Complete Guide on Intermediary Services under GST (Goods and Services Tax)

India is currently the 4th largest economy in the world. As the economy of the nation grows and prospers, dealings with foreign clients become more and more common for businesses. In such a scenario, not knowing the definition of intermediary services can cost you a fortune, due to the legal consequences involved.

If you are involved in the supply of services or goods, or the export of services or goods, then knowing what qualifies as intermediary services can save you not just from hefty fines or penalties, but also help you to implement the right strategies to avoid such risks.

In this blog, the leading GST consultant in Gurgaon will explore what it means to be an intermediary service provider, key case laws and advance rulings in the past few years, and risk mitigation strategies you can use as a business. Read more here:

Who is an Intermediary Service Provider?

Under section 2(13) of the IGST Act, the intermediary is an individual (broker or agent) who facilitates or arranges the supply of goods and/or services or securities between two or more people. This does not include individuals who supply such goods and/or services or securities on their account.

Therefore, we can say that the GST intermediary services involve 3 or more individuals:

• Supplier of goods and/or services.
• Principal on whose behalf the goods are supplied and/or services are rendered.
• The individual(s) who receive the goods and/or services.

You must note that the individual who supplies goods or provides services on their own account to customers will not be known as an intermediary under section 2(1) of the IGST Act. 

The Central Board of Indirect Taxes and Customs published a Circular No. 159/15/2021-GST to clarify on the score of intermediary services. This included some prerequisites for the scope of intermediary services:

• Minimum of three parties: The arrangement should involve at least three different individuals. Out of the two individuals, one will be the main supplier of goods and/or services, while the other will be the recipient of the same goods and/or services. The supplier will not be directly supplying the goods and/or services to the recipient. Meanwhile, the intermediary should not be the one who carries out the main supply themselves, and should be the one who arranges the supply of goods and/or services between the two parties. 
• Two distinct supplies: There are two types of suppliers-
• 1) Main supply: The goods and/or services between two principals. This can be a supply of securities, services, or goods.
• 2) Ancillary supply: When the service of the main supply of goods and/or services is arranged or facilitated between two principals, then it is known as ancillary supply. 
• Involvement of a broker, agent, or an individual with a similar role: Without the intermediary, who is the broker, agent, or any other individual who is arranging the goods and/or services, it cannot be defined as intermediary services. 
• Exclusion of people who sell services, goods, or securities on their own account: If the person who supplies such goods, services, or both or securities on their own account, then they will not be considered an intermediary. 
• Sub-contractors of a service are not intermediary services: Sub-contractors provide services on behalf of the main supplier's account. Such services cannot be considered as intermediary services. 
• The place of business is outside India: Section 13 of the IGST Act mentions certain provisions that shall be invoked if the recipient or supplier of the goods and/or services is outside India.

Recommended: Why Foreign Direct Investment (FDI) in India Matters - Benefits

Key Case Laws and Advance Rulings on Intermediary Services

Over the years, Indian courts have delivered several rulings to clarify what qualifies as an intermediary under GST. These case laws and rulings help us to understand what classifies as intermediary services and what does not. Here are some important case laws and advance rulings in India that every business should know:

1. M/s Vservglobal Private Limited - Maharashtra AAR (2018)

M/s Vservglobal Pvt Ltd (Maharashtra AAR, 2018) is an Indian company that offers marketing and pre-sales support services to foreign clients abroad. However, they treated the services they provided as exports. The AAR had declared that since the company was arranging or facilitating the supply between the foreign clients and Indian customers, the services were to be classified as intermediary services. Therefore, it was concluded by the AAR that the services provided by M/s Vservglobal Private Limited are intermediary services.

2. M/s Universal Services India Pvt Ltd - West Bengal AAR (2019)

M/s Universal Services India Pvt Ltd provides BPO services directly to U.S.-based clients. The AAR passed the judgment that since the services were provided without any agent or any other person that would be known as a third party, the company's services could not be classified as intermediary services.

3. M/s Godaddy India Web Services Pvt Ltd - AAR (2016)

GoDaddy India, in support of the parent company abroad, was delivering services directly to customers without the involvement of a third party. As a result, the AAR ruled that services provided by GoDaddy were not intermediary services. This ruling made it clear that services provided to a foreign client, without third-party involvement, are not considered as intermediary services.

4. Prettl Automotive India Pvt Ltd - Karnataka AAR (2021)

Prettl Automotive India Pvt Ltd provides sales and marketing services to foreign clients and helps them connect with Indian buyers through these services. Since the service provider was directly involved during the facilitation of the arrangement of supply of goods or services between the foreign client and Indian customers, it was classified as an intermediary service. 

5. Ernst & Young LLP vs Union of India - Delhi High Court (2023)

The Delhi High Court was overlooking the judgment on whether the services of the branch offices of EY India to foreign clients should be classified as “intermediary services” under Section 2(13) of the IGST Act. EY India had entered into an agreement where they were to provide professional consultancy services directly to EY companies abroad. EY India was receiving payment for the services from the parent company.

The Court addressed the ruling by mentioning that EY India was supplying services to the parent company, which meant that the transaction took place on its own account. Therefore, EY India was not arranging or facilitating the supply of goods or services as an agent, and there was no involvement of a third party either. The Court ruled that the services given by EY India were not to be classified as intermediary services. This made it clear that how services are delivered mattered more than the labels mentioned in the contract.

Read Also: What is the Reverse Charge Mechanism for Import of Services in GST?

Risk Mitigation Strategies for Service Providers with Foreign Clients

If you deal with foreign clients as an Indian service provider, read the following steps to avoid legal risks:

1. Know Your Service Model

Learn about your service model. You can use the following to determine it:

• If you are facilitating supplies such as goods or services between two parties, then it's an intermediary service.
• If you are delivering the services or goods directly to the client, then it's a non-intermediary service.

2. Contracts Should be Clear and Concise

Your contract should clearly define:

• The scope of work
• Whether services are delivered to the client or third parties
• Mode of payment and account used

3. Seek Professional Legal Support

If you have any doubts, you should consult an expert tax consultant in Gurgaon. This will allow you to make sure that your commercial activities are secure with legal guidance from experts.

4. Invoice and File Returns Accurately

• Use the correct SAC codes
• Charge 18% GST if you're an intermediary service provider
• File under B2B domestic supply (not export)
• Ensure accuracy across GSTR-1, GSTR-3B, and invoices

5. Keep Proper Documentation

Keep your important documentation safe, such as:

• Signed contracts
• Communication records
• Payment proofs
• Evidence of services provided

6. Ensure Your Team is Informed

Make sure your sales, legal, and accounts teams:

• Understand the difference between intermediary and direct services
• Know how to invoice and describe services correctly
• Are aware of taxation laws and regulations

7. Audit Your GST Returns

Regularly audit your contracts and GST filings to maintain compliance.

Read More: ⁠Disclosures and Penalties of Foreign Assets in Income Tax Return

Conclusion

GST on intermediary services has been clearly defined in the GST law, however, it can still be confusing for even the largest of corporations. You can avoid legal risks by following the strategies mentioned above and reaching out to a tax consultant to safeguard yourself from such risks.