While various established pre-GST concepts were transitioned into GST era, perhaps many were coupled with legacy disputes as well. To quote an illustration, ‘Intermediary’ could be one of them. Yet, what one should be worried about in today’s GST regime is the additional intricacies in GST.

In October 2014, the service tax law was amended to widen the tax net by including agents/ brokers engaged in facilitating sale of goods between two persons. The primary objective was to tax Indian subsidiary companies who helped their foreign counterpart to directly sell goods to Indian customers.

Legacy dispute:

The definition of the term ‘intermediary’ as existed in service tax law is the same as in  GST law. The definition in both laws provides that ‘intermediary’ means any person who arranges or facilitates supply of goods between two persons. However, a valid question here is whether sales agents who are merely marketing or promoting the goods of ultimate seller in general would be an ‘intermediary’. The Tribunal has dealt with such scenarios under service tax  and provided some relief to the taxpayers.

Given the varied industry practise and fine difference in case of a normal sales agent vis-à-vis an intermediary, the issue cannot be expected to be settled soon. 

Complexity in GST:

GST provisions were drafted continuing the old practise of taxing intermediary services provided by Indian companies to their foreign customers. The place of supply in such scenario is prescribed in Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), as the location of supplier is India. Accordingly, Indian intermediaries are required to pay tax on services when provided in India.

Given the dual GST system in India, it is also important to identify whether a taxpayer should discharge CGST+SGST or IGST. The said issue needs to be examined in the light of legal provisions and the recent Gujarat High Court in the case of Material Recycling Association of India [2020 VIL 341 GUJ].

The petitioner in above case challenged the constitutional validity of Section 13(8)(c) of the IGST Act (determining the place of supply for intermediary) primarily on the grounds of arbitrariness and territorial jurisdiction. However, what is alarming for the industry is not only the fact that Court dismissed the petition, rather, some of the arguments and observations made in the judgement.

Before, delving deep, it is pivotal to appreciate following aspects:

• Two key ingredients which determine the transaction as “inter-state” vis-à-vis “intra-state” are: (i) location of supplier and (ii) place of supply.
• As per Section 7 of the IGST, where location of supplier and place of supply are in two different States, it is an inter-state supply.
• Similarly, as per Section 8 of the IGST Act a supply is intra-state supply, where location of supplier and place of supply are in the same State.
• Further, as per Section 7(5)(c) of the IGST Act if a supply made in India is not an intra-state supply it would be an inter-state supply.

CGST+SGST or IGST?

To reiterate, Section 13(8)(c) of the IGST Act determines the place of supply for intermediary as the location of supplier.

A first blush reading of the above provision would suggest that in case of intermediary services, the supply would always be an intra-state supply, since place of supply would coincide with the location of supplier. The petitioner, while challenging the constitutional validity of the above provision, canvased similar argument before the Court that the supply of intermediary services provided by Indian companies to its foreign customers would amount to ‘intra-state supply’. The High Court decided the matter in light of above submission and held that such transaction is an ‘intra-state supply’.

Let us now go through the other connected provisions under GST. Section 8(2) of the IGST Act provides that a supply would be an ‘intra-state supply’ when the supplier and place of supply are in same State. However, a closer look at Section 8(2) provides a special condition attached to it which reads as ‘Subject to the provision of Section 12, supply of services……’

The provision begins with the term ‘subject to’ thereby giving a meaning that Section 8 is inextricably conditional upon Section 12. The Supreme Court in the case of K.R.C.S. Balakrishna [(1961) 2 (SCR) 736] has held that the use of words ‘subject to’ is to effectuate intention of legislation and the correct meaning would be ‘conditional upon’. Thus, in other words, Section 8 does not have its own identity unless, Section 12 is being invoked.

Section 12 of the IGST Act deals with various scenarios for determining the place of supply of services. However, the scope of Section 12 is restricted only to determine nature of supply of service where both supplier and recipient are located in India.

On the contrary, where either of the parties is situated outside India, the place of supply would be governed by Section 13. Hence, in case of ‘intermediary services’ provided by an Indian company to foreign customer, the same is covered under Section 13(8)(c) of the IGST Act.

Therefore, in cases where intermediary service is provided by an Indian supplier to its foreign customer, can it be said that the said transaction does not qualify as ‘intra-state supply’ in terms of Section 8(2), since the place of supply in this case is not determined under Section 12.

If the answer is in affirmative, the residuary provision i.e. Section 7(5)(c) should come into play and accordingly, the transaction may be deemed as inter-state supply. At this juncture, another judgement of the Gujarat High Court in the case of Mohit Minerals [2020 (33) ELT 321 Guj] may also be referred. The Court here was dealing with the applicability of IGST on ocean freight in the hands of Indian importers. While deciding the said case, the Court also held that Section 13 of IGST Act is applicable to identify a transaction as inter-state supply under Section 7(5). The Court further held that Section 7(5)(c) is a residuary clause intended to capture any substantial transaction which should not escape tax net.

Indeed, Section 7(5)(c) intends to cover any supply in taxable territory i.e. India and not the case where place of supply is in India. In any case, the term ‘supply in taxable territory’ is not defined. Also given the nature of residuary provision tangled with the fact that both supplier and place of supply are located in India, the said transaction may fit within four corners of Section 7(5)(c).

Obiter dicta:

Certainly, it would not be an irrelevant question to examine whether the above discussed legal position is in direct conflict with the ruling given by the Gujarat High Court.

It should be appreciated that the High Court had given its decision on constitutional validity of Section 13(8)(c), so far as it deals with place of supply for intermediary services. The question whether the said transaction should qualify as inter-state or inter-state supply was never raised before the court and hence its view on the same is a mere passing remark which is referred to as ‘Obiter dicta’.

The concept of ‘Obiter dicta’ is explained by Bennion’s Statutory Interpretation (sixth edition) as “a gratuitous opinion, an individual impertinence (that is something strictly not pertinent) which, whether it be wise or foolish, right or wrong, bindeth none – not even the lips that utter it”.

In the light of above backdrop, it can be argued that the decision of court in so far as intermediary service is held as intra-state supply is merely obiter dicta and hence, not a binding precedent.

Though many such arguments may be raised, it is ultimately the taxpayer who would suffer financially, unless relief is granted.

Conclusion:

While the legacy issue of sales agent vs. intermediary is still continuing on one hand, this possible dispute under GST is also rising. In such uncertain situation, it is high time for CBIC to clarify the nature of applicable tax. Also, relaxation in terms of internal adjustment in the Governments account i.e. transfer from IGST to CGST+SGST and vice-versa could be even more business friendly, rather than making payment and seeking refund. The Kerala High Court in case of Saji S. [2018 (19) GSTL 385 (Ker.)] has also suggested the same, while allowing release of seized goods. The GST Council which has representatives from both centre and States therefore should now ‘mediate’ on ‘intermediary’.

[The authors are Principal Associates in GST practice at Lakshmikumaran & Sridharan, Pune]