Under GST, are BPO units to be classified as ‘intermediary’ or ‘exporter’?

Shishir Sinha New Delhi | Updated on July 22, 2020

Punjab and Haryana HC issues notice to Centre seeking clarity

The Punjab & Haryana High Court has issued notice to the Union Government on classifying Business Process Outsourcing (BPO) units as an ‘Intermediary’ and not as an ‘exporter’ under the GST system.

The issue holds interest because if exporters are classified as ‘intermediaries’, they do not qualify for tax refunds. That is exactly what happened to Gurugram-based Genpact India.

The company got a tax refund after assessment of its GST returns on the ground that it is involved in ‘Export of Services’.

However, the GST Department moved the First Appellate Authority, Joint Commissioner (Appeal), and secured a stay on the refund, since the appellate authority ruled that the company was an ‘intermediary’.

Aggrieved by this, the firm moved the High Court.

In its interim order, the Court ruled that the First Appellate Authority had illegally relied on a July 2019 circular that had been withdrawn by the Centre.

Senior Advocate Tarun Gulati, who represented the company, said the issue affects the entire BPO industry and needs to be resolved quickly. Blocking refunds on “untenable grounds” would affect the competitiveness of an industry that earns valuable foreign exchange, he said.

“At a time when employment levels are at their lowest and companies’ profitability is compromised on account of the pandemic, it should be ensured that the Indian BPO industry is given full support rather than raising roadblocks to their progress,” he said.

Harpreet Singh, Partner at KPMG, said that the case, and another recent ruling by the Andhra Pradesh AAR in the case of DKV Enterprises Private Limited, had revived the issues that arise when back offices and the Indian branch of multinationals, specially those who interact with ultimate customers of their overseas group entities, are classified as “intermediaries”.

Case history

Last July, the Central Board of Indirect Taxes & Custom (CBIC) issued a circular to clarify the concept of ‘intermediary services’ and the treatment of Information Technology enabled Services (ITeS), Back Office Support services, from a GST standpoint.

In one of the scenarios, the circular clarified that the provision of back-end services (such as back-office operations, call centre services, support centres, payroll, revenue accounting, data processing services) on their own account would not be covered under the ambit of an ‘intermediary’ and would count as export of services. That came as a relief to the industry.

On the flip side, however, the clarification provided in another scenario took forward a ruling by the Maharashtra Appellate Authority of Advance Ruling in the case of Vservglobal Private Limited. In that ruling, the AAAR had opined that the services in question (which included liaising with client’s buyers/suppliers with respect to delivery, transportation of goods, and settlement of payment between them) went way beyond back-office support services, and that they were to be classified as ‘intermediary’ services.

The circular was somewhat ambiguous, and left open to interpretation the question of which back-end services can be classified as ‘support services’, and which would qualify as ‘arranging or facilitating the supply of goods or services between two or more persons’. However, in December 2019, the government withdrew the circular ab-initio — that is, as if the circular never existed. This provided respite to the industry, to the extent that authorities were relying on the July circular to issue show-cause notices to back-office support providers.

The action now shifts to the Punjab & Haryana High Court, which has issued notice to the Centre. Watch this space for further developments.

Published on July 22, 2020

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