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GST Applicability On Commission Received For Rendering Services As Intermediary

Andhra Pradesh Appellate Authority for Advance Ruling (AAAR) has upheld that commission received by the Applicant in convertible Foreign Exchange for rendering services as an intermediary between an exporter abroad receiving such services and Indian importer of equipment is not an export of service, but an inter-state supply which is to be at taxable @18%. A detailed synopsis of the case is provided below:

Facts and issues of the case:

  1. The applicant is an authorized non-exclusive consultant for Grace Products (Singapore) pte Limited for the sale of fluid cracking catalyst and additives.
  2. Grace division is a business unit of W.R. Grace (Singapore) Pte. Ltd., a Singapore corporation (hereafter 'Grace') and it engaged DKV Enterprises pvt Ltd (Applicant) as its authorized non-exclusive consultant for sale of its products to the HPCL Visakha Refinery, the CPCL Chennai Refinery and the IOCL Barauni Refinery, and its affiliates the right to sell the products directly in the territory or through other consultants and distributors.
  3. The applicant claims that only marketing consultancy service is being done by them in India on behalf of foreign company and their billing is directly done to foreign company in foreign currency and paid by inward remittance. They are neither giving any service to Indian client nor having any agreement or payment to them.
  4. The applicant sought Advance ruling on whether the marketing and consultancy services supplied by the applicant are liable under export of service or not.
  5. The Authority for Advance Ruling Andhra Pradesh vide ruling No. 04/AP/GST/2020 dated 24/02/2020 issued ruling as follows:
    • The services in question are not 'Export of Service' but 'Intermediary Services and attract IGST.
  6. Aggrieved by the ruling, the applicant requested before AAAR to remand back the case to its original authority in light of recent developments and upon the request of appellant, the Appellate Authority remanded the case back to its original Authority to examine afresh and dispose accordingly.

Grounds of Appeal:

  1. Applicant states that services are related to pre-GST period in relation to export of services and is not applicable to the intermediary service under the IGST Act, 2017.
  2. The applicant relied on the judgment of the CESTAT, in the case of IBM India Pvt Ltd. versus Commissioner of Central Excise and Service Tax reported in 2020(34) G.S.T.L. 436 wherein the appellant is a subsidiary company for parent company engaged in identification of customers and sales promotion in India and it was held to be 'Export of service, under Rule 3(1) (iii) of Export of Service Rules, 2005.
  3. It was contended that same would be applicable under GST also.

Observation of the AAR:

  1. The AAR observed that the applicant will facilitate supply of goods between the foreign company and its customers in India. Therefore, the service provided by the applicant is intermediary service as per section 2(13) of the IGST Act, 2017.
  2. Therefore, place of supply in case of intermediary services shall be the location of supplier of services i.e. location of the applicant which is in India.
  3. In this case, the intermediary services are provided to the recipient located outside India and the Interstate provisions as contained under Section 7 (5) (c) shall be applicable and hence IGST is payable @18%.

Order of the AAR:

  1. Going through all the facts and arguments, the appellate authority upheld the AAR ruling.
  2. Accordingly, commission received by the applicant in convertible Foreign Exchange for rendering services as an Intermediary between an exporter abroad receiving such services and an Indian importer of equipment is not an export of service. Hence, such supply will be treated as inter-state supply and IGST will be levied @18%./li>

Impact on Industry: The taxability of ‘intermediary services’ has been a matter of extensive litigation under GST regime. Currently, in the instant case the AAR confirming that intermediary service does not qualify as export, however in the case of IBM India Pvt Ltd. versus Commissioner of Central Excise and Service Tax reported in 2020(34) G.S.T.L. 436, wherein the appellant is a subsidiary company for parent company engaged in identification of customers and sales promotion in India and it was held to be 'Export of service’.

It is pertinent to note that to address the ambiguity in this regard, the Central Board of Indirect Taxes and Customs (CBIC) had issued a clarification that was subsequently withdrawn. A revised clarification is still awaited and it is very much within the powers of the government to categorize services for the purpose of taxation in such manner as suits its policies and objectives.

1TS-413-AAR (AP)-2021-GST dated 16th August 2021

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