Mohan Lavi

The ‘intermediary’

Mohan R Lavi | Updated on November 27, 2018

GST will kick in if an entity is identified as one

Godaddy India WebServices is the Indian arm of the US web services entity Godaddy. The Indian arm was providing support services to the US entity on a principal basis. VServe Global Pvt Ltd provides back-office support services to overseas companies mainly in the area of trading of chemicals and other products.

Section 2(13) of the IGST Act 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 Vserve Global approached the Authority for Advance Rulings with a similar question — would they meet the definition of an intermediary? The Delhi AAR said ‘No’ in the case of Godaddy while the Mumbai AAR said ‘Yes’ in the case of VServe Global. Though the decision of the AAR is binding only on VServ, other entities in India who provide similar services are worried about the impact the decision will have on their price since it will only be a matter of time before the GST Department makes attempts to target such enterprises for revenue collection.

VServ Global presented its arguments as logically as it could. It reproduced the definition of zero-rated supply in Section 16 of the IGST Act, attempted to prove that the service it provides meets all the five tests prescribed for export of services laid down in Section 2(6) of the Act and tried to prove that the definition of intermediary does not apply to it by placing reliance on the Godaddy case.

To further strengthen its case, it produced a copy of a contract it had recently entered into with a company called Vikudha Overseas Corporate Ltd, Hong Kong. Vikudha has business interests in more than 20 countries and a majority of its work is done with customers/suppliers not located in India. The work of VServ commences after orders have been received by entities such as Vikudha. Its activities mostly comprise post-order administrative support such as raising sales details form, liaise with the parties and assisting in accounting.

While VServe seemed to have got all its arguments right, it did not look at the website of Vikudha. However, the Department did not miss this and produced the following extract from the website of Vikudha on its Indian operations. “Vikudha India is devoted to sourcing and trading varieties of chemical products from India and subcontinent countries... India is a home ground for our well-trained and experienced traders, those who are having close relationships with manufacturers. The thorough local chemical industry knowledge makes our India team to know the season, production cycle, market fluctuations, rules and regulations changes in advance, and this helps ourselves to be ahead of the competitors”. This was sufficient for the Department to prove that the recipient of services was not located outside India but in India. The AAR agreed with the Department and ruled that GST would be applicable.

It should be noted that GoDaddy had a similar decision in its favour under the service tax laws where the definition of intermediary was similar. An interesting takeaway from this could be that where the provisions under the GST Act and the previous laws are similar , taxpayers can take protection under cases decided under those laws in their favour. If the Department buys into this logic, one can expect some reduction in litigation under GST.

The writer is a chartered accountant.

Published on November 27, 2018

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