IT/Software Export GST: Intermediary Service vs Principal Service Provider

IT/Software Export GST: Intermediary Service vs Principal Service Provider

For India's IT and software exporters, a single classification question determines whether your entire revenue stream attracts zero tax or 18% IGST: are you a principal service provider making an export of services, or an intermediary whose place of supply is locked inside India? Under Section 13(8)(b) of the IGST Act 2017, intermediaries cannot escape Indian GST regardless of where their client sits. Getting this right — or wrong — can swing crores of rupees in annual tax liability for FY 2026-27 and every year after. This post explains the law, the tests, the documentation, and the mistakes that actually get companies caught.

Why This Classification Can Cost You 18% of Revenue

Zero-rated supply under Section 16 of the IGST Act is the prize every services exporter is chasing. If you qualify — if you are genuinely exporting services on your own account — you can either:

• Supply without payment of IGST under a Letter of Undertaking (LUT) filed in Form GST RFD-11 on the GST portal before the start of the financial year, and claim a refund of unutilised input tax credit (ITC); or
• Pay IGST and claim a refund of the tax paid, under the mechanism in Section 54 of the CGST Act read with Rule 89 of the CGST Rules.

Now compare that to being classified as an intermediary. Section 13(8)(b) of the IGST Act deems the place of supply of intermediary services to be the location of the intermediary — which is India. The moment that applies, your receipts from a New York or Singapore client are not exports. They are domestic taxable supplies liable to 18% IGST. Your foreign-currency invoices become a GST liability, not a refund source.

For a company billing Rs. 10 crore annually to overseas clients, the swing between these two outcomes is Rs. 1.8 crore in annual GST outflow — before you even count interest under Section 50, which accrues at 18% per annum on delayed payment.

The department has become sophisticated on this point. Scrutiny notices, audit queries, and adjudication orders routinely question export claims made by IT companies, BPOs, and Global Capability Centres (GCCs). The only durable defence is classification based on substance, not wishful drafting.

The Legal Foundation: Section 2(13) and Section 13(8)(b) of the IGST Act

What the Statute Says

Section 2(13) of the IGST Act 2017 defines an intermediary as:

> "A broker, 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."

The final clause — "does not include a person who supplies … on his own account" — is the exit door. If you supply services on your own account, you are a principal, not an intermediary, and Section 13(8)(b) does not apply to you.

Section 13(8)(b) states that where the location of the supplier and the location of the recipient are in different countries, the place of supply of services provided by an intermediary shall be the location of the supplier. For an Indian IT company, that is India. The result is a domestic IGST liability on what the company believes is an export.

The Ongoing Constitutional Challenge

The Bombay High Court in 2022 struck down Section 13(8)(b) as unconstitutional insofar as it applied to B2B intermediary services, on grounds of discrimination and violation of Article 14. The Supreme Court subsequently stayed that order, meaning the provision remains in full force as of May 2026. Until the Supreme Court settles the question definitively, you cannot rely on the Bombay HC ruling to escape the provision. Plan your structures around the law as it stands.

The Principal Test — Five Practical Anchors

The department applies a substance-over-form analysis. Here are five questions that determine which side of the line you fall on.

1. Who Bears Risk and Reward?

A principal takes on customer-acquisition risk, performance risk, credit risk, and warranty obligations. If the Indian entity merely passes through work and gets paid regardless of the overseas client's satisfaction, it looks more like an agent. Ask: if the overseas client refuses to pay, does the Indian company lose revenue — or does it bill the foreign principal anyway?

2. How Is Pricing Set?

A principal independently negotiates its pricing with the end customer. An intermediary typically receives a commission, margin, or markup calculated as a percentage of the foreign principal's transaction. Cost-plus-fixed-markup arrangements with a single foreign affiliate are a particularly high-risk structure — they mimic agency economics even when the contract says "independent contractor."

3. Who Owns the Customer Relationship?

Does the end customer's contract, non-disclosure agreement, and SLA sit with the Indian entity or with the foreign entity? Does the Indian entity's name appear on the deliverables, or is all output branded under the foreign principal? If the customer in Boston thinks they are dealing with the parent in the US and the Indian company is invisible to them, the department will read that as agency.

4. What Is the Nature of the Output?

A principal produces a distinct, defined deliverable — code, a report, a software module, a processed dataset — that stands on its own. An intermediary produces facilitation: connecting, routing, coordinating, or passing information between the overseas client and another supplier. If your statement of work reads more like a facilitation engagement than a deliverable-based one, rewrite it or reclassify.

5. Who Is the Sub-contractor to Whom?

The direction of contractual subordination matters enormously. If the foreign entity is a sub-contractor to the Indian entity, the Indian entity is the principal. If the Indian entity is a sub-contractor to the foreign entity, the Indian entity is the intermediary (or at minimum is at risk of being treated as one). Review your master services agreements carefully — particularly with related parties. Many GCC and captive arrangements embed language that inverts the commercial reality.

High-Risk Industry Scenarios: How the Department Reads Them

Indian Captive / GCC Serving a Single Foreign Parent

This is the grey zone. Indian subsidiaries providing IT, finance, HR, or technology services exclusively to their parent often argue principal status. The department typically looks for: Does the captive bear any risk? Does it have its own customers, IP, or pricing power? A captive that invoices at "cost plus 10%" under a transfer-pricing-driven intercompany agreement, has no external customers, and produces output branded entirely under the parent's name is a strong candidate for intermediary classification. Restructuring the agreement to give the Indian entity independent service obligations, a performance warranty, and IP ownership over the tools it builds substantially improves the position.

Indian BPO or KPO Routing Work for an Overseas Client

A BPO that manages customer calls, claims, or data entry on behalf of a foreign firm is at risk if it is merely "routing" the work — i.e., the BPO is invisible to the end-customer and the client's SLA governs everything. The BPO should ensure its own SLA with the client covers quality benchmarks and that it bears the economic consequence of a breach.

Indian SaaS Reseller or Distributor

An Indian entity that resells a foreign SaaS product — invoicing Indian customers, collecting payment, and bearing customer support obligations — is typically a principal buying and reselling on its own account. The risk arises when the "distributor" merely signs customers up on the foreign company's platform and earns a referral fee. That is agency, and the department will treat it as such.

Indian Marketing or Sales Agency for a Foreign Brand

If your deliverable is campaigns, leads, or content on your own creative account, you are likely a principal. If your job is to introduce customers to the foreign brand or arrange transactions between the foreign company and Indian buyers, you are likely an intermediary. Document the scope of work as output-based, not introduction-based.

Worked Example: The Rs. 1.8 Crore Annual Swing

Scenario: TechBuild India Pvt Ltd, a Bengaluru-based software development company, provides software engineering services to DataCore US Inc. Annual billing: Rs. 10 crore (received as foreign inward remittances; FIRC available). TechBuild files a LUT annually and claims zero-rated supply.

If correctly classified as principal:

• GST on output: Nil (zero-rated under Section 16, LUT in force)
• ITC on inputs (cloud services, office expenses, professional fees): Rs. 25 lakh per annum
• Refund claimed under Rule 89(4) of CGST Rules
• Refund formula: (Turnover of zero-rated services ÷ Adjusted Total Turnover) × Net ITC
• If Rs. 10 crore is 100% of turnover: refund = Rs. 25 lakh
• Net tax cost: nil. Cash refund: Rs. 25 lakh.

If reclassified as intermediary by the department:

• IGST liability: Rs. 10 crore × 18% = Rs. 1.8 crore per annum
• Assume this is discovered in a GST audit for FY 2023-24 and FY 2024-25 (two years of exposure): Rs. 3.6 crore principal demand
• Interest under Section 50 at 18% per annum for, say, 730 days (2 years from due date): Rs. 3.6 crore × 18% × 2 = Rs. 1.296 crore interest
• Penalty under Section 73 (non-fraud): up to 10% of tax = Rs. 36 lakh
• Total exposure: approximately Rs. 5.25 crore

The difference between good documentation and inadequate documentation on a single contract is the difference between a Rs. 25 lakh refund and a Rs. 5.25 crore demand.

The fix, applied at contract inception: TechBuild's master services agreement with DataCore US should specify that TechBuild owns the development process, is liable for defects and warranty, prices independently (not as a percentage of DataCore's revenue), and delivers software modules as a principal supplier. DataCore should have no operational visibility into how TechBuild manages its delivery — it receives the deliverable, not the process.

Documentation That Actually Wins the Argument

When the department issues a notice, your contracts and correspondence are the only defence you have. Here is what must exist before you file your first zero-rated invoice.

Contractual Documents

• Master Services Agreement (MSA) or Software Development Agreement (SDA): Must describe output deliverables (not facilitation activities), price TechBuild's services independently, and assign performance obligations (including SLA, defect warranty, and penalty clauses) to TechBuild — not to a foreign parent.
• Statement of Work (SoW): Milestone-based, with acceptance criteria that the Indian entity must meet. Avoid language like "coordinate", "arrange", "facilitate", "act on behalf of".
• IP Assignment clause: To the extent TechBuild creates IP, the agreement should clarify ownership during the project and on delivery — a principal owns or licences, not merely executes.

Financial Evidence

• Foreign Inward Remittance Certificates (FIRCs) or Bank Realisation Certificates (BRCs): Must be in TechBuild's name. If remittances flow through the parent and are on-forwarded, the paper trail looks like a pass-through.
• Invoices in TechBuild's name, in foreign currency, to the direct client: Not to the foreign parent who then bills the actual client.
• Transfer pricing documentation (Form 3CEB / TP Study): Ensure the characterisation in your TP study (service provider vs. routine service provider) is consistent with your GST position. Inconsistency between TP characterisation and GST classification is a red flag.

Operational Evidence

• Email correspondence where TechBuild's team engages directly with the client on requirements and delivery.
• Client-facing presentations and reports branded under TechBuild, not under the foreign principal.
• Project management records (Jira, Confluence, MS Teams) showing TechBuild running the engagement independently.
• HR and payroll records confirming that TechBuild's employees work under TechBuild's supervision, not under the foreign client's direction (the latter raises a PE risk under the Income-tax Act 1961 as well).

Common Mistakes That Get Export Claims Rejected

Across adjudication orders and audit findings, these errors appear repeatedly:

1. Contract language borrowed from the foreign parent's template — which describes the Indian entity as a "service provider acting on behalf of" the parent. That phrase is sufficient for a prima facie intermediary finding.

1. Cost-plus pricing with no independent margin justification — particularly where the markup is fixed in a transfer pricing study but the GST contract simply mirrors it without any independent commercial rationale.

1. Single customer equals single foreign affiliate — if 100% of your revenue comes from one overseas group company and you have never bid for or won a project from any third party, the department treats this as evidence of a captive agent arrangement.

1. FIRCs routed through the parent — where the overseas client pays the parent, and the parent on-forwards funds to the Indian entity, the Indian entity cannot produce FIRCs in its own name. Refund applications fail at the evidence stage.

1. LUT not filed for the financial year — if the LUT in Form GST RFD-11 is not filed on the GST portal before the supply is made, zero-rated treatment without payment of tax is unavailable for that period. You must pay IGST and then claim a refund — a cash-flow problem for large billers.

1. Inconsistency between income tax and GST positions — a company claiming "principal" status for GST but "routine service provider with no unique intangibles" under TP (to minimise the transfer price) is contradicting itself across two regulators. Both departments are now cross-referencing.

1. Amending contracts after a notice — retrospective contract amendments are routinely disregarded by adjudicating authorities. The credible position is built at inception, not retrofitted after a Section 73 notice.

The Refund Mechanism: What You Can Actually Recover

If you are correctly classified as a principal and have filed your LUT for FY 2026-27, you are entitled to a refund of unutilised ITC under Section 54(3)(i) of the CGST Act. The mechanics:

• File Form GST RFD-01 on the GST portal within two years from the relevant date (the end of the quarter in which the supply was received by the recipient, per Rule 89).
• Attach: copy of LUT, FIRC/BRC for each invoice, bank realisation confirmation, and statement of invoices in Annexure B of Form RFD-01.
• The refund formula under Rule 89(4): Refund = (Turnover of zero-rated supply of services ÷ Adjusted Total Turnover) × Net ITC
• The refund officer must process within 60 days of the complete application date (Section 54(7)). If delayed beyond 60 days, interest at 6% per annum accrues in your favour under Section 56.

If you paid IGST on exports (instead of using LUT), you can claim a direct refund of the IGST paid under Rule 89(1)(b). In that case, no ITC formula applies — you simply recover the tax paid, subject to the refund officer verifying the export.

Note that for FY 2026-27, the GST portal's refund module has been integrated with the ICEGATE export data for goods. For services, reconciliation is manual — ensure your chartered accountant reconciles FIRC dates with invoice dates and GST return data (GSTR-1, GSTR-3B) before filing.

Key Takeaways

• The intermediary trap is real and expensive. Section 13(8)(b) of the IGST Act converts what looks like a foreign-currency receipt into an 18% IGST liability if you do not establish principal status. For a Rs. 10 crore revenue company, that is Rs. 1.8 crore annually.
• The "own account" test is the legal pivot. If your company bears performance risk, sets its own price, owns the customer relationship, and delivers a defined output — you are a principal. Prove all four with documents, not assertions.
• Contracts must say what you do, not just what you want to be called. Avoid "agent", "on behalf of", "arrange", and "facilitate" in any service agreement you issue to an overseas client.
• FIRCs in your own name are non-negotiable. Remittances flowing through a parent entity destroy the export evidence trail for refund purposes.
• File your LUT in Form GST RFD-11 before FY 2026-27 begins (i.e., before 1 April 2026 — if you have not done so, file now and note the effective date carefully). A missing LUT means you must pay IGST and wait for a refund, tying up working capital.
• Transfer pricing characterisation and GST characterisation must be consistent. Cross-regulator inconsistencies are now a routine audit trigger.
• Do not rely on the Bombay HC ruling striking down Section 13(8)(b) — the Supreme Court stay means the provision is in full force. Build your position around the law as it stands, not as you wish it were.