Dharmendra M. Jani Vs Union of India And Others (Bombay High Court)
GST – Constitutionality of section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 –
While as per the opinion of Justice Ujjal Bhuyan the provision of section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 related to Itermediary Services are unconstitutional, whereas Justice Abhay Ahuja has expressed his disagreement and upheld the validity of Section 13(8)(b) of the IGST Act. Read Judgment containing differing view of both the Judges.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
Heard Mr. Bharat Raichandani, learned counsel for the petitioner ; Mr. Anil C. Singh, learned Additional Solicitor General of India alongwith Mr. Pradeep S. Jetly, learned senior counsel and Mr. J. B. Mishra, learned counsel for respondent Nos.1 to 4; also heard Mr. S. G. Gore, learned AGP for respondent No.5.
2. By filing this petition under Article 226 of the Constitution of India, petitioner has prayed for a declaration that section 13(8)(b) and section 8(2) of the Integrated Goods and Services Tax Act, 2017 are ultra vires articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution of India and also ultra vires the provisions of the Central Goods and Services Tax Act, 2017, Integrated Goods and Services Tax Act, 2017 and Maharashtra Goods and Services Tax Act, 2017.
3. Thus from the above it is evident that challenge made in this writ petition is to the constitutionality of section 13(8)(b) and section 8(2) of the Integrated Goods and Services Tax Act, 2017.
4. Case of the petitioner is that he is a proprietor of a proprietorship firm M/s. Dynatex International having its registered office at Andheri (West), Mumbai which is engaged in providing marketing and promotion services to customers located outside India. It is registered as a supplier under the provisions of the Central Goods and Services Tax Act, 2017 (briefly “the CGST Act” hereinafter).
5. Petitioner has explained in the writ petition the nature of the services rendered by it and the transactions involved. According to the petitioner, it is a service provider. It provides service to customers located outside India. These overseas customers are engaged in manufacture and / or sale of goods. Such overseas customers may or may not have establishments in India. However, petitioner provides services only to the principal located outside India and in lieu thereof receives consideration in convertible foreign currency from the principal located outside India. For providing such services, ordinarily an agreement is entered into with the overseas customers.
6. In terms of such agreement petitioner solicits purchase orders for its foreign customers. As a matter of fact petitioner undertakes activities of marketing and promotion of goods sold by its overseas customers in India.
7. The Indian purchaser i.e., the importer directly places a purchase order on the overseas customer of the petitioner for supply of the goods which are then shipped by the overseas customer to the Indian purchaser. Such goods are cleared by the Indian purchaser from the customs. The overseas customer raises sale invoice in the name of the Indian purchaser who directly remits the sale proceeds to the overseas customer. Upon receipt of such payment, the overseas customer pays commission to the petitioner against invoice issued by the petitioner. The entire payment is received by the petitioner in India in convertible foreign exchange.
8. Essentially the transaction entered into by the petitioner with the foreign customers is one of export of service from India earning valuable convertible foreign exchange for the country. It is an “export of service” within the meaning of section 2(6) of the Integrated Goods and Services Tax Act, 2017 (briefly “the IGST Act” hereinafter). Petitioner is also an “intermediary” within the meaning of section 2(13) of the IGST Act. So it is an export of service by an intermediary.
9. While section 7 of the IGST Act deals with inter-state supply, section 8 thereof deals with intra-state supply. The above provisions lay down when a supply will be considered as inter-state supply in India i.e., supply between two or more states or union territories of India and intrastate supply i.e., supply within one state or within one union territory.
10. Section 13 of the IGST Act deals with situations where the location of the supplier or the location of the recipient is outside India. While sub-section (2) generally provides that the place of supply of services shall be the location of the recipient of services, exceptions are carved out in sub-sections (3) to (13). As per sub-section (8), the place of supply of the services mentioned therein shall be the location of the supplier of services which is intermediary services in terms of clause (b).
11. Thus, by way of a deeming fiction, in the case of intermediary services where the location of the recipient is outside India, the place of supply shall be the location of the supplier of services which is in India, thus bringing into the tax net what is basically export of services. In this connection reference may be made to sub-section (2) of section 8 of the IGST Act which says that in case of supply of services where the location of the supplier and the place of supply of services are in the same state or same union territory, it would be treated as an intra-state supply. Therefore the export of service by the petitioner as intermediary would be treated as intra-state supply of services under section 13(8)(b) read with section 8(2) of the IGST Act rendering such transaction liable to payment of central goods and services tax (CGST) and state goods and services tax (SGST).
12. Petitioner has stated that it has paid CGST and SGST under protest from out of its own pocket without collecting the same from its foreign customers. Since the year 2015-16 petitioner is bearing net tax burden of about 40% of the total revenue leading to significant drop in net revenue of the petitioner. According to the petitioner, its tax burden has gone up from 28% in the year 2012 to 43.81% in the year 2017. The tax burden has increased post implementation of goods and services tax (GST) and is impacting the whole revenue earning of the petitioner.
13. It is in such circumstances that the present writ petition has been filed assailing the constitutional validity of section 13(8)(b) of the IGST Act read with section 8(2) of the said Act on the various grounds urged in the writ petition which can be broadly summed up as under:-
1. Levy of tax on export of service is ultra vires Article 269A of the Constitution of India.
2. Section 8(2) and section 13(8)(b) of the IGST Act are ultra vires section 9 of the CGST Act which is the charging section.
3. GST is a destination based tax on consumption. Therefore, services provided by a service provider in India to a service receiver located outside India which is treated as export of service cannot be taxed; for taxing a service it is not the place of performance but the place of consumption which is relevant. Once the services are consumed outside India, Parliament has no jurisdiction to levy tax on such services consumed outside India.
4. Levy of GST on an intermediary like the petitioner is violative of Article 14 of the Constitution of India.
5. Levy of CGST and SGST on the export of service by the petitioner to its overseas customers constitute an unreasonable restriction upon the right of the petitioner to carry on trade and business under Article 19(1)(g) of the Constitution of India.
6. GST is an indirect tax. The cardinal rule of indirect taxation is that it must be capable of being passed on to the end receiver of the service. Therefore, it is trite that an agent cannot be burdened with GST.
7. Levy of GST on an intermediary like the petitioner providing services to an overseas customer would lead to double taxation on the same service.
14. Respondent Nos.1 to 4 have filed a common affidavit-in-reply through Dr. K. N. Raghavan, Principal Commissioner of Central Goods and Services Tax, Mumbai Central Commissionerate. In so far contention of the petitioner that levy of tax on export of service is ultra vires Article 269A of the Constitution of India is concerned, it is submitted that there are several intermediaries who provide services to overseas customers. However, such services do not qualify as “export of service” even when consideration is received in foreign exchange. In this connection it is stated that till 2014 place of supply for intermediary services was governed by the Place of Provision of Service Rules, 2012. As per the said rules, for intermediary of services place of supply was location of service provider and for intermediary of goods place of supply was location of service recipient.
14.1. Several representations were received seeking change in place of supply for intermediary of services, further seeking clarification on the scope of the expression ‘intermediary’. The issue was examined and with effect from 01.10.2014 place of supply for all intermediaries (goods as well as services) was made the location of the intermediary. This was because many a times the same person provided agency services for selling of goods and subsequently selling of annual maintenance contract (AMC). Therefore, making a distinction between intermediary of goods and services caused hardship. Generally value addition of the service provided by an intermediary is at the place where the intermediary is located. Thus to eliminate any ambiguity between the place of supply of intermediary services provided in relation to goods and services and to bring both at par, place of supply for both was made the location of intermediary. If place of supply was to be made the location of recipient, place of supply for all intermediaries located in taxable territory providing service to a person whose usual place of residence is outside India would be the location of the recipient i.e., outside India and thus such services would have gone outside the tax net.
14.2. It is further stated that the issue of place of supply of intermediaries was discussed during the stage of drafting of GST laws and the above reasoning was adopted by the GST Council. In addition, it was found that with respect to intermediary services in relation to goods and services including stocks, transportation of goods etc., the services are actually performed and enjoyed at the place where the underlying arranged supply is made. Taxing such services provided by Indian service providers to foreign companies incentivises the foreign company to start manufacturing in India to offset the liability against the tax on goods cleared domestically or get refund of taxes on goods exported from India. Therefore, taxing such services in India is in consonance with the Make in India program.
14.3. Referring to the definition of the expression ‘export of services’ as provided in section 2(6) of the IGST Act, it is stated that the services provided by the intermediary (petitioner) are not export of services as all the five conditions mentioned in section 2(6) of the IGST Act are not satisfied. Therefore, the contention that levy of tax on export of services is ultra vires Article 269A of the Constitution of India is untenable.
14.4. Contention of the petitioner that section 13(8)(b) read with section 8(2) of the IGST Act would lead to double taxation has been denied. In case of intermediary services in relation to import of goods in India, there are two distinctly identifiable supplies involved, viz, (a) supply of goods by the overseas supplier to the Indian importer of goods; and (b) supply of services by the intermediary to the overseas supplier of goods. The above two mentioned distinct supplies are liable to tax under two different statutes i.e., Customs Act, 1962 and the IGST Act operating under two different fields of taxation. Thus the argument that there is double taxation on the services rendered by the petitioner is untenable. Elaborating further it is stated that in the first transaction as the title of the imported goods does not lie with the intermediary service provider, the incidence of custom duty is on the importer of goods. In so far the second transaction is concerned, the commission is paid by the overseas supplier to the Indian intermediary for the services provided by the latter and IGST on the same is levied in India on the intermediary as the place of supply is the location of the intermediary as per section 13(8)(b) of the IGST Act.
14.5. In the circumstances, respondents seek dismissal of the writ petition.
15. Petitioner has filed a longish rejoinder affidavit. In so far place of supply in terms of Place of Provision of Service Rules, 2012 is concerned it is contended that challenge made in the present writ petition is to section 13(8)(b) of the IGST Act read with section 8(2) of the said Act after introduction of the GST regime with effect from 01.07.2017. Therefore, reference to the 2012 Rules is wholly irrelevant and completely out of context. Referring to impost of service tax it is contended that taxable territory was defined under section 65B(52) of the Finance Act, 1994 as the territory to which provisions of the said Act applied; section 64(1) of the Finance Act, 1994 provided that Chapter V thereof extended to the whole of India except the State of Jammu and Kashmir. Therefore, any service provided outside India could not be subjected to service tax. Thus, the Finance Act, 1994 did not have extraterritorial operation. With effect from 01.07.2012 a new scheme of taxation was introduced. All services were made subject to service tax except those placed in the negative list or specifically exempt. The Place of Provision of Service Rules, 2012 was introduced with effect from 01.07.2012. This set of rules provided for determining the place of provision of the services. In other words, if the place of provision of service was India, the service would be taxable. On the other hand, if the place of provision of service was not India then the said service would not be taxable.
15.1. Petitioner has meticulously referred to the various individual rules of the aforesaid 2012 Rules whereafter it is submitted that while Rule 3 was the general rule which provided that the place of provision of a service would be the location of the recipient of service, this being based on the universally accepted principle that tax on services is a destination based consumption tax; it was a tax on the consumer and levied in the country of consumption of the service. Rules 4 to 12 were exceptions to the general rule which were based on actual consumption of the service. The exceptions were carved out keeping in mind that the said services were related to physical performance of the service and service related to immovable property situated in India. Such exceptions did not have any remote connection with the services provided by the petitioner which had no nexus to immovable property situated in India.
15.2. Reiterating his contentions made in the writ petition, petitioner asserts that all services when provided to overseas customer and consumed abroad are treated as export of service and not taxed in India; the same treatment should be offered to intermediary services as well. Similarly placed services provided by market research agencies, marketing agents, advertising consultants, professional services provided by lawyers, accountants etc. are all treated as export of service. Therefore, there can be no justifiable reason for singling out the petitioner as intermediary and by creating a legal fiction deny export of service by treating it to be service rendered in India and taxed accordingly.
15.3. In so far claim of the respondents that section 13(8)(b) would in fact boost the Make in India program the same has not only been denied but has been termed as unreal and illusory.
15.4. Petitioner has also referred to the 139th Parliamentary Committee Report, annexed to the writ petition as Exhibit-1, and submits therefrom that levy of GST on intermediary services is contrary to the basic fundamental concept of GST as a destination based consumption tax. On such basis petitioner asserts that for taxing a service it is not the place of performance but the place of consumption which is relevant; export would take place when the service is provided from India by a person in India but is received and consumed abroad. The artificial exception carved out in section 13(8)(b) of the IGST Act is contrary to all principles of interpretation besides being unconstitutional and ultra vires the IGST Act itself. Therefore the aforesaid provision is liable to be struck down as ultra vires to the fundamental principle of destination based consumption tax.
15.5. By giving various illustrations, petitioner has stated that levy of GST on export of services has created an exodus of such intermediaries from India. While it will not have any impact on import of goods into India, it would only lead to extinguishment of intermediaries from India.
15.6. Asserting that GST would be levied twice on the same commission, once by the petitioner on the commission and then by the importer (Indian purchaser of the goods) on the said commission, which is a clear case of double taxation.
15.7. Finally petitioner asserts that the world over intermediary services are treated as export of services and are accordingly not subject to VAT / GST. In the circumstances petitioner seeks and prays that the writ petition be allowed in full.
16. Opening his arguments Mr. Raichandani, learned counsel for the petitioner submits that the factual position in this case is undisputed. Petitioner is engaged in providing marketing and promotional services to customers located outside India. The Indian purchaser (importer) directly places purchase order on the overseas customer for supply of goods which are shipped by the overseas customer to the Indian purchaser who gets the goods cleared from the port / customs. The overseas customer raises sale invoice in the name of the Indian purchaser who directly remits the sale proceeds to the overseas customer. Upon receipt of the payment from the Indian purchaser the overseas customer pays commission to the petitioner. Petitioner has no privity of contract with the Indian purchaser.
16.1. By virtue of section 13(8)(b) read with section 8(2) of the IGST Act the place of supply has been declared to be the location of the service provider i.e., the petitioner making the said transaction liable to payment of CGST and MGST as intra-state supply of services. Petitioner has paid such taxes from out of his pocket ‘under protest’ without collecting the same from the foreign customers.
16.2. In the above circumstances, petitioner has challenged the legality and validity of section 13(8)(b) of the IGST Act to the extent that it seeks to levy GST on services provided to, used and consumed by recipients located outside India and treating the same as intra-state supply leviable to CGST and MGST which is not only illegal, void, arbitrary and unreasonable but also ultra vires Articles 14, 19(1)(g), 21, 286, 246A, 265, 269A and 300A of the Constitution of India read with section 9 of the CGST Act and the MGST Act.
16.3. Mr. Raichandani submits that admittedly the service rendered by the petitioner is an export of service to foreign customer located outside India. The said service is used and consumed outside India. That being the position it is an ‘export of service’ as defined under section 2(6) of the IGST Act. In fact it is so in terms of section 13(2) of the IGST Act as well. However, ‘intermediary’ which is defined under section 2(13) of the IGST Act has been placed under section 13(8)(b) of the IGST Act by virtue of which the place of supply of the service is the location of the supplier (petitioner). Consequently, the said supply is deemed to be an intra-state supply within the state of Maharashtra and taxed accordingly.
16.4. Further submission is that GST is a destination based consumption tax. It is a value added tax; a tax on services provided and consumed within the territory of India. Therefore it cannot have any extra-territorial operation or nexus. In this connection learned counsel has referred to the decision of the Supreme Court in All India Federation of Tax Practitioners Vs. Union of India, 2007 (7) STR 625. He has also extensively referred to the 139th Parliamentary Committee Report with regard to place of supply of services. On the strength of the above, Mr. Raichandani contends that section 13(8)(b) of the IGST Act is evidently contrary to the fundamental principle of destination based consumption tax.
16.5. Another limb of argument of learned counsel for the petitioner is that levy of CGST and MGST on export of service by intermediary is arbitrary, unreasonable and discriminatory. He submits that petitioner has been denied a level playing field vis-a-vis other exporters of services. Besides it incentivises the foreign customer to set up liaison office in India at the cost of an intermediary like the petitioner. Though all service providers like the petitioner should be treated in the same manner, this is not so. Service providers like marketing agents, marketing consultants, management consultants, market research agents, professional advisers etc. provide similar services. However, such services would not be subject to GST in terms of section 13(2) of the Act. But by virtue of the exception carved out under section 13(8)(b) of the IGST Act, the service rendered by the petitioner despite satisfying all the conditions of section 13(2) read with section 2(6) of the IGST Act would be subject to GST. Therefore, he contends that the levy is most unreasonable and arbitrary, thus violative of Article 14 of the Constitution of India.
16.6. On the proposition that a provision can be struck down if it is violative of Article 14, learned counsel for the petitioner had placed reliance on the following decisions:-
a. Reliance Energy Limited Vs. MSRDC, (2007) 8 SCC 1;
b. Union of India Vs. N. S. Rathnam, (2015) 10 SCC 681; and
c. K T Moopil Nair Vs. State of Kerala, AIR 1961 SC 552.
16.7. Mr. Raichandani in his next limb of argument advances the proposition that levy of tax on export of service is ultra vires Article 246A read with Article 269A and Article 286 of the Constitution of India. Referring to Article 246A he submits that this is a special provision with respect to GST. It provides that notwithstanding anything contained in Articles 246 and 254, Parliament and subject to clause (2) the legislature of every state have power to make laws with respect to GST imposed by the union or by such state. As per clause (2), Parliament has exclusive powers to make laws with respect to GST where the supply of goods or of services or both take place in the course of inter-state trade or commerce. Article 269A provides for levy and collection of GST in the course of inter-state trade or commerce. While clause (1) provides that GST on supplies in the course of inter-state trade or commerce shall be levied and collected by the Government of India, clause (5) provides that Parliament may by law formulate the principles of determining the place of supply and when a supply of goods or of services or both takes place in the course of inter-state trade or commerce. On the above basis Mr. Raichandani submits that the Constitution only grants power to the Parliament to frame laws for interstate trade and commerce i.e., for determining inter-state trade or commerce. It does not permit imposition of tax on export of services out of the territory of India by treating the same as a local supply. Hence, section 13(8)(b) of the IGST Act is ultra vires Articles 246A and 269A of the Constitution.
16.8. Referring to Article 286, learned counsel for the petitioner submits that clause (1) is very clear in as much as it provides that no law of a state shall impose or authorize the imposition of a tax on the supply of goods or services or both where such supply takes place outside the state or in the course of import of the goods or services or both into the territory of India or export of goods or services out of the territory of India. He submits that this is a prohibitive bar and is couched in negative language. In so far clause (2) is concerned, Parliament may by law formulate principles for determining a supply of goods or of services or both in any of the ways mentioned in clause (1). Thus no state has authority to levy local tax on export of services. Section 13(8)(b) of the IGST Act has deemed an export to be a local supply. This is violation of Article 286(1). In support of the above submission, Mr. Raichandani has placed reliance on the following decisions:-
a. State of Travancore – Cochin Vs. Bombay Company Limited, AIR 1952 SC 366;
b. Central India Spinning and Weaving and Manufacturing Company Limited Vs. Municipal Committee, Wardha, AIR 1958 SC 341; and
c. GVK Industries Limited Vs. ITO, (2011) 332 ITR 130.
16.9. Mr. Raichandani has argued that section 13(8)(b) of the IGST Act is not only ultra vires the charging section of the said Act i.e., section 5, but is also ultra vires the charging section of the CGST Act as well as the MGST Act i.e., section 9. He submits that IGST Act is an Act providing for levy and collection of tax on inter-state supply of goods and services. While section 1 provides that it shall extend to the whole of India except the State of Jammu and Kashmir, section 5 which is the charging section provides that there shall be levied IGST on all interstate supplies of goods or services or both. Section 7 explains what is inter-state supply. Section 8(2) clarifies that supply of services where the location of the supplier and the place of supply are within the same state or union territory, shall be treated as an intra-state supply. Thus he submits that from an analysis of the scheme, scope and object of the IGST Act, it is evident that the same provides for levy of IGST on interstate supplies. However, section 13(8)(b) runs contrary to the overall scheme of the IGST Act because it deems a supply out of India as an intra-state supply. Viewed in that context the said provision is also contrary to section 9 of the CGST Act as well as the MGST Act in as much as section 9 provides for levy of CGST on all intra-state supplies of goods or services or both. The said levy cannot be extended to cross border transactions i.e., export of services.
16.10. Learned counsel for the petitioner has also argued that respondents by levying CGST and MGST on the service provided by the petitioner to its overseas customers have imposed an unreasonable restriction upon the right of the petitioner to carry on trade under Article 19(1)(g) of the Constitution. He submits that such action on the part of the respondents would result in closure of business of the petitioner besides encouraging foreign service recipient to set up liaison offices in India and thereby escape taxation.
16.11. Last submission of Mr. Raichandani is that section 13(8)(b) of the IGST Act leads to double taxation and more. The same supply would be taxed at the hands of the petitioner and following the destination based principle it would be an import of service from India for the foreign service recipient and would be taxed at his hands in the importing country. In support of his above submission learned counsel has placed reliance on the following decisions:-
a. BSNL Vs. Union of India, 2006 (2) STR 161;
b. Adani Power Ltd. Vs. Union of India, 2015 (330) ELT 883 (); and
c. Union of India Vs. Adani Power Ltd., 2016 (331) ELT 129.
17. Leading the arguments on behalf of the respondents, Mr. Anil C. Singh, learned Additional Solicitor General submits that there is always a presumption in favour of constitutionality of a statute. Burden lies heavily on the person who challenges the validity of a statute. It is a settled proposition that for declaring a statute as unconstitutional, Court has to see whether there is legislative competence to enact the statute or not and whether the impugned provision is violative of any of the fundamental rights enshrined in Part III of the Constitution or not. According to Mr. Singh, the impugned provision cannot be assailed or struck down on the above two tests. Elaborating further he submits that no statute can be struck down as arbitrary unless it is unconstitutional. Greater latitude vests with the Parliament in taxing statutes and motive is not a relevant factor. In support of the above submissions, learned Additional Solicitor General has placed reliance on the following decisions:-
a. Union of India Vs. Exide Industries Ltd., (2020) 425 ITR (SC) 1;
b. Shri Ram Krishna Dalmia Vs. Shri S. R. Tendolkar, AIR 1958 SC 538;
c. R. K. Garg Vs. Union of India, AIR 1981 SC 2138;
d. Government of Andhra Pradesh Vs. P. Lakshmi Devi, AIR 2008 SC 1640;
e. Laya Binykumar Panday Vs. Medical Council of India, 2006 (6) Mh.L.J. 438; and
f. Amrit Banaspati Company Vs. Union of India, (1995) 3 SCC 335
17.1. Next submission of Mr. Singh is that even under the erstwhile service tax regime, the Place of Provision of Service Rules, 2012 contained a similar provision with effect from 01.10.2014. In compliance thereto petitioner had been paying service tax on the service rendered to overseas customer and therefore it is not open to the petitioner to make the impugned challenge now. Reverting back to the aforesaid rules Mr. Singh, learned Additional Solicitor General submits that central government considered several representations and after examining the issue in detail declared that with effect from 01.10.2014 the place of supply for all intermediaries (goods and services) would be the location of the intermediary. This in turn would encourage the Make in India program by encouraging the overseas customers to set up units in India thereby leading to foreign investments giving a boost to Make in India program. This will also bring about a level playing field in India.
17.2. Learned Additional Solicitor General has placed strong reliance on the judgment of the Gujarat High Court in Material Recycling Association of India Vs. Union of India decided on 24.07.2020, wherein identical challenge made to section 13(8)(b) of the IGST Act has been repelled by the Gujarat High Court. Mr. Singh firstly submits that the decision of the Gujarat High Court is correct in all respects and therefore, there is no reason as to why a different view should be taken by this Court. Secondly, relying on a decision of the Supreme Court in Kusum Ingots & Alloys Vs. Union of India, (2004) 6 SCC 254 followed by the Gauhati High Court in Rehena Begum Vs. State of Assam, Writ Petition (C) No.6968 of 2013 decided on 21.07.2015, he submits that in the case of an all India statute a view taken by a High Court as to its constitutionality or otherwise would be applicable throughout the territory of India and therefore, should be followed.
17.3. In such circumstances learned Additional Solicitor General submits that there is no merit in the writ petition and therefore, the writ petition should be dismissed.
18. Replying to the general submissions made by the learned Additional Solicitor General on constitutionality of a statute Mr. Raichandani submits that there can be no doubt or dispute about the said propositions canvassed by Mr. Singh. However, each challenge has to be decided having regard to the facts and circumstances of each case and there can be no straight jacket formula. In this connection learned counsel for the petitioner has placed reliance on State of UP Vs. Deepak Fertilizers & Petrochemical Corporation Ltd., (2007) 10 SCC 342.
18.1. Mr. Raichandani submits that substance of the impugned provision has to be looked into to determine as to whether in pith and substance it is within a particular entry. He has placed reliance on a number of decisions in this regard. Continuing with his submissions Mr. Raichandani asserts that apart from passing the test of legislative competence, the impugned provision must be otherwise legally valid and would also have to pass the test of constitutionality in the sense that it cannot be in violation of the provisions of the Constitution nor can it operate extra-territorially.
18.2. In so far reliance placed on the Place of Provision of Service Rules, 2012 by the respondents, Mr. Raichandani submits that there cannot be waiver or estoppel against raising an issue of constitutionality. Challenge made is to section 13(8)(b) of the IGST Act which has come into effect from 01.07.2007. Therefore, reference to the Finance Act, 1994 and to the Place of Provision of Service Rules, 2012 is wholly irrelevant and completely out of context. The present challenge as to levy of GST on export of services by intermediary treating the same as intra-state supplies cannot be judged or adjudicated on the touchstone of service tax law which in any case did not have extra-territorial operation.
18.3. Regarding the submission that the impugned provision would boost the Make in India program, Mr. Raichandani submits that such a submission is without any evidence and needs to be rejected outright. As a matter of fact levy of GST on export of services by intermediary has created an exodus of intermediaries to places like Singapore, Dubai, Hong Kong etc. thereby depriving the central government not just GST but also income tax, valuable foreign exchange and employment to thousands of people. Such levy of GST is rather against the Make in India program as well as against the age old policy of the Government of India to encourage export of goods and services.
18.4. In so far the Gujarat High Court judgment in Material Recycling Association of India (supra) is concerned, the submission is that decision of the Gujarat High Court cannot be treated as a binding precedent. It is a settled legal position that decision of one High Court is not binding on another High Court. If what the learned Additional Solicitor General submits is accepted then no High Court would be in a position to examine the validity of a provision which has been upheld by one High Court. Assailing the Gujarat High Court judgment Mr. Raichandani submits that it has been rendered sub silentio. The challenge to section 13(8)(b) of the IGST Act that it is ultra vires Article 286 read with Article 246A and Article 269A of the Constitution was neither canvassed before nor considered by the Gujarat High Court. There is no discussion on Articles 14 and 19(1)(g) as well. He therefore submits that this Court may take a view different from and independent of the Gujarat High Court.
19. Both the sides have filed written submissions.
20. Submissions made by learned counsel for the parties have received the due consideration of the Court.
21. Before we proceed to deal with goods and services tax (GST) and integrated goods and services tax (IGST), we may note what the Supreme Court had said on two of the legacy taxes i.e., value added tax (VAT) and service tax which have since been replaced and subsumed by GST. In All India Federation of Tax Practitioners (supra), the question for consideration before the Supreme Court was the constitutional status of the levy of service tax and the legislative competence of Parliament to impose service tax under Article 246(1) read with entry 97 of List I of the seventh schedule to the Constitution. It was an appeal before the Supreme Court against the decision of the Bombay High Court upholding the legislative competence of Parliament to levy service tax vide Finance Act, 1994 and Finance Act, 1998. According to the Bombay High Court, service tax fell in entry 97 List I of the seventh schedule to the Constitution.
21.1. The issue was examined by the Supreme Court from the point of view of competence of Parliament to levy service tax on practising chartered accountants having regard to entry 60 of List II of the seventh schedule to the Constitution and Article 276 of the Constitution. Referring to the service tax background it was noticed that Government of India in the late 1970s had initiated an exercise to explore alternative revenue sources due to resource constraints. Though customs and excise duty constituted two major sources of indirect taxes in India, however by 1994 Government of India found revenue receipts from customs and excise on the decline due to various reasons. Therefore, in the year 199495 the then Union Finance Minister introduced the new concept of service tax by imposing tax on services of telephones, non-life insurance and stock brokers. That list increased since then, as knowledge economy had made ‘services’ an important revenue earner. Service tax was an indirect tax levied on certain services provided by certain categories of persons. Service tax was premised on the economic viewpoint that there is no distinction between consumption of goods and consumption of services as both satisfy the human needs.
21.2. Finance Bill, 1998 was introduced in Parliament so as to levy tax on services rendered by a practising chartered accountant, cost accountant and architect to a client in professional capacity at a particular rate.
21.3. It was in that background that Supreme Court referred to the concept of VAT which is a general tax that applies in principle to all commercial activities involving production of goods and provision of services whereafter it was concluded that VAT is a consumption tax as it is borne by the consumer. It was held that service tax is a VAT which in turn is a destination based consumption tax in the sense that it is on commercial activities. It is not a charge on the business but on the consumer and it would logically be leviable only on services provided within the country (emphasis is ours); service tax is a value added tax. It was held as under:-
“6. At this stage, we may refer to the concept of Value Added Tax (VAT), which is a general tax that applies, in principle, to all commercial activities involving production of goods and provision of services. VAT is a consumption tax as it is borne by the consumer.
7. In the light of what is stated above, it is clear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax.
8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding, broadly services fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas etc. Performance based services are services provided by service providers like stock-brokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents etc.”
21.4. After re-stating that the economic concept of there being no distinction between consumption of goods and consumption of services was translated into a legal principle of taxation by the Finance Acts of 1994 and 1998, it was noted that Government of India had introduced Article 268A in the Constitution in the year 2003 by providing that taxes on services shall be charged by the Union of India and shall be appropriated by Union of India and the States. A new entry 92C was also introduced in the Union List for the levy of taxes on services.
21.5. On analysing the scheme of the Finance Act, 1994, Finance Act, 1998, relevant provisions of the Constitution of India and the decision of the Supreme Court in Moti Laminates Pvt. Ltd. Vs. Collector of Central Excise, Ahmedabad, 1995 (76) ELT 241 (SC), Supreme Court recorded the finding that source of the concept of service tax was traceable to economics. It is an economic concept. It has evolved on account of the service industry becoming a major contributor to the Gross Domestic Product (GDP) of an economy particularly knowledge based economy. Supreme Court held that service tax is a value added tax which in turn is a general tax applying to all commercial activities involving production of goods and provision of services, besides VAT being a consumption tax as it is borne by the client. It was held as under:-
“20. On the basis of the above discussion, it is clear that service tax is VAT which in turn is both a general tax as well as destination based consumption tax leviable on services provided within the country.”
22. Thus what is clearly discernible is that the emphasis in the above paragraph was on tax leviable on services provided within the country.
