Recently, in the case of Global Reach Education Services Pvt Ltd ("Applicant"), the West Bengal Authority for Advance Rulings (Goods and Services Tax) ("AAR") ruled that marketing and promotional services (such as promoting foreign universities' courses in India, providing market intelligence, supporting student recruitment etc.) provided by the Applicant to foreign universities amounted to "intermediary services" for the purposes of Goods and Services Tax ("GST"). Accordingly, the supply of such services by the Applicant did not qualify as an "export of service" for GST purposes ("Ruling").
The Ruling appears to unsettle past precedent on the understanding of "intermediary services", and is likely to have a significant impact on non-resident entities engaging Indian agents for advertising, marketing, and promotion activities across industries and sectors. Although advance rulings are binding only on the applicant seeking the ruling, and the concerned jurisdictional GST officer, in practice, they are often considered as having precedential and persuasive value by subsequent rulings.
The Applicant had tied up with various universities around the world for promoting and marketing their courses in India among prospective students, for which it received consideration in convertible foreign exchange on a commission basis. The Applicant was required to provide market intelligence about latest educational trends in India, and to also ensure payment of requisite fees to universities by prospective students enrolling in foreign programmes through the Applicant.
In this background, the Applicant sought an advance ruling from the AAR on whether services provided by it to foreign universities could be considered an "export of service" within the meaning of section 2(6) of the Integrated Goods and Services Tax Act, 2017 ("IGST Act").
Section 2(6) of the IGST Act defines "export of service" as a supply of service which satisfies all of the following conditions: (a) the supplier of service is located in India; (b) the recipient of service is located outside India; (c) the "place of supply" (explained below) is located outside India; (d) payment for supply has been received in convertible foreign exchange; and (e) the supplier and the recipient are unrelated parties.
The taxability under GST of any supply, whether of goods or services, is to be determined in accordance with the "place of supply" of that good or service. Insofar as cross-border supplies are concerned (i.e. where either the supplier or the recipient are located outside India), the "place of supply" is to be determined in accordance with sections 11 (in case of cross-border supplies of goods) and 13 (in case of cross-border supplies of services) of the IGST Act.
Section 13 of the IGST Act contains several rules for determining the "place of supply" of cross-border services. As a general rule, the "place of supply" of cross-border services is deemed to be the location of the recipient of services. Where the location of the recipient of services is not available in the ordinary course of business, the "place of supply" is deemed to be the location of the supplier of services. This general rule is subject to special rules provided under sub-sections (3) to (13) of section 13 for specific type of services. For instance, as per section 13(4) of the IGST Act, the place of supply of services supplied directly in relation to an immovable property is the place where the immovable property is located or intended to be located. Similarly, as per section 13(8) of the IGST Act, the "place of supply" of intermediary services is intermediary services is the location of the supplier of services.
Per section 2(13) of the IGST Act, the term "intermediary" is defined to mean a broker, agent, or any other person who arranges or facilitates the supply of goods or services or both, or securities, between two or persons. A person who supplies such goods or services or both or securities on his own account is excluded from this definition.
Arguments raised by the Applicant
The Applicant's arguments were largely focused on the question of whether the place of supply of services was in India, since most other conditions for "export of service" were prima facie satisfied.
The Applicant argued that it provided such services as an independent service provider and not as an agent of any foreign university. The Applicant also argued that it did not facilitate the provision of any service by foreign universities to students in India, and that its role was limited to promoting foreign universities' courses in India. The fact that the Applicant was paid on a commission basis was argued to be irrelevant in determining the Applicant's standing as an independent service provider, since it was merely a mechanism for determining the quantum of compensation payable.
On this basis, the Applicant submitted that the services supplied by it could not be classified as "intermediary services" for the purposes GST. By consequence, the place of supply of services was the location of the recipient as per section 13(2) of the IGST Act. Since the recipients were always situated outside India, the place of supply was outside India and the supply amounted to an "export of service" being a zero-rated supply for the purposes of GST.
Ruling of the AAR
The AAR rejected the Applicant's contention and ruled that the services supplied by the Applicant did not amount to "export of services" for the purposes of GST, and were therefore taxable in India.
For the purpose of arriving at this conclusion, the AAR relied primarily (and almost exclusively) on the agreement between the Applicant and the Australian Catholic University ("Agreement"), which was submitted by the Applicant at the hearing to further its contention that services had been supplied on a principal-to-principal basis. On reviewing the Agreement, the AAR noted the following:
- Per Clause 3.1 of the Agreement, the Applicant was required to promote the courses of the University to find suitable prospective students and assist in their recruitment (by providing all necessary information and assistance in completing and submitting forms to the University) in accordance with the procedures and requirements of the University;
- Per Clause 4.1 of the Agreement, the Applicant was under an obligation to collect all fees and charges payable from prospective students and forward the same to the University, and to ensure that relevant fees and charges accompanied all applications and acceptance of offer documents.
- Per Clause 4.4(h) of the Agreement, the Applicant was not allowed to undertake any promotional or advertising activity without the prior written approval of the University;
- Per Clause 4.4(i) of the Agreement, the Applicant was neither entitled to receive any fees or charges from students nor allowed to deduct any amounts from the fees or charges payable by students to the University.
- Per Clause 9.2 of the Agreement, the Applicant was subject to audit by the University in the course of supplying services to the University; and
- Per Clause 9.4 of the Agreement, the Applicant was subject to performance evaluation by the University, especially with respect to recruitment targets achieved.
In addition, the Applicant was to be paid on a commission basis, which was expressed as a percentage of the tuition fee for each student recruited / enrolled through the Applicant, provided the University had actually received the course fees. The Applicant was also not entitled to claim any consideration for promotional activities unless students were enrolled through it. If students were enrolled directly by the University either through distant education or through online services, the Applicant was not entitled to any consideration, regardless of whether it had provided any promotional services.
Based on these findings, the AAR observed that the principal service supplied by the Applicant was facilitating recruitment of students, while course promotion was only an incidental supply. Had course promotion been the principal supply, the Applicant would have been remunerated for its promotional activity regardless of whether it had facilitated recruitment or not. Put differently, since the Applicant received commission solely based on recruitment / enrolment through it, the principal supply was clearly the facilitating of recruitment, and course promotion services were only ancillary thereto. The Applicant was therefore supplying services as a representative of the University, and not as an independent service provider.
Accordingly, the services supplied by the Applicant amounted to "intermediary services" for the purposes of GST. The place of supply of intermediary services, determined in accordance with section 13(8) of the IGST Act was the location of the supplier i.e. the location of the Applicant. Since the Applicant was located in India, the supply did not amount to "export of service" for the purposes of GST.
Analysis of the Ruling
The Ruling is certain to cause some ripples in the advertising, marketing, and promotion industries. Foreign entities wishing to enter the Indian market or support existing businesses in India typically engage Indian entities to undertake market research, provide advertising and promotion services, and disseminate information among prospective customers. An Indian entity supplying such services has conventionally been understood to not be an "intermediary", provided it supplied such services on its own account, and not on behalf of the foreign entity.
While the IGST Act has defined the term "intermediary", it has not laid down any qualitative parameters to assess whether a certain service falls within the definition of "intermediary service" under section 13(8) of the IGST Act. In the absence of guiding principles, reference may be made to the Guide on Taxation of Services ("Education Guide")1 issued by the Central Board of Excise and Customs ("CBEC")2 and relevant decisions under the service tax regime that existed prior to the introduction of GST in India.
As per the Education Guide, an "intermediary" is a person who arranges or facilitates a supply of goods or services or both between two persons, without material alteration or further processing.3 The Education Guide also laid down the three guiding principles4 to determine whether an entity was acting as an intermediary.
Thus, in Re Universal Services India Pvt. Ltd,5 the New Delhi AAR ruled that payment processing services would not be considered intermediary services if the service provider was providing the services separately on his own account. It was reasoned that the payment processing services were themselves a main service and were separate from the web hosting services, which the service recipient was providing to third party consumers, and with which the payment processing service provider had no concern. Similarly, in GoDaddy India Web Services (P.) Ltd., In re,6 business support services in the form of marketing and promotion, oversight of third party call centers and payment processing, were not construed as intermediary services since they were provided as a main service by the service provider on his own account, even though third party customers benefitted from such services being provided to the service recipient.
In the present case, the Applicant had provided course promotion and recruitment services to various foreign Universities. At all points, the Applicant only provided services to such foreign universities and not to prospective students in India. The mere fact that the Applicant assisted Indian students with their recruitment, and in fee collection, does not change the nature of the relationship between the Applicant and foreign universities. It must be remembered that in such a tripartite situation, the third party (in this case, a prospective student in India) is never the "recipient of services" as far as the supplier of services (in this case, the Applicant) is concerned. This principle has been succinctly illustrated by the Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal ("CESTAT") in Vodafone Essar Cellular Ltd v. Commissioner of Central Excise, Pune – III7 as follows:
"5.1. We have perused the agreement entered into between the appellant and the foreign telecom service providers. As per the said agreement, the appellant has agreed to provide telecom services to the customer of the foreign telecom service provider while he is in India using the appellant's telecom network. The consideration for the service rendered is paid by the foreign service provider. There is no contract/agreement between the appellant and the subscriber of the foreign telecom service provider to provide any service. Since the contract for supply of service is between the appellant the foreign service provider who pays for the service rendered, it is the foreign telecom service provider who is the recipient of the service. From the provisions of law relating to GST in UK and Australia, relied upon by the appellant, this position becomes very clear. Your customer's customer is not your customer. When a service is rendered to a third party at the behest of your customer, the service recipient is your customer and not the third party. For example, when a florist delivers a bouquet on your request to your friend for which you make the payment, as far as the florist is concerned you are the customer and not your friend." [Emphasis supplied]
Similar reasons were adopted by the AAR in both Universal Services and GoDaddy.
Further, the term "recipient of services" is defined by section 2(93) of the Central Goods and Services Tax Act, 2017 ("CGST Act") as follows:
(93) "recipient" of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
In the present case, foreign universities were solely responsible for compensating the Applicant for the services supplied by it. Thus, foreign universities were always the "recipient" of services supplied by the Applicant. Had the Applicant been supplying services to Indian students, the Applicant would have received consideration from Indian students. However, the fact was that no remuneration / consideration was received by the Applicant from Indian students. Indeed, the Applicant was expressly forbidden from receiving any fees or charges from Indian students and from deducting any amounts from the fees or charges payable by such students to the foreign universities. Accordingly, it could not be said that the Applicant was supplying services to both foreign universities, as well as Indian students. By consequence, the Applicant could not be said to have provided "intermediary services" to foreign universities and Indian students. As such, the Ruling may require reconsideration.
1 CBEC, Taxation of Services: An Education Guide (June 20, 2012).
2 Now the Central Board of Indirect Taxes and Customs.
3 Supra n. 2, at para. 5.9.6.
4 These principles were as follows:
(a) Nature and value: An intermediary could not alter the nature or value of the main service which it facilitated on behalf of the principal, although the principal may authorize the intermediary to negotiate a different price.
(b) Separation of value: The value of an intermediary's service is always identifiable from the main supply of service being arranged or facilitated.
(c) Identity and title: The service provided by the intermediary on behalf of the principle is clearly identifiable.
5 2016  STR 585 (AAR).
6 2016  STR 806 (AAR).
7  39 STT 777 (Mumbai - CESTAT).
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