Relief for BPOs: CBIC withdraws circular on Intermediary Services

Months ago, the Government issued a circular that said anyone engaged in the facilitation of supply of goods/services will not be considered to be engaged in export and will now be considered as intermediary, unless it is on his own account. This circular meant that BPO, KPO and IT services were treated as intermediaries under GST laws and as such any refund claims by BPO, KPO and IT services were denied. This article outlines the concept of intermediary services.

The concept of ‘intermediary services’ was originally introduced under the erstwhile Service Tax law when the negative list scheme was introduced in July 2012 and despite umpteen protests by various industry verticals, it has been brought into the Goods and Service Tax (GST) law.

As per Section 2(13) of the Integrated Goods & Service Tax, 2017 (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’.

The above definition of ‘intermediary’ does not include a person who provides the service on his own account (i.e. principal to principal basis). The Central Board of Indirect Taxes and Customs (‘CBIC’) in its Educational Guide had explained the concept of ‘intermediary' and its exclusion clause by way of an illustration. An intermediary is involved with two supplies at any one time:

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

Also excluded under this definition is a person who arranges or facilitates a provision of a service (generally referred to as ‘the main service’) but provides the main service on his own account.

In general parlance, intermediary services refer to services which are provided by an agent, for eg. real estate agent, stock broker, etc. Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) companies are engaged in providing back office support, accounting and legal support, etc. The services provided by the Indian Companies, under a service agreement, are on a principal-to-principal basis. The Indian Company either provides services to its foreign counterparts or directly to the customers of foreign counterparts.  

The Authority for Advance Ruling (‘AAR’) Maharashtra, in the case of Vserv Global (P.) Ltd. (2018-TIOL-263-AAR-GST), held that back-office support services do not qualify as export but are in the nature of arranging or facilitating supply of goods or services between overseas companies and customers. It categorised these as intermediary services, liable to GST at 18%, on the grounds that the place of supply of service is the location of service provider. Subsequently, the Appellate Authority for Advance Ruling (‘AAAR’) confirmed the order passed by the AAR (2019-TIOL-37-AAAR-GST).

Further, the AAR Maharashtra in the case of Mayank Jain (TS-527-AAR-2019-NT) held that the services are in the nature of intermediary and not support service as being claimed by the taxpayer and the said service does not qualify to be an export of service.

It should be noted that an Advance Ruling is binding only on the taxpayer who had sought it and the concerned Revenue Authorities. However, the above-mentioned Advance Rulings provide clarity about the issues being faced and have persuasive value in matters before the Revenue Authorities.

The aforesaid rulings have created chaos amongst several MNCs engaged in providing back-end support services with the fear of being taxed at 18% GST, despite following favourable rulings:

• GoDaddy India Web services (P.) Ltd. (67 taxmann.com 324) (AAR, New Delhi) - under erstwhile Service Tax law;
• Asahi Kasei India Pvt. Ltd. (AAR Maharashtra) - affirmed by AAAR; and
• NES Global Specialist Engineering Services Pvt. Ltd. (AAR Maharashtra).

Later, the CBIC issued a clarification vide Circular No. 107/26/2019-GST, dated 18 July 2019, providing three scenarios when a supplier of Information Technology-enabled Services (‘ITeS’) services such as call centres, BPO, etc. located in India, will qualify as export or intermediary for determining GST liabilities on such services. In Scenario 1, the Circular explains why ITeS services (as enlisted under Rule 10TA(e) of Income-tax Rules, 1962) are not covered by intermediary services as these are the services provided on their own account. But in respect of Scenario 2 (backend services) and Scenario 3 (ITeS alongwith arranging or facilitating the supply of various support services), it refuses to acknowledge that back-end services are also provided on their own account and are outside the purview of intermediary services.

Based on the above Circular, it would mean that BPO service providers engaged in back-end services such as transportation of goods, sales support services and others will now come under the ambit of GST and may be taxed at 18%. The Circular issued by the CBIC has kept the situation unsettled rather than settling it. Pursuant to various representations made by the taxpayers, the CBIC has decided to withdraw, ab-initio, the Circular No. 107 /26/2019-GST dated 18 July 2019, on the scope of ITeS and its coverage under intermediary services.

While the withdrawal of the Circular is helpful to taxpayers, in order to avoid unwarranted litigation and financial repercussions, the BPO / KPO industry looks forward to an explicit clarification on the scope of intermediary services.