Who qualifies as Intermediary from a GST standpoint?

Genpact India Private Limited v. Union of India & Others, CWP-6048-2021 (O&M)

Punjab & Haryana High Court

Brief Background of the sector
India is considered a leading hub for Business Process Outsourcing (BPO) with leading Indian and overseas IT giants already having established large BPO units in India.  BPO services also account for a major portion of revenues generated from foreign clients.  It is the export qualification of such services, from an indirect tax perspective, that has always remained under the scanner.  An acceptance of export status would mean that the services become zero-rated and that no indigenous indirect taxes ought to be paid on the same if the customer/ client base is outside India.  On the contrary a denial would mean a gigantic cost being loaded on the value of such services, in form of indirect taxes, which the foreign client has to absorb as a cost.  This would also imply commercial non-viability of these services and weaken the position of Indian players vis-à-vis other competitors from other jurisdictions.

The taxmen often argue that BPO services are in the nature of facilitation of main service provided by another entity to its customers and thus, should be regarded as ‘intermediary’ services implying services of a broker, an agent or any other person, who arranges or facilitates the supply of services between two or more persons.  The consequence of intermediary qualification of an Indian service provider is that its services would qualify as deemed to be provided in India itself and hence, cannot qualify as export.  An exception to this rule, are cases where the service provider is providing services on his own account.

More clarity on the ‘intermediary status’ has been recently provided by the Punjab & Haryana High Court in Genpact India vs. UOI (CWP 6048 of 2021). In this judgment, the Court not only delivered its judgment on facts but also pronounced clear principles to be examined in determining ‘intermediary’ status of service providers. This judgment will have ramifications across sectors where ‘intermediaries’ are employed.  Given the importance of this subject, our alert does a deep dive into the finer aspects of the said ruling.

Facts
Genpact India or the ‘Petitioner’, a registered GST taxpayer, entered into a master services agreement (MSA) with a group company outside India to render a fully sub-contracted or outsourced scope of services.  The Petitioner provided BPO services, including maintaining vendor/ customer master data, bookkeeping, developing, licensing and maintaining software, technical IT support services, data analysis etc., to clients of the overseas group company located outside India under the said arrangement.

Some peculiar features of the said arrangement were, all demonstrated through documentary evidence in the form of underlying MSA and conduct:

• Essentially an arrangement for complete sub-contracting of services;
• The relationship or basis of arrangement between the contracting parties was Principal to Principal rather than the Indian provider acting as an agent of the overseas party;
• The services were rendered directly to the end customer on its own account by the Petitioner, rather than facilitating any supply of services between the group company and its customers;
• Petitioner is responsible for providing all services and bears the risk/ rewards of its performance; etc.

The Petitioner self-assed the services rendered to the overseas company as export and claimed zero-rating from a GST standpoint.  Also, consequent to the export performance, it filed claims for refund of unutilized input tax credit (ITC) periodically. The refund claim juggled between favorable/unfavorable at various quasi-judicial levels.  The eventual position was that the refund claims were held ineligible.  The appellate authority held that the underlying services did not qualify as export but instead qualified as intermediary services.

Position under erstwhile service tax regime overlooked

It is noted that the scope of intermediary service under the erstwhile service tax regime and the present GST regime is similar and that for the Petitioner there is no change in facts across different tax regimes.

The petitioner had, accordingly, pleaded at the appellate level that the BPO services rendered by the Petitioner have been held as export of services under the erstwhile service tax regime and refund claims were sanctioned on a regular basis by the tax authorities. Given that the scope of intermediary services is largely similar under the two regimes (GST included), the detailed examination of facts and approval of export status in the past qualified as a valid precedent. Given this, precedent cannot be overlooked or deviated from unless any contrary findings are placed on record on facts or law over different periods.  The appellate authority, however, disparaged the said argument, holding that the law differs.

Reliance on CBIC clarification

Circular no. 159/15/2021-GST dated 20 September 2021 (Circular) had clarified that (i) there is no change in the scope of intermediary services in the GST regime vis-à-vis service tax regime; and (ii) that sub-contracting for a service does not qualify as an “intermediary” service.

Aggrieved by the adverse order of the appellate authority, the Petitioner, thus, assailed the same before the High Court.
Rival Contentions before the High Court
Petitioner

The Petitioners resolutely advanced their pleas on consideration of factual aspects (noted above) and that in such circumstances the services do not qualify as intermediary service.  It also expanded on its legal arguments regarding favourable examination in the past as well as reliance on the above Circular which should be binding on the tax authorities in adjudication or appellate proceedings.

The petitioners also vehemently argued that in case of a sub-contract, there is only one sale/ supply involved.  The findings in the lower authorities had no factual or legal basis to allege or hold that a second contract of agency between the Petitioner and its group company existed. Therefore, on this ground too, the sub-contracted nature should be upheld. It should be made clear that the sub-contracted scope falls outside the realm of intermediary services.

‘Respondent’ i.e. UOI or the Tax Administration

The Respondent made its case basis its reference to the MSA. The Respondent argued that the Petitioner was acting on behalf of its group company and supplying these support services to that group company, which is ultimately providing these services to its customers.

The Respondent also argued that the principle of anything being previously examined or adjudged and the conclusion to be followed repeatedly cannot be made applicable to taxation matters in light of available jurisprudence.  The contention was that each assessment period is independent and matters that have been finally decided for other periods hold no precedent or bar against fresh assessment and expression of views.

Observations of the Court and Ruling

In its examination of the intermediary issue, the High Court recorded as under:

• • The MSA sets out a sub-contracting arrangement by the group company in favour of the Petitioner. These are the same services which the group company was contractually supposed to provide to its own customers. Pursuant to the sub-contracting arrangement, the Petitioner undertakes to serve the overseas clients of the group company on its own. Merely the compensation for services is routed indirectly through the group company.
  • The arrangement does not tantamount to the Petitioner facilitating provision of services by the group company in any manner and hence, basis MSA, this does not indicate that the Petitioner is acting as an “intermediary” under GST law.
  • To qualify as ‘intermediary’ the following three conditions must be fulfilled:
  • The relationship between parties must be of principal-agent;
  • The person must be involved in arrangement / facilitation of provision of services provided by a principal to a third party; and
  • The person must not actually perform the services intended to be received by the recipient of service.

  Since the agency relationship is absent, the finding of lower authority holding the Petitioner as intermediary seems without basis and erroneous.

  • The above Circular issued by the authorities, clarifies that sub-contracting for a service is not an “intermediary” service. The definition of “intermediary” under the service tax regime and GST is similar, and it is also clarified that there is no change in the scope of intermediary services in the GST regime vis-à-vis service tax regime.
  • Absent change in any facts and/ or law, it is not open for Revenue authorities to deviate from the views expressed previously. Principles of consistency apply in the case of the Petitioner.
  • The Hon’ble Punjab and Haryana High Court has decided that the services supplied by the Petitioner qualify as export of services and are not in the nature of intermediary services as per the provisions of the GST law. The Revenue authorities were directed to grant refund of accumulated ITC to the Petitioner.

  ELP comments

  This is a welcome ruling for not only the tax community, but also the business community at large. This long-standing debate has finally been put to rest in favour of the taxpayer.  Also, the 3-tier criteria defined for intermediary qualification, which is also the summary of statutory definition of the concept, would no doubt, instil confidence in the BPO sector on their tax position going forward but may also assist in resolution of several proceedings currently in vogue (including export refund claims) for industry at large. At the same time, similar matters on scope of intermediary under erstwhile service tax and GST regime are currently pending at various forums including the High Courts in other jurisdictions. The outcome of these will also be carefully tracked by industry.  Also, it remains to be seen if the Revenue would further challenge the said decision before the Supreme Court.

  We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

  Rohit Jain, Partner – RohitJain@elp-in.com
  Adarsh Somani, Partner – AdarshSomani@elp-in.com
  Mohammad Asif Mansoory, Associate Partner – Asif@elp-in.com

  Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein