Place of Supply Rules for Intermediary Services: A Major Relief Under GST#
The "Intermediary" Nightmare#
For years, the Indian Business Process Outsourcing (BPO), ITES (IT Enabled Services), and backend support sectors have lived under the looming threat of the "Intermediary" classification under GST.
Under Section 13(8)(b) of the IGST Act, the Place of Supply (POS) for an "intermediary" is the location of the supplier of services (i.e., India). This meant that if an Indian company was classified as an intermediary, its services provided to a foreign client would be deemed to have occurred in India. Consequently, the service would not qualify as an "export of service," and a flat 18% GST would apply, making Indian firms globally uncompetitive.
Who is an Intermediary?#
The GST law defines an intermediary as a broker, agent, or any other person who arranges or facilitates the supply of goods or services between two or more persons. Crucially, it does not include a person who supplies goods or services on their own account.
The controversy arose because GST officers began classifying standard back-office support, accounting, and customer care services provided to foreign multinationals as "intermediary services," simply because the Indian entity was interacting with the foreign company's global customers.
The Crucial Clarification#
Following massive industry pushback and numerous High Court writ petitions, the CBIC and judicial forums have provided much-needed clarification on how to interpret this rule:
1. Subcontracting vs. Intermediary: If a foreign company subcontracts a specific chunk of work (like bookkeeping, software testing, or answering customer support tickets) to an Indian BPO, the Indian entity is providing these services on its own account. It is NOT arranging a contract between the foreign company and the end customer. Therefore, the Indian BPO is not an intermediary, and the service qualifies as a zero-rated export.
2. The Principal-Agent Test: To be an intermediary, you must be acting as an agent representing a principal. If you operate as an independent contractor providing a primary service, you fall outside the scope of Section 13(8)(b).
Structuring the Master Service Agreement (MSA)#
The entire classification hinges on how your Master Service Agreement (MSA) is drafted. If your MSA uses words like "agent," "liaison," "facilitate sales," or "commission-based," you are inviting an intermediary classification and an 18% GST demand.
To ensure your foreign billing qualifies as a zero-rated export:
- Clearly state that services are provided on a principal-to-principal basis.
- Avoid tying your remuneration to the successful closing of a sale between the foreign client and their end customer. Charge on a cost-plus, man-hour, or fixed-fee basis.
If you are a BPO or KPO exporting services, a robust review of your contracts is essential to prevent crippling GST demands under the intermediary clause.