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GST Update: Bombay High Court Ruling | Split opinion on constitutional validity of GST on intermediary services
GST Update: Bombay High Court Ruling | Split opinion on constitutional validity of GST on intermediary services

June 11, 2021

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The Hon’ble Bombay High Court, in the case of Dharmendra M Jani (Petitioner), has recently delivered a split opinion on constitutional validity of GST on intermediary services.

Background

  • The Petitioner is a proprietor of M/s Dynatex International (Firm), engaged in providing marketing and promotion services to its customers outside India (who are engaged in manufacture or sale of goods)
  • The Petitioner solicits orders for its customer outside India. In lieu of the services provided, the Petitioner receives commission in convertible foreign exchange
  • By virtue of Section 2(13) of Integrated Goods and Services Tax Act, 2017 (IGST Act), the Petitioner qualifies as an intermediary
    • Due to deeming fiction created by Section 13(8)(b) of IGST Act, the place of supply for intermediary services is location of supplier of services i.e. Ind
    • Hence, the services provided by the Petitioner qualifies as intra-state supply under Section 8(2) of IGST Act, attracting CGST and SGST
  • The Petitioner has paid the applicable taxes out of his own pocket, thereby resulting in increased tax burden. Hence, the instant writ petition has been filed to declare Section 13(8)(b) and Section 8(2) as ultra vires GST law and unconstitutional

Petitioner’s contention

  • The levy of tax on export of service is ultra vires to the Article 269A, Article 14 and Article 19(1)(g) of the Constitution of India
  • The services provided by a service provider in India to a service receiver located outside India is to be treated as export of service and cannot be taxed. In order to tax a service,  it is not the place of performance but the place of consumption which is relevant. Once the services are consumed outside India, the Parliament has no jurisdiction to levy tax on such services consumed outside India
  • The cardinal rule of indirect taxation is that it must be capable of being passed on to the end receiver of the service. Therefore, the Petitioner, being an agent, cannot be burdened with GST

Observations and ruling

  • Justice Ujjal Bhuyan has provided his ruling stating that S. 13(8)(b) of IGST Act is ultra vires GST law and unconstitutional. In arriving at such conclusion, the following observations are made:
    • Basis conjoint reading of Article 246A and Article 269A of the Constitution,  it is clear that the Parliament is empowered to frame law for levy and collection of GST on inter-state supply and not empowered to impose tax on export of services out of India by treating the same as local suppl
    • Hon’ble Justice made a reference to Parliamentary Standing Committee on Commerce’s Report No. 139 on impact of GST on exports, which recommended that place of supply for Indian intermediaries shall be location of service recipient or provide an exemption
    • Article 286(1) of the Constitution provides for an express bar on taxation of exports or imports and Article 286(2) which provides for power to formulate principles for determining when a supply qualifies for import or export
      • Hon’ble Justice stated that Article 286(2) cannot be used to foil the express bar provided under Article 286(1)
    • ​​​​​​​With regard to Parliament’s power to enact law having a extra-territorial operation, Hon’ble Justice observed that the provocation of such a law must be found within India and have direct nexus with India
      • ​​​​​​​The extra-territorial effect of Section 13(8)(b)of IGST Act has no nexus with GST regime in India and runs contrary to fundamental principle (i.e. destination based tax) of GST
    • ​​​​​​​Section 9 of CGST Act cannot be invoked to levy tax on cross border transaction and so is the case of Section 5 of IGST Act as the same provides for levy of GST on inter-state supplies
      • ​​​​​​​The creation of deeming provision to treat place of supply as location of supplier (ie India), for intermediary services provided outside India, is beyond the scope of charging sections of GST law
    • Justice Abhay Ahuja has stated that he is unable to share the opinion as stated above. In this regard, the matter is listed on 16 June 2021 for pronouncement of his opinion

Overall Comments

  • To recap, Hon’ble High Court in Material Recycling Association of India has held that Section 13(8)(b) of IGST Act is not ultra vires and unconstitutional basis the observation that there is no deeming provision created, whereas a stipulation has been made by the IGST Act to consider the location of service provider of intermediary to be place  of supply. However, the same has been distinguished in this judgment.
  • To recap, Parliamentary Standing Committee had also recommended amendment of Section 13(8) of the IGST Act to exclude ‘intermediary’ services, so that export of services status would be available.
  • Though, Justice Ujjal Bhuyan’s order points to a much needed respite to the Indian intermediaries, we will have to wait for Justice Abhay Ahuja’s order. News reports suggest that the Judges have had divergent rulings and therefore the matter will now have to be referred to a larger bench.

We hope you will find the update useful.

We will keep you posted on further developments on the same. ​​​​​​​


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