English language and technical proficiency, coupled with the highly skilled workforce that India has to offer, has made the country a darling of most multinational companies (MNCs). For a while now, these MNCs have been outsourcing their routine as well as technical and complex business processes to their subsidiaries or third-party service providers in low-cost and efficient jurisdictions, including India. Indian entities, in turn, offer their expertise in customer care, follow ups for regular payables like credit card, life and healthcare insurance premiums, routine troubleshooting services, assisting internal departments like finance, accounting, human resources departments, etc., as well as supporting various complicated and complex issues like sophisticated high-end research and technology services, analytical and computational support services, etc. The Government has taken several steps to encourage the service sector and has come up with many benefits and incentives. However, there appears to be a new set of challenges that this sector must deal with, arising in the context of Goods and Service Tax (“GST”).
Indian entities have treated rendering services to overseas entities as zero-rated supply and did not pay any GST. Moreover, they also claimed refund of unutilised input tax credit (“ITC”) of the GST paid on various goods and services procured by them.
However, GST officials have been trying to find ways and means to deny them the benefit of ITC by raising one issue or the other. One of the issues that has been raised on multiple instances is that Indian entities are not entitled to claim refund of unutilised ITC because they are intermediaries and GST legislation provides that the place of supply of intermediary services would be the location of the intermediary and not the recipient, therefore, ITC refund shall not be available. The scope of intermediary services has been under the scanner since the implementation of GST. The Central Board of Indirect Tax and Customs (“CBIC”) had issued a circular dated July 18, 2019, clarifying the situations where supplies made by such entities would not be construed as intermediary services. However, the said circular was subsequently withdrawn as it created ambiguity about the status and entitlement of the information technology sector. Pursuant to the withdrawal of the said circular, several tax officers have been denying ITC refund by alleging that the services rendered by the information technology sector are intermediary services and hence, refund of ITC is not permissible.
The term “intermediary” is defined under the GST legislation as 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 account. Further, the CBIC vide Circular No. 159/15/2021-GST, dated September 21, 2022, clarified the pre-requisites to qualify as an intermediary. Thus, the following can be said to be the characteristics of an intermediary:
i. the arrangement requires a minimum of three parties, two of them transacting in the supply of goods or services or securities (the main supply) and the intermediary arranging or facilitating (the ancillary supply) the said main supply;
ii. two distinct supplies;
iii. Intermediary provides a supportive role and must be a broker, an agent or any other person having similar characteristics;
iv. Supplies are not on own account;
v. Sub-contracting of main supply either fully or partly is excluded from the ambit of the intermediary.
While it is abundantly clear that if the work is subcontracted to Indian entities in the information technology sector, such services would not qualify as intermediary services, GST authorities tend to examine the contract between an Indian entity and the foreign entity more minutely and allege that there exists an agency relationship and the Indian entity is facilitating supply of services between the overseas entity and its customer.
Ruling of Punjab & Haryana High Court
The Hon’ble Punjab & Haryana High Court (“HC”) – in its decision in the case of Genpact India (P.) Ltd. v. Union of India – has analysed this issue in detail and has held, on the facts of the case, that Genpact International Inc. (“GII”) had sub-contracted its work to Genpact India Pvt. Ltd. (“Genpact”) under a master-supply agreement. It also clarified that merely because Genpact was allowed to interact with GII’s customers to deliver services, the said services cannot be construed as intermediary services. The HC also noted that as per the MSA, GII was responsible for identifying new clients, developing/ maintaining relationship with the clients, negotiating with them or resolving any dispute with them. GII was also responsible for appointing a contact person between Genpact and its customers to coordinate the work proposed to be performed by Genpact from India. The MSA clearly provided that Genpact has been subcontracted by GII for rendering services to GII’s customers. Genpact was responsible for completing the assigned scope of work and sharing the finalised deliverables with GII’s clients directly through data communication channels. Hence, the MSA dealt with the modalities of the operation of assignment and the responsibility of GII and Genpact. Moreover, the HC also noted that there was no agreement between Genpact and GII’s clients. Accordingly, the HC was of the view that Genpact was not responsible for arranging or facilitating services between GII and GII’s clients. As an intermediary is responsible for mediating between two parties and the same is inapplicable, Genpact shall be eligible to avail refund of unutilised ITC for export of services.
The aforesaid judgement has attempted to clear the clouds of ambiguity and uncertainty over the availability of ITC refund on services rendered by the information technology sector to foreign entities. Where the sub-contractor provides the main services, completely or partially, it cannot be equated with arranging or facilitating the main services between the principal supplier and its customers.
In another important ruling delivered a couple of months earlier, the Hon’ble Bombay High Court had held in the case of Vodafone India Limited that telecommunication services provided by Vodafone to individual subscribers of foreign telecom operators did not make such subscribers its own customers. The telecom services provided to such individual subscribers were regarded as export of services. This decision reiterated that the mere presence of a customer’s customer in India or any indirect connection with India of such customers at the time of rendering of services would not shift the place of supply to India, provided there was no direct contractual relationship between the Indian service provider and the customer of the non-resident recipient of services, who might be present in India.
While the decision definitely puts to rest controversies related to intermediary services when the work is subcontracted, where additional support services such as services during pre-delivery, delivery or post-delivery of supplies are rendered as a part of common package for a lumpsum fee, the issue still remains ambiguous. If some of such services are regarded to have been rendered through an agency relationship, i.e. intermediary services, the classification of the entire package of services may be disputed by the tax authorities. However, when such support services are naturally bundled, the Indian service provider would have to determine the nature of principal supply. Only if the principal supply is identified not to have been rendered as an intermediary, refund of unutilised ITC may be claimed even though it is likely to be vigorously contested by the GST authorities. If the principal supply of services is regarded to have been rendered as intermediary services, refund of unutilised ITC could be denied.
Further, there is a very fine difference between promotional marketing service supplier and an ‘intermediary’. Various service providers help in identification of potential customers through direct calls or by holding conclaves, business meetings, events, seminars, or webinars, wherein they advertise or describe their products to the attendees. From the perusal of judicial precedents available under the erstwhile service tax regime, in order to treat services rendered by such service providers as intermediary services, the supplier must be responsible for additional services in addition to mere promotion, such as price negotiations, participating in contractual negotiations, etc., which could amount to “arranging” or “facilitating” such supplies.
It is necessary for all Indian service providers to review their existing contracts and structuring of their operations to ensure that their intent of principal to principal arrangement is clearly represented, nature and scope of services are mentioned categorically and stakeholders act strictly in consonance with the agreements to avoid any unwarranted allegations of short payment or denial of refund. If the GST authorities continue to reject tax refunds, it could put additional cost burden on Indian service providers, who are already suffering from expiry of Service Export from India Scheme benefits.
The information technology sector already faces tough competition from other countries like Philippines and Malaysia. Unless this issue is resolved and all possible benefits and amenities are extended to the sector, the potential risk of exodus to other locations offering better tax benefits cannot be ruled out, which may further impede India’s foreign exchange earning potential.
Hence, it is recommended that this issue be put to rest through a clarification, wherein the GST authorities are asked not to come up with frivolous arguments to deny the benefit of refund of unutilised ITC, already available to the information technology sector for engaging in export of services. This will go a long way for the sector to focus on the business side so that new service offerings may be added to the bouquet of services being offered by them to further augment the foreign exchange earning potential of the information technology sector.
 Circular No. 107/26/2019-GST dated July 18, 2019 withdrawn vide Circular No. 127/46/2019 – GST dated December 04, 2019.
 Genpact India (P.) Ltd. v. Union of India,  144 taxmann.com 201 (Punjab & Haryana).
 Vodafone Idea Limited v. The Union of India (2022) 140 taxmann.com (Bombay HC).