India Intermediary Services Ruling Has Important GST Implications

Foreign corporations looking to do business in India often rely on the support of branch offices, subsidiaries or third parties to market products and services, identify potential customers and/or provide a range of pre- and post-sales support services. No two arrangements are identical, as each is based on a business’ unique commercial aspirations.

This type of support, however, provided in whatever combination, can be considered “intermediary services,” and these services have significant GST implications.

Like any other services that are not specifically exempt, intermediary services are considered to be a “supply” for the purposes of Goods and Services Tax (GST) in India. As such they are taxable, whether provided by the Indian subsidiary or branch to its foreign parent/head office or by an Indian third party. Due to a specific deviation from the general place-of-supply rules — as outlined in Section 13(8) of India’s Integrated Goods and Services Tax Act 2017 (IGST Act) — intermediary services are deemed to be provided in India and therefore are taxable in India, even when they are provided to a recipient based outside the country.

Defining intermediary services in India

This section provides a brief summary of the concept of “intermediary services” in India and is followed by comments about recent rulings from local authorities. While the rulings are not by themselves binding to all taxpayers, they provide insight into Indian tax authorities’ current thinking and approach when considering whether or not services are intermediary services.

The IGST Act defines an “intermediary” as “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.”

From the above definition, the following can be said to be characteristics of an intermediary, and therefore of intermediary services:

1. An intermediary arranges or facilitates the supply of goods or services or both, or securities between two or more persons.
2. An intermediary’s supply is distinct from that of the supplier of goods or services and it cannot alter the nature or value of supply, which he facilitates on behalf of his principal.

There has been some debate as to whether intermediary services include services in the nature of pure promotion and marketing. In other words, it is not always clear that an Indian supplier who undertakes nothing more than marketing or promotional activities on behalf of a foreign company can be said to be “arranging or facilitating the supply of goods or services or both.”

Two important rulings

In 2014, the Authority for Advance Ruling (the Authority) — a quasi-judicial body in India that provides opinions on the taxability of supplies being undertaken or proposed to be undertaken in India — provided a ruling in the case of GoDaddy India Web Services (P.) Ltd. In determining the scope of “intermediary services,” the authority ruled that pure marketing and promotional services were not to be included.

In September 2018, the Authority released a ruling in the case of M/s Toshniwal Brothers (SR) Private Limited. In this case, the supplier (Toshniwal Brothers) was providing marketing, sales-promotion and certain post-sales support services to a foreign company. The services included actively identifying and soliciting new customers and negotiating prices on behalf of the foreign company. In addition, the supplier’s commission was linked to a number of successful sales. These activities are distinct from passive marketing activities and are not covered under the ambit of intermediary services.

In the case of Toshniwal Brothers, the Authority concluded that the services supplied were over and above promotional or marketing services and amounted to facilitating a supply.

The ruling in this particular case also considered that the provision of post-sales support activities could not logically be bundled with marketing and promotional services or other pre-sales activities. Post-sales support therefore had to be considered as a separate supply, with the appropriate valuation applied and the appropriate place-of-supply determination made.

Implications for organisations with activities in India

The above rulings are strongly indicative of Indian authorities’ opinion on the scope of intermediary services. Authorities are typically looking for scenarios where local suppliers play a substantial role in bringing together parties for the supply of goods or services or both.

It is not uncommon to see local suppliers undertaking a host of activities under the name of “marketing and promotional” services. Suppliers that have previously maintained these wide-ranging services are no more than pure marketing and promotion may not be covered by the “intermediary services” provision, depending on the actual services provided. They should therefore reevaluate their positions in light of the Toshniwal Brothers ruling.

To maintain compliance, some suppliers may need to shift from a previous zero-rated export position to a domestic position in which 18 percent GST must be charged on the services supplied. This will impact accounting and reporting requirements significantly, particularly in cases where a corporate group as a whole suffers 18 percent GST costs.