GST will be applicable if an entity is the ‘INTERMEDIARY’

Recently, Maharashtra AAR gave a ruling on backend services that created turmoil in $167 billion IT services and BPO sector. In fact as per software industry body Nasscom, the said ruling will jeopardize India’s image as a global service provider. In this article, we discuss the facts of latest case of Vserv Global, AAR’s ruling and its impact on the future of back office support industry.

Godaddy India WebServices, the Indian arm of the US web services entity Godaddy, provided continuous support services to the US entity on a principal basis. Similarly, Vserv Global Private Limited provides back-office support services to overseas companies mostly in the sector of trading chemicals and other products. Now as per section 2(13) of the IGST Act which defines an intermediary to be “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 to GST”. Both Godaddy and Vserv Global approached the Authority of Advance Ruling with one question – would they meet the definition of an intermediary? The Delhi AAR said ‘No’ to Godaddy whereas the Mumbai AAR said ‘Yes’ in case of Vserv Global. India being a hub for export of an array of information technology enabled services, this contrary ruling has created a panic in the market.

Facts of the Case:

  • Vserve Global Private Limited is a Mumbai based company which is engaged in providing back office support services to foreign clients. The clients are mostly involved in the business of trading chemicals and other products in International trade.

 

  • Following services are offered by Vserve Global:
  1. Coordinating with suppliers and customers of clients for execution of purchase and sales contracts.
  2. Creating and arranging all the documents (purchase order, sales contract, proforma invoice etc.) to be exchanged between clients and their suppliers/customers.
  3. Liaising with suppliers/inspection authorities on behalf of clients.
  4. Processing of payments for clients and arranging inspection certificates.
  5. On behalf of clients, maintaining the employee records, payroll processing, accounting of payments made by clients etc.

 

  • Vserv Global posed a question before the Maharashtra Authority for Advance Ruling (AAR) that whether the above mentioned services provided to the clients would qualify as ‘zero-rated supply’ in terms of section 16 of IGST Act, 2017?

Applicant’s Arguments:

  • Vserv Global contended that it fulfills all the conditions required for the services to qualify as ‘export of services’ and hence, covered under the definition of ‘zero-rated supply’.

 

  • It also stated that if any supply of goods between clients and their customer is facilitated due to its back office or accounting services provided to clients, then such facilitation is merely incidental to the principal supply.

 

  • Further, it is providing services on principal-to-principal basis, therefore, it should excluded from the definition of an intermediary.

 

  • Vserv Global stated that the facts of the case are similar to the case of GoDaddy India Web Services Private Limited where it was ruled that the services (marketing, branding etc.) provided to the oversees parent company shall qualify as export of service.

Ruling of the AAR:

  • AAR observed that all the activities performed by Vserv Global for its clients indicate that the company is engaged in ‘arranging/facilitating’ supply of goods or services between clients and their customers. Therefore, it qualifies as an intermediary.

 

  • AAR also clarified that the facts of the case in question are not similar to that of Godaddy as in the latter’s case, support services were provided on principal-to-principal basis and were provided with the sole intention of promoting the brand Godaddy US in India.

 

  • AAR held that to qualify a transaction as export of services, it has to satisfy all five components of the definition of services export simultaneously. The services, proposed to rendered by the applicant, do not qualify as ‘export of services’ and thus, not a ‘zero rated supply’ as per section 16(1) of the IGST Act, it had ruled.

Impact:

In the erstwhile service tax regime, an intermediary was seen in the context of broker services and the concept was not extended to support services.  Hence, it can be noted that the said ruling by the AAR is contrary to the earlier position of the government in the previous service tax regime. This ruling is deemed to have direct impact on the 500+ GICs (Global In-house Centres) with over 3.5 lakh employees currently operating out of India, and supporting their global counterparts.

National Association of Software and Services Companies (Nasscom) has been highly critical of the ruling and stated that it would result in potential job losses and depress India’s image as a global service provider.  Expressing its surprise the software body stated that "At a time when, when India's image is bullish on ease of doing business parameters, it is advisable that we ensure a transparent and clear tax regime to maintain our global leadership position”.

Further, the ruling may result in a substantial tax demand from some of industries biggest players since India is amongst the largest exporter of ITeS. Generally AAR rulings are not binding and have no precedent value, this particular ruling will cause serious confusion and may lead to unwarranted disputes.

The said ruling covered the activities undertaken by outsourcing company registered in India on behalf of their foreign client. The scope of the agreement is wide enough to cover under the definition of “Intermediary services”. The benefit of export of services may be rejected to Outsourcing companies registered in India on the basis of said ruling. It is advisable to review the agreement executed between Indian Outsourcing Company with their foreign clients.

The ruling has caused a considerable uproar in the Indian markets and can possibly stunt an environment for healthy competition. Hopefully, the government will step in soon to provide a resolution on industry’s concerns and thus end this confusion for good.