2023 Taxo.online 10

“Cracking the GST Code: The Hidden Truth Behind ‘Intermediary Services'”

Introduction

In recent years, the Indian Goods and Services Tax (GST) regime has faced various challenges and legal disputes, particularly regarding the classification of services as “intermediary services.” This report delves into a significant case involving the Indian Branch Office of M/s Ernst & Young Limited, highlighting the misinterpretation of the definition of an “intermediary” and its profound implications. We will unravel the intricacies of this case and its far-reaching impact on the GST sector in India.

What Happened

The legal battle in question revolves around the rejection of a refund application for input tax credit (ITC) related to the export of services. The petitioner, an Indian Branch Office of M/s Ernst & Young Limited, contested the rejection, asserting that its services should not be classified as “intermediary services” under the GST regime. 

Why It Happened

The heart of the matter lies in the interpretation of the term “intermediary” under Section 2(13) of the IGST Act. According to this section, an intermediary is defined as someone who arranges or facilitates the supply of goods or services but does not supply these goods or services on their own account. The Adjudicating Authority and the Appellate Authority had wrongly interpreted this definition, believing that services rendered on behalf of the petitioner's head office (E&Y Limited) constituted intermediary services. 

Analysis & Impact

Upon close scrutiny, it becomes evident that the petitioner was not providing intermediary services. Instead, it offered professional services directly to overseas entities (EY Entities), invoicing and receiving payments from these entities. The interpretation of “intermediary” is flawed as intermediaries facilitate services rather than provide services themselves. To strengthen the case, the petitioner referred to its success in establishing the same under the previous service tax regime.

Impact on the Sector

This legal dispute has broad implications for the GST sector in India. It not only underscores the importance of clear definitions but also sets a precedent for the classification of services under the GST regime. The court's ruling that the petitioner's services fall within the definition of “export of services” prior to the GST implementation further emphasizes the significance of accurate classification.

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