The Hon’ble AAR Gujarat in the matter of M/s. Sagar Powertex Private Limited [Advance Ruling No. GUJ/GAAR/R/98/2020, dated October 14, 2020] held that, ‘Central Goods and Services Tax (“CGST”) + State Goods and Services Tax (“SGST”)’ would be applicable and not Integrated Goods and Services Tax (“IGST”), on intermediary services provided by an Indian agent to its Korean principal, where the agent is earning commissions on sale of machinery, in territory of India, in the capacity of an intermediary.
M/s. Sagar Powertex Pvt. Ltd. (“Applicant”) is engaged in the agency business of weaving machineries. The Applicant has have entered into an agreement with UKIL Machinery Co. Ltd. (“the Company”), a corporation organized under the laws of Republic of Korea to sell their machinery in the Indian Territory, wherein, the Applicant is appointed as its exclusive sales agent for the sizing/warping machinery and/or components and supplies for the territory of India.
For the same, the Applicant is getting certain amount as commission in the capacity of Agent/ intermediary from the foreign entities for the Supply of their machinery. The Company pays a commission of 7.5% for all capital equipment sold in the allotted territory and 10% for all spare parts ‘sold in the territory’, on the FOB Busan, Korea and selling price of all such orders are placed through the applicant. The applicant against the said service received commission income from Korea in foreign currency.
Whether the services provided by the Applicant as an intermediary are liable to Central Goods and Services Tax (“CGST”) + State Goods and Services Tax (“SGST”) or Integrated Goods and Services Tax (“IGST”)?
The Hon’ble AAR Gujarat in Advance Ruling No. GUJ/GAAR/R/98/2020, dated October 14, 2020 held as under:
- Noted that, the services provided by the Applicant are in the nature of services of commission agents or commodity brokers who negotiate between buyers and sellers as a facilitator for the supply of goods for which they are paid a fee or commission. The said service can also be called as ‘intermediary services’.
- Observed that, an intermediary can be a broker, an agent or any other person who arranges and facilitates the supply of goods and/or services between two or more persons and who cannot change the nature of supply as provided by the principal. The Applicant is covered by the definition of an ‘intermediary’ under Section 2(13) of Integrated Goods and Services Tax Act, 2017 (“IGST Act”), as they are acting as an agent and facilitating the process for sale of machinery by their foreign principals to the Indian parties and for providing such service to the foreign principal the Applicant is receiving the commission. It is very clear from the facts of transaction that the Applicant is acting as an “agent” of the foreign company and neither providing services nor supplying the goods on their own account.
- Analyzed Section 13 of the IGST Act to find out the type of Goods and Service Tax i.e. ‘CGST + SGST’ or ‘IGST’ is to be levied on the Applicant, and stated that the same is dependent on type of supply of goods or services provided i.e. intra-state or interstate or imports/exports and also on the place of supply of goods or services. The Hon’ble AAR found that, the supplier of service is the Applicant and the service recipient is the Company and observed that the intermediary services provided by the Applicant, appears at sub-section (8)(b) of Section 13 of the IGST Act. Further, stated that, Section 13(8) of the IGST Act, clearly mentions that the place of supply in respect of the services described under the said sub-section shall be the location of the supplier of services. Hence, the supplier in the instant case is the Applicant and the location of the said supplier is in Gujarat.
- Held that, since the location of both the supplier of service i.e., the Applicant as well as the place of supply of service is in Gujarat, the supply of services would be considered as intra-state supply of services and would be liable to CGST and SGST as per the provisions of Section 9(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act) on the services provided by them as an intermediary.
Section 7 and Section 8 of the IGST Act, contains provisions to determine whether the supply by intermediary shall be regarded as an inter-state supply or as an intra-state supply. Further, Section 13(8) of the states that the place of supply in case of intermediary services becomes the location of the supplier. This leads to the situation where location of supplier and the place of supply are in the same state, which means that the transaction between the intermediary service provider and a recipient outside India becomes intra-state supply.
Similar issue was dealt in Q25 of the FAQs on Banking, Insurance and Stock Brokers Sector released by the CBIC, where the query before department was whether the intermediary services provided by a banking company to its offshore account holders be treated as an intra-state supply or an inter-state supply for payment of GST?
The department answered citing Section 13(8)(b) of IGST Act and responded that “the place of supply of such services is the location of the provider of services. As the location of supplier and place of supply are in same state, such supplies will be treated as intra-state supply and Central tax and State tax or Union territory tax, as the case may be, will be payable.”
The clarification of the department induces one to think that the intermediary services provided to an offshore account holder shall be treated to be intra-state supply where the place of supply shall be location of the service provider. Now, the question is whether the said answer as given for this FAQ is correct?
A contrasting and opposite view is reflected for the determination of place of supply whether intra-state or inter-state when Section 7(5)(c) and Section 8(2) of the IGST Act are interpreted together. For Section 12 of the IGST Act to be applicable, location of supplier as well recipient must be in India. This means that Section 8(2) of the IGST Act cannot be applied to the supply of intermediary services as the recipient is situated outside the taxable territory of India, hence, taking the transaction of providing intermediary services outside the purview of intra-state supply or services.
Therefore, it may be concluded with conjoint reading of Section 8(2) of the IGST Act and Section 7(5)(c) of the IGST Act that intermediary services given to the recipient outside India by an intermediary in India is an inter-state supply on which CGST and SGST is leviable, but it might not create any problem even when IGST is charged, because, in such case, the other state code is made as 00000000000. In such scenario, SGST portion will accrue to a state where location of supplier is, and place of supply be mentioned as same state.
Section 2(13) of the IGST Act:
“13) “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;”
Section 13(8) of the IGST Act:
“Place of supply of services where location of supplier or location of recipient is outside India-
(8) The place of supply of the following services shall be the location of the supplier of services, namely:––
(a) services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;
(b) intermediary services;
(c) services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.”
Section 9(1) of the CGST Act:
“Levy and collection-
9. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.”
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