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GST Update: Much awaited Circular protects IT-ITeS industry from concerns of being treated as 'intermediary' service
GST Update: Much awaited Circular protects IT-ITeS industry from concerns of being treated as 'intermediary' service

September 21, 2021

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The much awaited Circular providing clarity on scope of intermediary services has finally been issued by the Central Board of Indirect Taxes and Customs (CBIC) yesterday. As you are aware, NASSCOM has been pursuing this matter for over 3 years and we are extremely glad to see it culminate into such a positive outcome

The Circular is broadly based on the draft circular approved in the 37th GST Council meeting and while that draft was specific to the Information Technology (IT)/ IT enabled Services (ITeS) sector placing reliance on the definitions under the Income Tax Act, 1961, this version is more broad based and can therefore be applied across the board.  This circular is even better and clearer. It also addresses the emerging concerns around treatment of contract R&D and IT services.

Principles outlined in the Circular:

The Circular has outlined the principles/ pre-requisites for a service to qualify as “intermediary service”:

  • Minimum of 3 parties: The Circular clarifies that by definition, an intermediary is someone who arranges or facilitates the supplies of goods or services or securities between two or more persons. Therefore, this means that there needs to be 3 parties i.e. the transacting parties and the person arranging/ facilitating the main supply to for a service to qualify as “intermediary services”.
  • Existence of 2 distinct supplies i.e. the main supply and the ancillary supply (which is provided by the intermediary).
  • Person acting in capacity of an agent/ broker or similar person – The Circular has clarified that the usage of the term “means” in the definition of intermediary does not expand the definition. The use of the expression “arranges or facilitates” in the definition of “intermediary” suggests a subsidiary role for the intermediary. It must arrange or facilitate some other supply, which is the main supply, and does not himself provides the main supply. Thus, the role of intermediary is only supportive.
  • Does not include services provided on “own account” – The Circular also clarifies that services provided on a principal to principal basis cannot be covered under the scope of “intermediary”.  In cases wherein the person supplies the main supply, either fully or partly, on principal to principal basis, the said supply cannot be covered under the scope of “intermediary”.  This aspect is reemphasized in Illustrations 2 as well as 4 provided in the Circular.
  • Sub-contracting for a service is not intermediary service – Most importantly, the Circular also goes on to clarify that sub-contracting of a service is not an intermediary service.  The supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors. Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers, and therefore, clearly is not an intermediary.

Specific illustrations provided

Sl no

Illustration

Whether the services qualify as “intermediary”

Relevance for members

1

Typical sales agent mode

C i.e. the intermediary facilitates supply of machinery from A to B

Intermediary as C is providing the ancillary supply of arranging or facilitating the ‘main supply’ of machinery between manufacturer and customer, and therefore, C is an intermediary and is providing intermediary service to manufacturer

Clarifies the position in respect of sales/ commission agents.  Aligned to the tax position of such services being taxable.

2

Software development/ customization

C undertakes software development under a sub-contracting arrangement from A who in turn has a contract with customer B

C may have to interact with end customer B in order to provide services

Not an intermediary as C is providing main supply of service of design and development of software to A, and thus, C is not an intermediary in this case.

Relevant for software development and R&D use cases.  Aligned to the Circular issued May 2018 relating to service tax matters.

3

Insurance claim processing

Q (located in India) is engaged by an insurance company (outside India) P to source insurance claims processing services from R

Intermediary as Q is merely arranging or facilitating the supply of services between P and R, and not itself providing the main supply of services

Clarifies the position in respect of sales/ commission agents for services.  Aligned to the tax position of such services being taxable.

4

Technical support services/ BPO/ KPO services

B provides customer care service to A by interacting with the customers of A and addressing / processing their queries / complains

Not an intermediary as B is involved in supply of main service ‘customer care service’ to the A

Relevant for BPO/ KPO services in case of customer support services.

5

AMC contract (illustration specified in para 3.5)

C undertakes AMC under a sub-contracting arrangement for tools and machinery from A who in turn has a contract with customer B

 

C may have to deal with end customer B in order to provide AMC services

 

Not an intermediary as C is providing main supply of service of AMC to A on his own account, and thus, C is not an intermediary in this case.

Relevant for AMC contracts/ sub-contracting arrangements.

The Circular should serve as a panacea for the numerous disputes that are pending at various levels of litigation and also ease processing of pending refund claims held up as a result of exports being viewed as “intermediary services”.  The principles laid down are going to come handy for identifying tax treatment across sectors.

Copy of the Circular is attached for your reference. 


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Download Attachment

Circular No. 159_14_2021_GST.pdf

Tejasvi

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