CESTAT Delhi Holds Consultancy To Single Client Cannot Be Treated As Intermediary Services
The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi, has recently held that consultancy services provided directly to a service recipient cannot be classified as intermediary services merely because the consultancy helps the recipient deal with third parties.
The bench comprising Judicial Member Binu Tamta and Technical Member P.V. Subba Rao observed that an intermediary arrangement requires three parties. The intermediary must facilitate or arrange the main supply between the other two.
The case concerned a show-cause notice proposing a ₹9.46 crore service tax demand against National Engineering Industries Ltd. (NEI) for consultancy services provided to Electro Motive Diesel, USA (EMD) between April 2016 and March 2017. The Revenue treated the services as intermediary services on the ground that NEI assisted EMD in its dealings with Indian Railways.
Under its agreement with EMD, NEI was required to provide advice and guidance on several aspects of EMD's business in India. These included Indian Railways tenders, coordination with Railways for order execution and technical support, customs clearance, warranty and claim matters, tender documents, and other business-related issues.
The Revenue argued that NEI had acted as an intermediary between EMD and Indian Railways. It relied on NEI's role in coordinating with Railways on order execution, technical support, clearing material supplied to customers and tendering.
Since intermediary services were covered by the exception under Rule 9 of the Place of Provision of Services Rules, 2012, the department contended that the place of provision was Jaipur. The department therefore contended that the services were taxable in India.
NEI, however, maintained that it had no lis with Indian Railways. Its role was to provide consultancy and guidance to EMD, USA, including assistance in preparing tenders and coordinating with Railways.
Since the service recipient was outside India, NEI argued that Rule 3 applied. The place of provision was therefore the USA.
The bench accepted NEI's contention that its services were not intermediary services.
“It is well-established that for someone to be intermediary there must be three parties to the agreement and the intermediary should be liaisoning with the other two parties. Where the agreement is with only one party, the service provider provides services to that party only. It does not matter that the services were consultancy services which would help the service recipient in dealing with some other parties,” the bench observed.
The bench also relied on the Delhi High Court's ruling in Cube Highways and Transportation Assets Advisor Pvt Ltd. v. Assistant Commissioner of CGST. There, the court held that a service provider rendering advisory services directly to its client is not acting as a facilitator for providing those services.
It referred to the CBIC framework on intermediary services, which requires a minimum of three parties. Two parties are involved in the main supply, while the third arranges or facilitates that supply.
The framework also distinguishes between the main supply and the ancillary intermediary service. A person providing the main service on a principal-to-principal basis cannot be treated as an intermediary.
Applying that distinction, the bench observed that a person providing advisory or consultancy services on its own account is not an intermediary where the person is not arranging or facilitating a supply from another service provider.
The bench found that NEI was providing consultancy and guidance to EMD in dealing with Indian Railways. It was not acting as a go-between between EMD and Railways.
It accordingly held that the Commissioner had correctly dropped the proceedings initiated by the show-cause notice. The Revenue's appeal was dismissed and the impugned order upheld.
For Revenue: Jaya Kumari, Authorised Representative
For Respondent: Advocates Charanya Lakshmikumaran, Dhruv Tiwari and Mehek Mehra