The GST Policy Wing, CBIC, Ministry of Finance released an important circular on 18.07.19 to address concerns raised by us in relation to IT enabled services (ITeS)/ BPO export services. The concern being that ITeS/ BPO export services were being incorrectly classified as ‘intermediary services’, resulting in GST of 18% on exports. NASSCOM has been actively engaging with the Government on this issue and we had also raised concerns on the aggressive interpretation adopted by the Advance Ruling Authorities in the case of Vserv Global and some other cases.

Summary Analysis:

The circular has listed three scenarios of ITeS services. In Scenario 1, it has excluded most back-office support services including ITeS from the ambit of ‘intermediary services’. However, much of the good work has been undone by Scenario 2 where an attempt has been made to define“support services” which are covered under “intermediary services”. The reason itis problematic is that it leads to a situation where these “support services” would be considered as “intermediary services” even if these are provided on a principal to principal basis. This is likely to negate scenario 1. Scenario 3 seeks to cover situations where ITeS supplies are performed along with other services in the nature of arranging or facilitation. It says that categorisation as ‘intermediary services’ would depend on the facts and circumstances of each case. Intermediary is already a highly litigated topic and this scenario is an invitation for further litigation. The circular is available here: https://cbic-gst.gov.in/pdf/circular-cgst-107.pdf

We have already conveyed our concerns verbally to the GST authorities.

Next steps

• We are engaging with the members to discuss and frame our final response. We will be meeting the GST policy wing and the officials of the GST secretariat.
• We are in touch with some other trade associations (manufacturing sector) who have written for an amendment in the GST law to remove the concept of taxation of intermediary export services based on the location of the intermediary. As NASSCOM, we have been advocating this and will further push this with the GST law committee. We will collaborate with other trade associations where it is useful to do so.
• Our immediate goal is to have this circular amended.

Detailed analysis is provided below.

Scenario 1

This seeks to clarify that pure ITeS services provided on “own account” will not qualify as ‘intermediary services’. This clarification positively and fittingly clarifies that most back-office support services covering IT enabled services as defined under Rule 10TA(e) of Safe Harbour Rules under the Income Tax Rules, 1962, are excluded from the ambit of ‘intermediary services’.

The definition of ITeS under Rule 10 TA (e) excludes “research and development services whether or not in the nature of contract research and development services”. This exclusion, while logical from an ITeS definition stand point, could create possible confusion and possible litigation on “contract research and development services”, being treated as an “intermediary”. From a reading of the definition of ‘intermediary services’, it is clear that R&D services clearly qualify as ‘export of services’ and are covered under the General Rule of the place of supply provisions. These services are provided on a P2P basis on ‘own account’ and are even clearer than ITeS services, to not have any shade of intermediary.

Recommendation: A specific mention of “research and development” should be made for exclusion from being considered as intermediary service.

Scenario 2

This seeks to clarify that back end services in the nature of support services – during pre-delivery, delivery and post-delivery of supply (such as order placement and delivery and logistical support, obtaining relevant Government clearances, transportation of goods, post-sales support and other services, etc.) will fall under the ambit of intermediary as these services are merely arranging or facilitating supply between two or more persons and such services are not provided by supplier of services on his own account.

This scenario is a cause for concern for the following reasons:

• It ignores the fact that for a service provider to qualify as an intermediary, he needs to be necessarily be appointed in the capacity of an agent/ broker;
• It seeks to cover activities undertaken “during delivery” and “post-delivery” within the ambit of ‘intermediary services’;
• It ignores the aspect that the definition of intermediary specifically excludes a person who provides the main service on his own account, irrespective of the agent /broker status and irrespective of the activity having an element of “arrangement or facilitation”; and
• It actually confirms the decision of the Authority for advance ruling (AAR) (affirmed by the Appellate Authority for Advance Ruling) in the case of Vserv Global and goes beyond the ruling as well, instead of clarifying or restricting/ amending the issue created by it.

This clarification will lead to incorrect expansion of the concept of ‘intermediary services’ to cover subcontracted activities undertaken “during delivery” and “post-delivery” e.g., call center and post-sales support services provided on own account post the supply taking place. This would in-fact contradict the correct interpretation as laid down in Scenario 1.

Recommendation: This scenario should be deleted. Alternatively, if complete deletion is not possible and if the intent of the circular is to outline what qualified as “intermediary”, then the scenario 2 should be redrafted to clearly state that the supplier of intermediary services needs to be an “agent or broker” and the scope of services should be limited to the pre-supply stage.

Scenario 3

This seeks to address situations where ITeS supplies are performed along with other services in the nature of arranging or facilitation. It provides that in such situations, categorisation as ‘intermediary services’ would depend on the facts and circumstances of each case. This leaves a lot of room for interpretation and leads to a lot more confusion.

Our concern in this scenario is that Intermediary is already a concept that is widely litigated and issuance of a Circular with an open-ended guidance will only lead to ground level authorities taking arbitrary views and unnecessary litigation.

Recommendation: This scenario should be deleted. In any case, the law provides for clear rules on “composite supply” and that would be followed.

In the meantime, do feel free to write to us with your inputs that will help us in our efforts.