are provided in the taxable territory. Thus, the services that are provided in a non-taxable territory would not be chargeable to Service tax. At this juncture it, therefore, becomes essential to determine the “place” where the services have been provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided.
Intermediary Services: As per Sub-rule (f) of Rule 2 of the place of provisions of Services Rules, 2012, ‘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 2 or more persons but does not include a person who provides the main service
Rule 9 of The Place of Provision of Supply Rules, 2012, rules states that for the following services:
- Services provided by a banking company, or a financial institution, or a non- banking financial company, to account holders;
- Online information and database access or retrieval services
- Intermediary services;
- Service consisting of hiring of means of transport, up to a period of one month.
the place of provision of service shall be the location of the service provider :
In terms of Rule 9, in case of intermediary, following conditions should be met –
- Should arrange or facilitate a service between two persons
- Does not include a person who himself provides the main service on his own account
- Two services get involved –
- main service by principal to customer (airlines, hotel, tour operator etc.)
- own service to customer or principal (hotel booking, ticket booking, travel agent etc.)
Does not influence any of the two –
- characteristics of main service
- price of main service.
Clarification and Legal nemesis
An Education Guide (‘Guidance Note’) on June 20, 2012 issued by the Central Board of Excise and Customs clarifying the meaning of intermediary states:
Para 5.9.6 what are intermediary services?
Generally, an “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing . Thus, an intermediary is involved with 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.’
In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:-
- Nature and Value
- Separation of Value
- Identify and Title
Hence, from the analysis of the definition of ‘intermediary’ read with the aforementioned Guidance Note, the following points emerge:
- An intermediary arranges or facilitates a provision of a ‘main service’ between two more persons;
- An intermediary is involved with two supplies at any one time: (i) the supply between the principal and the third party; and (ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged;
- An intermediary cannot alter the nature or value of service, the supply of which he facilitates on behalf of his principal, although the principal may authorize to negotiate a different price;
- The consideration for an intermediary’s service is separately identifiable from the main supply of service that he is arranging and is in the nature of fee or commission charged by him;
- The test of agency must be satisfied between the principal and the agent i.e. the intermediary. The Guidance note states that the intermediary or the agent must have documentary evidence authorizing him to act on behalf of the provider of the ‘main service’;
- The payment for such services is received by way of commission;
As per the Guidance Note, the principal must know the exact value at which the service is supplied (or obtained) on his behalf.
Advance Ruling Related to Intermediary Services:
- Provision of marketing support services, call centre services, payment processing etc does not amount to provision of ‘intermediary’ services(M/s GoDaddy India Web Services Pvt. Ltd. Versus Commissioner of Service Tax, Delhi-IV, Ruling No.AAR/ST/08/2016, Application No. AAR/44/ST/15/2014)
The applicant entered into an agreement to provide marketing support services, (including direct marketing, branding activites, offline marketing), call centre services, payment processing services to its parent company. The Applicant was not all concerned about the services provided by GoDaddy US directly to their Indian Customers, which related to domain name registration, transfer services, web hosting services, designing services etc.In this case, applicant was not in receipt of any remuneration/consideration from the Indian Customers of GoDaddy US. Applicant was to only receive a fee from GoDaddy US, being the operating cost incurred by the applicant plus mark up of 13% on such costs. It was noticed that applicant was to receive the said fees from GoDaddy US, even in respect of Indian Customers, who directly remitted the service charges to GoDaddy US through International Credit Card, wherein applicant is not in the picture. This fact further shows that the applicant is not providing any service to Indian Customers and hence could not be said to be an intermediary for the purpose of POPS rules.
- Customer support and payment processing services provided by the service provider does not make the service provider an intermediary, as long as the services are provided on own account. (M/s Universal Services India Pvt. Ltd. v.The Commissioner of Service Tax, Gurgaon, Ruling No.AAR/ST/07/2016 in Application No. AAR/44/ST/14 /2014)
In this case, the applicant proposed to assist WWD US with the processing of payments made by their customers in India through their internet banking facilities/ credit cards. The detailed facts were as follows – WWD US would provide its services and products to customers in India through its website. In respect of such services, the customers would make the payment to WWD US online. For making such payment, in case the customers used an international credit card, they would be making a payment directly to WWD US in US Dollars. The applicant would provide payment processing facilities in India and collect money from the customers of WWD US in India and remit the same to WWD US. Towards this, the applicant proposes to open a separate bank account in India wherein the payment collection gateway company appointed by the applicant will deposit the money so collected from the customers of WWD US. The applicant would charge a fee equal to the operating costs incurred by the applicant plus a mark-up of 13% on such costs. The applicant is not authorized to enter into any contract or arrangement on behalf of WWD US or which bind it in any manner whatsoever. WWD US will directly contact and provide services to customers in India. The Advance Ruling Authority held that from the facts, the applicant would not be receiving any fees in respect of processing the payments of the customer remitted directly through the payment gateway. Since the service is being provided on own account, the service is not covered by Rule 9 (intermediary services) but covered under Rule 3 of the POPS rules, 2012. The Advance Ruling Authority relying on the CBEC Education Guide dated 20th June, 2012 issued by Ministry of Finance, Department of Revenue, Tax Research Unit (‘TRU’) held that normally a service receiver is the person is legally entitled to receive the service and is therefore obliged to make payment of the service received whether or not he actually makes the payment or someone else makes the payment on his behalf. In the facts of the present case, even though the applicant processed the payment of the customer, the service was being rendered to WWD US who was legally entitled receive the service and obliged to make payment for the same.
- Reimbursements of salary and other emoluments of employees under deputation contracts with Group companies is not a service itself. Incidentally it can inferred that mere presence of three parties involved (individual, group company and subsidiary company) does not make the service as an intermediary service(M/s North American Coal Corporation India Pvt. Ltd. V. Commissioner of Central Excise, Pune-III, Advance Ruling No. AAR/ST/13/2015, Application No. AAR/44/ST/2/2014)
In this case, certain employees of the US company were sent on deputation to its Indian subsidiary. The salary payment of US Company’s employee were continued to be paid in the US and were recovered from the Indian company. The issue was on the levy of service tax on such recoveries by the US Company. The Advance Ruling authority held that the agreement is very clear to suggest that so long as individual is serving in India, he will be treated to be the employee of the applicant (i.e Indian company) though his interests as the employee of NAC, US, insofar as the social security interests are concerned, will be taken care of by NAC, US. It is trite that he does not get the salary from NAC, US when he is offering services to NAC, India in that behalf, the benefits are mutually exclusive, at least so far as, they are concerned with the salary. The only obligation on NAC, US is regarding the social securities which are not reimbursed by NAC, India to NAC, US – merely because the social security of Mr. Sloan while he is in India is being taken care of by the NAC, US. The service of the individual with NAC, India cannot be viewed otherwise in view of the clear language of the provisions of law. There shall be no liability to pay service tax on the salary and the allowances payable by the applicant to the employee in terms of the dual employment agreement and such salary will not be eligible to levy the service tax as per the provisions of the Finance Act.
Conclusion: Thus, it appears that in the present Service tax regime, the agreement between the parties deserves a paramount importance; hence, proper attention should be given while arranging the transactions. We recommend that utmost care must be taken while preparing agreement so that litigation can be avoided.
Disclaimer: The Views Expressed in the article is personal opinion of author. The author is CA and CS by profession and one can reach him on @hemanshow79 on twitter or mail queries on email@example.com. The article can be said as reference material. However courts can take different opinion based on nature and circumstances of each case.