Dharmendra M. Jani Vs Union of India (Bombay High Court)
HC held that provisions of Section 13(8)(b) and Section 8(2) of the IGST Act are legal, valid and constitutional, provided that the provisions of Section 13(8)(b) and Section 8(2) are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST and MGST Act.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Their Lordships of the Division Bench have spoken in different voices in deciding the above Writ Petitions. In view of the cleavage of opinion, by an order dated 16 June 2021 the Division Bench recording the disagreement, ordered that the proceedings be placed before the Hon’ble the Chief Justice. Consequent thereto, by an order passed by the Hon’ble the Chief Justice, the proceedings are referred for the opinion of this Court.
A) PRELUDE
2. The petitioners in both the petitions primarily challenge the constitutional validity of the provisions of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (for short “the IGST Act”).
In Writ Petition No. 2031 of 2018, there is an additional prayer assailing the constitutional validity of Section 8(2) of the IGST Act. The petitioners have commonly contended that the impugned provisions are violative of Articles 14, 19, 245, 246, 246A, 248, 265, 269A, and 286 of the Constitution.
3. As noted in the referral order, one of the Hon’ble Judges of the Division Bench, struck down Section 13(8)(b) of the IGST Act as ultra vires, the IGST Act, besides being unconstitutional, whereas the companion Hon’ble Judge upheld the validity of the said provisions on all counts. The referral order dated 16 June 2021 passed by the Division Bench needs to be noted which reads thus:-
“1. There is difference of opinion in the Bench.
2. Matters relate to constitutionality of section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017. While as per one opinion (opinion of Justice Ujjal Bhuyan) the said provision is unconstitutional, Justice Abhay Ahuja has expressed his disagreement and has rendered his separate opinion today.
3. In view of such difference in opinion, Registry to place the matters before Hon’ble the Chief Justice on the administrative side for doing the needful.”
B) FACTS
4. Although the facts are not in dispute and are succinctly set out in both the judgments of the learned members of the Division Bench, reference to the nature of the business and transactions of the petitioners would aid the discussion.
5. At the bar, Writ Petition No. 2031 of 2018 (Dharmendra M. Jani vs. The Union of India & Ors.) was argued as the lead petition before the Division Bench as also before this Court, hence, in some detail the facts in such petition are being referred hereunder.
6. The petitioner, a proprietary firm, is engaged in providing marketing and promotion services to its customers located outside India. The overseas customers to whom services are provided by the petitioner are inter alia engaged in the manufacturing and/or sale of goods. Such customers may or may not have an establishment in India. The petitioner provides services only to its foreign principal and receives consideration in convertible foreign exchange. To provide such services, the petitioner enters into an agreement with its overseas customers. Illustratively, a copy of one such agreement is placed on record at ‘Exhibit-C’. Under such agreement, the petitioner provides services to enable his foreign principal to get purchasers for its goods in India or elsewhere. The petitioner thus undertakes activities of marketing and promotion of goods sold by its overseas customers in India.
7. The service as provided by the petitioner fructifies, if an Indian purchaser [importer] directly places a purchase order on such overseas customer of the petitioner, for supply of goods. Such transaction is enabled as a result of the service so provided by the petitioner to his foreign principal. The goods are directly shipped by the petitioner’s overseas customer to the Indian purchaser. This is an independent transaction between these two parties, namely, the Indian importer and the foreign exporter, which has nothing to do with the petitioner. On arrival of the goods in India, they are cleared by the Indian purchaser directly from the port/customs. In regard to the payment of consideration qua such import, such overseas customer raises a sale invoice in the name of the Indian purchaser. The Indian purchaser directly remits the sale proceeds to the overseas customer. Thus, the petitioner has no concern whatsoever qua such import transaction.
8. Once such payment is received by the overseas customer from the Indian importer, the foreign principal pays a commission to the petitioner, against an invoice issued by the petitioner. The entire payment is received by the petitioner in India in convertible foreign exchange.
9. The petitioner’s establishment is registered as a supplier under the provisions of the Central Goods Services Tax Act, 2017 (for short “CGST Act”). It is not in dispute that the petitioner on such transactions has deposited CGST at the rate of 9% and the State GST under the Maharashtra Goods and Services Tax Act, 2017 (for short “MGST Act”) at the rate of 9% under self-assessment. At no point in time, there was any independent demand by the authorities for payment of GST either under the IGST Act or the CGST Act and the MGST Act.
10. The petitioner has contended that the nature of the transaction(s) entered by the petitioner with its overseas customers are transactions of “export of services”, as the petitioner was providing services to its overseas clients, which were consumed and used by the overseas clients outside India, for which valuable foreign exchange was earned by the country, hence, such transactions were outside the purview of the CGST and the MGST Acts. The petitioner, therefore, addressed a representation dated August 22, 2017, to the Superintendent, CGST, Mumbai Range-I inter alia recording that with the advent of the Goods and Services Tax, in terms of Section 13(8) of the IGST Act, the place of supply of “intermediary services” has been defined as the place of the supplier of the service. It was stated that by virtue of such provision, the services provided by the petitioner to the overseas clients are being subjected to the Goods and Services Tax in India. The petitioner stated that it has been the policy of the Central Government to promote exports, hence, the inclusion of intermediary services under Section 13(8) of the IGST Act would lead to the closure of business of several such agencies, resulting in loss of jobs for several employees. The petitioner recorded that the petitioner intended to challenge the said provision, and hence, the petitioner would pay GST on the said commission under protest, as the petitioner did not accept the liability to pay GST on the said transactions. The petitioner, hence, reserved its right to claim refund of the duties so paid. It is on such premise, the petitioner has assailed the provisions of Section 13(8)(b) and Section 8(2) of IGST Act as noted above. The prayers as made in the Writ Petition reads thus:
“(a) that this Hon’ble Court may be pleased to issued any writ, order or direction more particularly in the nature of a Writ of Declaration to declare Section 13(8)(b) and Section 892) of the Integrated Goods and Services Tax Act, 2017 as null, void and ultra vires Article 14, 19, 246, 246A, 248, 265, 268A, 286 and 302 read with Entry 41 and 83 of List 1 of VII Schedule of the Constitution of India and as also being beyond the legislative competence of Parliament under Article 269A of the Constitution of India and as also being beyond the legislative competence of Parliament under Article 269A of the Constitution of India and being ultra vires the provisions of CGST Act and MGST Act, 2017 and pass such further or other orders as this Hon’ble Court may deem fit and necessary in the facts and circumstances of the case and thus render justice.
(b) that this Hon’ble Court be pleased to issue a writ of mandamus or any other appropriate writ, order or direction staying the implementation of the provision to above in prayer clause (a) and stay thereof;
(c) For ad-interim reliefs in terms of prayer clause (b).”
Writ Petition (L) No. 639 of 2020 of A.T.E. Enterprises Private Limited
11. The facts of this petition are not too different from the first petition. The petitioner in this petition is stated to be a company registered under the Companies Act, 1956. It is a multi-faceted engineering group dealing in representation of textile machinery manufacturers from across the world. It is stated that the petitioner-A.T.E. Enterprises Private Limited (for short “A.T.E.”) represents over 50 principals in the domains of textile engineering, flow technology, print and packaging solutions and machine-to-machine solutions. The prominent principals for whom A.T.E. acts as a sole selling agent are in Germany, Italy, Austria and China. A.T.E. has entered into several agency agreements with foreign principals. It has enclosed a sample agent agreement dated March 15, 2005 entered into with Karl Mayer Textilmaschinenfabrik GmbH, Germany, which is engaged in the manufacture and sale of textile machinery. Under this agreement, ATE is assigned exclusive rights to distribute within India, the products manufactured by its foreign principal. A.T.E has stated that it has no role to play in the actual sale and purchase of the machinery manufactured by such foreign principal. The machinery manufactured by the foreign principal is directly shipped by the foreign principal to the Indian purchaser [importer]. These goods are cleared by the Indian purchaser from the customs authorities on its own account. Also, the sale invoice is directly issued by the foreign principal in the name of Indian purchaser. The consideration for such transaction is directly remitted by the Indian purchaser to the foreign principal. As a consideration for the services provided by the petitioner under the agreement, the petitioner is entitled to a commission calculated as a percentage of the ex-works net value of the foreign principal’s products sold in India, for which, the payment is realized by the foreign principal. The petitioner raises periodic invoices on the foreign principal for commission. The payment is received by the petitioner in convertible foreign exchange. Thus, the facts of this petition, except nature of service offered, are similar to the first petition. The prayers as made in this petition are required to be noted, which reads thus:
“a) This Hon’ble Court may be pleased to issue an appropriate writ, order or direction declaring Section 13(8)(b) of the IGST Act insofar as it stipulates that the place of supply in case of intermediary services shall be the location of the supplier of services in cases where the location of the supplier of services is in India and the location of the recipient of services is outside India as null, void and ultra vires Article 14, 19(1)(g), 265 and 286 of the Constitution of India; and/or
b) This Hon’ble Court may be pleased to issue an appropriate writ, order or direction reading down Section 13(8)(b) of the IGST Act insofar as it stipulates that the place of supply in case of intermediary services shall be the location of the supplier of services in cases where the location of the supplier of services is in India and the location of the recipient of services is outside India; and/or
c) This Hon’ble Court be pleased to issue a writ of mandamus or any other appropriate writ, order of direction staying the implementation of the provision referred to in prayer clause (a) and (b) above; and/or
d) This Hon’ble Court may be pleased to direct the Respondent to refund the amount of GST (CGST and SGST) paid by the petitioner on intermediary services provided to its foreign principals till date; and/or
e) That such further and other reliefs be granted as this Hon’ble Court may deem fit and proper.”
Stand of the Revenue
12. On behalf of the revenue, a counter affidavit has been filed by the Principal Commissioner, CGST, Mumbai Central Commissionerate. In regard to the petitioners’ contention that levy of the Goods and Service Tax (GST) on the export of services as undertaken by the petitioners is ultra vires Article 269A of the Constitution of India, it is contended that several intermediaries provide services to overseas suppliers/customers, however, services provided by them to their foreign clients do not qualify as export of services even when consideration is received in foreign exchange. It is stated that till the year 2014, the place of supply (POS) for intermediary services was governed by the ‘Place of Provision of Service Rules 2012’ (short “POPSR”)(framed in exercise of powers by sub-section (1) of Section 66(C) and Clause (hhh) of sub-section (2) of Section 94 of the Finance Act, 1994). brought into effect from July 1, 2012, which defined an intermediary under Rule 2F. It is stated that Rule 9 (c) of the said rules, providing for the place of provision of specified services stipulated that the place of provision of the intermediary services shall be ‘location of the service provider’. The affidavit also refers to Rule 3, which speaks in regard to the ‘place of provisions’ generally to mean the place of provision of a service, to be the location of the recipient of services.
13. The counter affidavit further states that several representations were received seeking modification of Rule 9 of POPSR to the extent it included intermediary services under sub-clause(c). It is stated that the issue was examined and with effect from October 1, 2014, the place of service for all intermediaries [goods and services] was made to be the location of intermediary as stipulated under Rule 9(c). The stipulation as made in Rule 9(c) was inter alia for the reasons that many times, same person provides agency services for selling of goods and subsequently selling of AMC (Annual Maintenance Contracts), therefore, making a distinction between the intermediary of goods and services caused hardship. Generally, the 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, PoS for both was made to the location of the intermediary. It is next stated that if the PoS was to be made to be the location of recipient under default rule, PoS for all intermediaries located in the 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. The counter affidavit further states that the issue of POS of intermediaries was also discussed during the drafting of the GST laws and same reasoning as above was adopted by the GST Council, a Constitutional body established under Article 279A of the Constitution, entrusted to make recommendations to the Union of India and the States on all matters related to the Goods and Services Tax. It is stated that in regard to the intermediary services provided in relation to goods and services including stocks, transportation of goods, etc., these services are performed and enjoyed at the place where the underlying arranged supply is made. Hence, taxing such services as provided by the Indian service providers to foreign companies, incentivizes the foreign companies 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. Hence, taxing such services in India is in consonance with “Make in India” programme. The affidavit further records that taxing intermediaries located in India which provide services to foreign exporters for exporting goods or services to India, make such imports costlier, however, such a situation promotes “Make in India”. This would, however, not be true when the service is provided to an Indian importer of goods and services, as he would be entitled to avail input tax credit of GST paid on services provided by the intermediary. Referring to the definition of “export of services” as contained in Section 2(6) of the IGST Act, it is stated that the services provided by the intermediary are not export of services, as all the five conditions in the definition, are not satisfied and hence, the contention of the petitioner that the levy of tax on export of services is ultra vires under Article 269-A of the Constitution, is not tenable.
15. It is next contended that no double taxation is allowed, as in the case of intermediary services in relation to import of goods in India, there are two distinctly identifiable supplies involved; firstly, supply of goods by the overseas supplier to the Indian importer of goods; and secondly, supply of services by the intermediary to the overseas supplier of goods. It is stated that these two supplies are distinct and are liable to tax under two different statutes, namely, the Customs Act, 1962 and the IGST Act, 2017 respectively operating under two different fields of taxation.
16. It is contended that in the first transaction, as the title of the imported goods does not lie with the intermediary service provider, the incidence of Customs duty is on the importer of goods; and in the second transaction, the commission is paid by the overseas supplier to the Indian intermediary for the services provided by the intermediary 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.
17. It is next contended that the services provided by the intermediaries located in India are taxable in India, and if the intermediaries are affecting the procurement of supplies for manufacturers in India, the manufacturers in India can avail input tax credit, and in case of exports, they can avail refund of such taxes. Further, if intermediaries located in India are affecting the import of finished goods, there is no consumption of these input services within India. Whereas the Indian importer would have had to suffer same cost in the event an overseas supplier procured such services from an intermediary in a non-taxable territory. This is a situation akin to a B2C transaction where credit lapses or has no necessity of further continuation. It is stated that such taxable services would cause additional costs, however, it gives an advantage to the counterpart Indian manufacturer. It is stated that if the services of Indian intermediaries are taxed again at the hands of the foreign exporter (under reverse charge in a foreign country), then while making exports from the foreign country, the taxes ought to be zero-rated for the exports from that country. Hence, again there is no double taxation.
Submissions on behalf of the petitioners:-
18. Bharat Raichandani and Mr. Abhishek Rastogi, learned counsel for the petitioners have made the following submissions :-
(i) Section 13(8)(b) of the IGST Act read with Section 2(13) and 2(6) to the extent, these provisions seek to levy GST on services provided by the petitioners to its overseas customers, which are consumed by such customers/ recipients outside India, by fiction of law as created by these provisions are treated as intra-state supply making GST leviable on such export of service, under the CGST Act and MGST Act. These provisions are violative of the provisions of Article 246A read with Articles 269A and 286 of the Constitution this more particularly when the nature of the transaction entered by the petitioner with overseas customers is not in dispute and in fact, is accepted by the respondent in the reply affidavit.
(ii) Section 13(8)(b) read with Section 2(6) and Sections 2(13) and 8(2) of the IGST Act creates a fiction to bring about a situation that the place of supply of service by the petitioner for the purposes of the CGST Act and the MGST Act, becomes the location of the petitioner [service provider] thereby making the petitioners liable for the levy under the CGST Act and MGST Act, without such amount being collected by the petitioners from their foreign customers, which otherwise would be collected by a registered dealer if the supply or service was to be either inter-State or intra-state supply of goods or services. Once the service is admittedly an export of service to foreign customers located outside India, except for the provisions of Section 13(8)(b), for all purposes such service is a service used and consumed outside India.
(iii) Section 13(8)(b) read with the other provisions cannot be understood and applied de’hors the fundamental principles underlying the levy of goods and service tax, namely that GST is levied on the destination-based principle, wherein the place of supply of service, necessarily would be the location of the recipient of the service, which in the present case is the place outside India. The petitioners clearly fall within provisions of Section 2(6) which defines “Export of Service”.
(iv) The legislature by the inclusion of an ‘intermediary’ in Section 13(8)(b) of the Act to which a meaning is attributed as defined under Section 2(13) of the IGST Act, an attempt is made to convert the actuality of the place of supply in foreign territory to a place of supply of such service at the location of the supplier, namely, the location of the petitioners, so that it would be deemed to be an intra-State supply [supply within the State of Maharashtra] leviable with the local GST. Neither the provisions of Article 246A read with Article 269-A and Article 286 of the Constitution would permit such inclusion, nor the basic principles, under which GST would levy, would permit such consequences as created by the impugned provisions.
(v) GST is a destination-based tax on consumption. It is a value-added tax. It is a tax provided on services consumed within the territory of India. Hence, it does not have extra-territorial operation or nexus. This position is sufficiently clarified by a circular dated 18 February 2019 issued by the revenue [circular no.20/16/04/2017-GST]. Paragraph 3 of the circular issues the following clarification:-
“3. After introduction of GST, which is a destination-based consumption tax, it is essential to ensure that the tax paid by a registered person accrues to the State in which the consumption of goods or services or both takes place. ……”
(vi) That the Goods and Service Taxes Council established under Article 279A of the Constitution of India has issued a paper on GST titled as “Paper on GST – Concept and Status” dated 1 April 2018 inter alia reiterating in paragraph 7 under the heading “Origin based taxation v/s. Destination based taxation” interalia recording that the GST is a destination based consumption tax under which tax accrues at the destination/ place, where consumption of goods and services takes place. The Circular also clarifies that the existing VAT regime was based on origin principles whereas GST Act was assigned to the State of origin where production or sale happened and not to the State where consumption happened. This contention is also supported by relying on the decision of the Supreme Court in All India Federation of Tax Practitioners v/s. Union of India1.
(vii) The Government introduced the draft of the Model GST Law on 14 June 2016, inviting comments and suggestions from the trade, industry, and other stakeholders. In the said draft, “intermediary” services were not placed in the Section 13(8)(b) of the Act and in fact were placed under the general rule under Section 13(2) of the Act. However, the final version of the IGST Act released on 12 April 2017 included “intermediary” services under Section 13(8)(b). It is submitted this is clear in the light of the 139th Parliamentary Committee Report (Clauses 15.1 to 15.3). Such principle is based on the internationally accepted and followed principles laid down by the OECD International VAT Guidelines, 2015, which records that under the destination principles, tax is ultimately levied only on the final consumption that accrues within the taxing jurisdiction, whereas in origin principles, the tax levied in various jurisdiction where the value was added. The key economic difference between the two principles is that the destination principle places all firms competing in a given jurisdiction on an even footing, whereas the origin principle places consumers in different jurisdictions on an even footing. It records that the application of the destination principle in VAT achieves neutrality in international trade. Under the destination principle, exports are not subject to tax with a refund of input taxes (that is, “free of VAT” or “Zero-Rated”), and imports are taxed on the same basis and at the same rates as domestic supplies. Consequently, the total tax paid in relation to a supply is determined by the rules applicable in the jurisdiction of its consumption and all revenue accrues within the jurisdiction where the supply to the final consumer occurs. To support this contention, reliance is being placed on the decision of the Division Bench of this Court in Commissioner of Service Tax vs. SGS India Pvt. Ltd.2 although SGS rendered in the context of the erstwhile service tax being levied under the Finance Act 1994. It is thus submitted that Section 13(8)(b) is contrary to the fundamental principles of destination-based consumption tax.
(viii) Levy of tax on the export of service by virtue of the impugned provisions is ultra vires Article 246A read with Article 269A and Article 286 of the Constitution. These provisions under the Constitution confer power only on the Parliament to frame laws for inter-State trade or commerce. Such provisions do not permit the imposition of tax on the export of services out of the territory of India by treating the same as a local supply. The Parliament, therefore, could not have enacted Section 13(8)(b) to create and impose a tax on the export of services, being effected out of the territory of India by treating the same as a local supply. Article 286 lays down restrictions as to the imposition of tax on the sale or purchase of goods when in sub-clause (1) 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-(a) outside the State; or (b) in the course of import of the goods, or services, or both into the territory of India, or export of goods or services, or both, out of the territory of India. It is, hence, submitted that the place/destination is required to be recognized. Even the power under sub-clause (2) of Article 286, namely, that Parliament may by law formulate principles for determining when a supply of goods or services, or both, takes place in any of the ways mentioned in clause (1) is sought to be utilized, it cannot be used in a manner which would nullify as to what is provided by sub-clause (1) of such Article. These articles of the Constitution make it clear that it was not permissible for the Parliament to impose a tax on the export of services out of the territory of India by treating the same as a local supply. Hence, Section 13(8)(b) is ultra vires Articles 246A and 269A of the Constitution.
(ix) The expressions “export” and “import” have not been defined in the Constitution and hence would be of wide connotation as admittedly when there is a supply of services from India to a country outside India, it is an export of service in terms of Section 13(8)(2). Thus, the export of service is required to be given its ordinary meaning. Such interpretation would lead to the conclusion that no State has the authority to levy a local tax on the export of services. Once the supply takes place outside the State of Maharashtra during the course of export by virtue of Section 13(8) (b) read with Section 7(5) of the IGST Act, a clear export of service is deemed as a local supply.
(x) The levy is arbitrary, unreasonable and discriminative and, hence, violative of Article 14 of the Constitution. It is submitted that the levy does not provide a level playing field to the petitioners vis-a-vis other exports of services. It creates an unfair advantage for foreign customers to set up a liaison office in India at the cost of the petitioners. Thus, all service providers like the petitioners are required to be placed equally. However, this is not the case with Service providers like marketing agents, marketing consultants, management consultants, market research agents, professional advisors, etc., who provide similar services. However, the said services would not be subject to GST in terms of section 13(2) of the Act. Despite having satisfied all the conditions of section 13(2) read with section 2(6) of the IGST Act, by virtue of exception under section 13(8)(b), the services provided by the petitioners are subjected to GST. Thus, the levy is unreasonable and arbitrary and without any basis. It is submitted that a separate provision can be struck down if it is arbitrary or unreasonable. It is also well settled that tax laws are not outside Article 14, as Article 14 applies to Government policies as well.
(xi) Article 269A provides for the levy and collection of goods and service tax in the course of inter-State trade or commerce. Sub-clause (1) thereof provides that GST on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India. Further 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. The submission is that the Constitution only grants power to the Parliament to frame laws for inter-State trade or commerce. In other words, the rules for determining inter-State trade or commerce would not permit the imposition of tax on the export of services out of the territory of India by treating the same as a local supply. It is for such reason that Section 13(8)(b) is ultra vires Article 246A and Article 269A of the Constitution.
(xii) Even otherwise, Article 286 lays down the restrictions as to the imposition of tax on the sale or purchase of goods, as clause (1) of Article 286 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 (a) outside the State or (b) 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. There is thus a prohibitive bar. It is submitted that the provision is couched in the negative. Sub-clause (2) provides that Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1). The expression “export” and “import” have not been defined under the Constitution and hence, would be of wide construction. It is submitted that admittedly, there is a supply of service from India to outside India. It is an export of service in terms of section 13(2). It is an export of service in terms of the ordinary meaning of the term export under the Constitution. Thus, no State has the authority to levy a local tax on the export of services. The supply takes place outside the State of Maharashtra during the course of export. The IGST Act, by virtue of section 13(8)(b) read with section 7(5), has deemed the export of service to be a local supply. This is a violation of Article 286(1), as Central legislation cannot authorize the State to collect the tax which itself is prohibited by the Constitution. Thus, the legislation to such an extent is clearly a colorable legislation. In support of such contention, reliance is placed on the decision of the Supreme Court in State of Travancore-Cochin and Others vs. The Bombay Co.Ltd.3, Central India Spinning & Weaving and Manufacturing Co. Ltd. The Express Mills Nagpur vs. Municipal Committee Wardha4.
(xiii) The levy is ultra vires Article 245 of the Constitution. It is submitted that the question that arises is whether the Parliament is empowered to enact laws in respect of ‘extra-territorial’ aspects or causes that have no nexus with India and furthermore could such laws be bereft of any benefit to India. The submission is that the answer would have to be emphatic no. In supporting such submission, reliance is placed on the decision of the Supreme Court in GVK Industries Limited vs. Income Tax Officer & Anr5.
(xiv) There could be instances where the supplier of the goods (say, in Germany) and the buyer of the goods (say, in Singapore) are both outside India. Such a transaction would be subject to GST, in the hands of the petitioner by virtue of Section 13(8)(b). Also, exemption from payment of GST provided to such transactions does not validate the levy.
Section 13(8)(b) is ultra vires the charging section
(xv) Section 13(8)(b) of the IGST Act is a provision for the levy and collection of tax on the inter-State supply of goods and services. Section 1 of the IGST Act provides that it shall extend to the whole of India (except the State of Jammu and Kashmir). Section 5 is the charging section. It provides that there shall be levied IGST on all inter-State supplies of goods or services or both. However, the proviso states that IGST shall be levied on goods imported into India, in terms of section 3 of the Customs Tariff Act.
(xvi) In the above context, it is submitted that considering the scheme, scope and object of the provisions of section 7 to 13 of the IGST Act, it is evident that the same provides for the levy of IGST on inter-State supplies. Import and Export of services have been treated as inter-State supplies in terms of section 7(1) and section 7(5). However, section 13(8)(b) seeks to run contrary to the scheme of the Act and deem an inter-State supply as an “intra-State” supply. It is submitted that hence, the said provision is ultra vires the charging section and the provisions of the CGST Act and the MGST Act.
(xvii) Article 265 of the Constitution provides that no tax can be collected without authority of law. Hence, the doctrine of pith and substance applies. For deciding the true character and nature of a particular levy, with reference to legislative competence, the court has to look into the pith and substance of the legislation. Reliance is placed on the decision of the Supreme Court in Gujarat Ambuja Cement Limited vs. Union of India6.
Section 13(8)(b) is ultra vires Section 9 of the CGST Act and MGST Act
(xviii) Section 9 of the CGST Act, being the charging section, provides for the levy of CGST on all intra-State supplies of goods or services or both. Such levy cannot be extended to cross-border transactions i.e. export of services. Sub-section (2) of section 8 of IGST Act, 2017 provides that where the location of the supplier and place of supply of service is in the same State or Union Territory, the said supply shall be treated as ‘intra-State supply’. It is submitted that by an artificial mechanism, where the location of the recipient is outside India, the place of supply is being treated in India by the impugned provision. The same is beyond the charging section. Though ordinarily, courts would not question legislative wisdom, however, if shown that the provision is contrary to the parent act or charging section, it can be struck down. Even legislative policy has to conform to the Constitution.
Violation of the right to carry on business viz. Article 19(1)(g) of the Constitution
(xix) By levying CGST and SGST on the export of service, i.e. the service provided by the petitioners to their overseas customers, the respondents have constituted an unreasonable restriction upon the right of the petitioners to carry on trade under Article 19(1)(g) of the Constitution of India. This action of respondent no. 1 would result in the closure of the business of the petitioners. It would encourage foreign service recipients to set up liaison offices in India and escape taxation. Reliance is placed on the decision of the Supreme Court in Bengal Immunity Company vs. State of Bihar7. It is submitted that a similar view has been taken in Himmatlal Harilal Mehta v. State of Madras8.
No Double Taxation is permitted
(xx) It is well settled that any provision which leads to double taxation needs to be struck down. In the instant case, it is submitted that Section 13(8)(b) falls foul of the same vice. The same supply would be taxed at the hands of the petitioners as well as the foreign customer. Following the destination-based principle, it would be an import of service for the foreign service from India and would be taxed at the hands of the importing country. Thus, on the same supply, two taxing jurisdictions would levy VAT/GST. This is specifically why section 13(13) of the IGST Act was enacted i.e. to avoid non-taxation and to avoid double taxation. The import of services by the foreign buyer would be an expense for him. It would, ultimately, form a part of the cost of the goods sold to Indian buyers and thus, the said tax would again be imported into India.
(xxi) It is submitted that the levy of GST would not only amount to Double Taxation but triple taxation since customs duty and/or CVD are already being paid on the imported CIF value of the goods. The landed cost of the costs would, naturally, obviously and legally, include the commission paid to the petitioners. Thus, the very same commission will suffer tax at the hands of the petitioners (CGST + SGST), at the hands of the foreign buyer and hands of the Indian purchaser (importer) (IGST). This is a classic case of double taxation. In this context, reliance is placed on the decision of the Supreme Court in BSNL v. Union of India9 and on the decision of the Gujarat High Court in Mohit Minerals vs. Union of India10 and Adani Power Ltd. vs. Union of India11.
(xxii) The alternate submission as urged on behalf of the petitioner is that Section 13(8)(b) of the IGST Act may be read down to state that the said provision would apply in a case where the tax escapes in both taxing jurisdictions i.e., India and importing country when the said provision would be applicable. This reading of the provision would be in consonance with section 13(13) of the IGST Act as well. It is submitted that this would be equally applicable to Section 13(2) of the Act. In support of this contention, reliance is placed on the decision of the Supreme Court in Sunil Batra vs. Delhi Administration and Ors.12
(xxiii) It is submitted that Section 13(8)(b) is ultra-virus Article 286 of the Constitution for the reason that it is not permissible for the State to impose tax on services when the supply takes place outside the State or in the course of export. It is submitted that Article 286(1) does not employ the words “place of supply”, therefore, deeming fiction cannot be introduced by the impugned provision to empower the State to impose a tax on intermediary services. It is submitted that the impugned provision deems the supply of intermediary services to have occurred within India and treats such services as an intra-State supply thereby leaving state GST.
19. The petitioners have categorically contended that the grievance of the petitioners is in respect of the effect of Section 13(8)(b) categorizing intermediary services which are regarded as ‘export of services’ undertaken by the petitioners, to be an ‘intra-State supply’ for the purposes of the CGST and MGST Act. It is thus their contention that the provisions of Section 13(8)(b) remaining in the IGST Act is stated to be of no harm and injury to the petitioners, as any export of services falling under the IGST Act would fall within the ambit of Section 16 providing for ‘zero rated supply’.
20. On the above contentions, the petitions need to succeed is the submission on behalf of the petitioners.
Submissions of learned ASG on behalf of the respondents
21. It is submitted that the case of the petitioners is premised on the plea that service rendered by them amounts to “export of services”, and that “export of services”, is not taxable and hence the levy on the petitioners as supplier of intermediary services is invalid. It is submitted that such contention is not tenable, as on a plain reading of the averments as made in the petition and the supporting agreements produced therewith would show that the respondents’ case that the services being rendered by the petitioner take place entirely in India, hence, there is no export of service. Three services i.e. soliciting purchase orders, promotion and marketing are all conducted within India though the recipients of the service may be outside India. Thus, on the reading of the petition itself, the services do not amount to export.
22. It is next submitted that even otherwise under the statutory provisions i.e. under Section 2(6) of the IGST Act, an export of service is deemed to be a service that meets the five conditions as mentioned therein. Condition no.3 is the place of supply, whereas condition no.2 is the location of the recipients. The place of supply both in terms of the actual rendering of services is in India, hence, in terms of Section 13 (8) (b) of the IGST Act, the place of supply being the location of the supplier which is in India, hence, there is no export of service in regard to the transactions in question.
23. It is submitted that the plea under Section 13(8)(b) of the IGST Act introduces a deeming fiction would not arise in the instant case, wherein the services are being rendered in India, although the recipients of services are located outside India. Such an issue may arise for determination in a case where for eg. an Australian principal hires an Indian intermediary to render services in a third country like America.
24. The challenge to the constitutional validity of Section 13(8)(b) as raised by the petitioner is purely academic for the reason that such a challenge is premised on the plea that the petitioner is being taxed as an intermediary. The factual foundation, however, depicts a different picture as seen from the averments made in the petition. The averments show that the petitioner is a simplicitor agent. In paragraph 4.4 of the petition, it is averred that the petitioner rendered services “only to the foreign principal”, while so contending the petitioner completely ignores the definition of an ‘intermediary’ as defined under Section 2(13) of the IGST Act, which provides that the intermediary facilitates or arranges services between two or more persons. Thus, although a challenge is of an intermediary being taxed, the factual foundation as seen in the petition is to the effect that the petitioner is an agent simplicitor. Thus, the challenge itself is vague and bereft of particulars, and thus applying the principles of law in V.S. Rice and Oil Mills Vs. State of Andhra Pradesh13 and Amrit Banaspati Co. Ltd vs Union Of India And Ors.14, this Court ought not to delve into the legality and validity of the provisions.
25. The constitutional validity of the impugned provisions would be required to be upheld for the reason that the petitioner is rendering services while being located in India. As the petitioner solicits purchase orders for his foreign customers and undertakes marketing and promoting activities for goods sold by overseas customers in India, hence, on the face of it the services rendered by the petitioner are being rendered in India and not outside India.
26. It is submitted that an intermediary is a distinct category of service provider and is treated as such by the law, since the case of intermediary services there would be two contracts/transactions involved; the first contract is between the intermediary and his client/principal to whom he would render services; and secondly a contract between the principal and his purchaser. In the present case, the question is not of the second transaction but the first transaction which is a transaction/contract of rendering services within India (marketing and promoting) by the intermediary, hence, this would clearly be amenable to tax in India as the contract is of not an extra territorial operation. The reason for prescribing distinct treatment for an intermediary is that the intermediary is acting between two persons the main service provider and the service recipient. He provides services to both persons, though he may have a contractual agreement with only one or both of them. Hence, it may not be feasible to prescribe one person as a recipient of intermediary services, so as to apply a general rule. For such reasons, the services rendered by the intermediary would be taxed as intra-State services and amenable to tax under the provisions of the CGST Act and MGST Act.
Submissions on the provisions.
27. The IGST, CGST, and MGST laws have been framed pursuant to the specific amendment made to the Constitution of India by the 101 st Constitution Amendment. The presumption of constitutionality must be displaced by the petitioner, for which the petitioner needs to establish that the services rendered by them amount to “export of services”. The challenge of the petitioner is premised on a plea that the petitioner is being taxed for services rendered outside India which is unconstitutional, which according to the respondents is an erroneous premise as canvassed by the petitioners, for the reason that Article 245(2) of the Constitution provides that no law made by the Parliament shall be deemed to be invalid on the ground that it would have an extra-territorial operation and by application of such article, a challenge to the validity of the provisions of IGST Act need to fail. In support of such submissions, reliance is placed on the decisions of the Supreme Court in Shri Ram Krishna Dalmia Vs. Shri. Justice S. R. Tendolkar & Ors.15, Government of Andhra Pradesh & Ors. vs. Smt. P. Laxmi Devi16; Union of India & Ors. Vs. Exide Industries Ltd. & Anr.17; A.H Wadia V. Income Tax Commissioner18 ; GVK Industries Ltd. & Anr vs The Income Tax Officer & Anr. (supra). Applying the principles of law as laid down in the above decisions, the approach of the Court in determining the constitutional validity of a statutory provision would be that the Court would be required to examine the existence of legislative power and once such power is found to be present, then the next step would be to ascertain whether the enacted provision impinges upon any rights enshrined in Part III of the Constitution. Considering the scheme of IGST, CGST and the SGST laws, it is evident that these laws function harmoniously and as a part of a well thought of statutory mechanism to tax goods and services. These three statutory laws operate harmoniously but in different spheres, as they lay down as to how supply is to be taxed, the nature of supply and their place of supply.
On Legislative Competence.
28. The Constitutional provisions clearly mandate that the powers are vested with the Parliament to frame laws relating to GST which are wide and untrammelled. Not only the Constitution provides power to the Parliament and Legislatures of every State to frame the law in relation to the goods and services tax, but it authorizes and empowers the Parliament to formulate the principles for determining the place and supply. Article 246A(2), 269A(5) and Article 286 specifically empower the Parliament to make laws to determine the place of supply of goods, or services or both. Article 269A(5) specifically provides that Parliament may, by law, formulate “the principles for 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.” Thus, Article 269A authorizes the Parliament to frame the law in respect of two aspects, firstly, to formulate the principles for determining the place of supply; and secondly, when the supply of goods, or services, or both takes place in the course of inter-State trade or commerce. The power is thus two-fold and specific. This power as vested with the Parliament to determine the supply is unbridled and unrestricted. Even power to determine as to what is inter-State trade is unbridled and unrestricted, even when the phrase “in the course of inter-State trade or commerce” is used. Thus, Article 269A(5) empowers the Parliament by authorising it to make law on what is inter-State supply as also to determine what is not inter-State supply i.e. intra-State supply. It is evident that there can either be inter-State supply or intra-State supply and hence, the power to determine one, would necessarily and concomitantly include the power to determine the other. Any contrary interpretation would lead to an absurd legislative vacuum.
29. Articles 246A and 286 also manifest and grant similar power to the Parliament to frame laws with respect to goods and services tax and determine a place of supply. Alternatively, another way to consider the same would be that there is no prohibition upon the Parliament from doing so in terms of residuary powers granted under Article 248, which provides for the residuary powers of legislation on the subject not mentioned in State or concurrent laws. Although this is subject to Article 246-A. Hence, the Parliament is within its domain to determine the place of supply. Section 13 of the IGST Act which determines the place of supply on service in a certain scenario is within the specific mandate of Parliament as per the provisions of the Constitution. Further, the legislative competence is to be determined with reference to the object of levy and not with reference to its incidence or machinery, as there is a distinction between the object of tax, the incidence of tax and the machinery for calculation of tax. To support such contention, reliance is placed on the decision in Gujarat Ambuja Cement Ltd. vs. Union of India (supra). It is submitted that Section 13(8)(b) is thus validly enacted. Upon applying the provisions of Section 2(64), 2(86) and Section 9 of the CGST Act read with 8(2) of the IGST Act (none of these provisions being challenged) the supplier of services like the petitioners, who are intermediaries, would be taxable as the supply of services by intermediaries is considered as an intra-state supply under the CGST Act and SGST Act.
Other Submissions
30. The petitioners’ contention that there is a conflict between Section 13(2) and 13(8) (6) of the IGST Act, resulting in absurdity in law, is not correct, as there is no such conflict. The reason being under Section 13(2) of the IGST Act, the place of supply shall be the location of the recipient unless the services fall within the ambit of sub-section (3) to (13) of the IGST Act, however, under Section 13(8)(b) of the IGST Act the place of supply in case of intermediary services shall be the location of supplier of services. Hence, on bare reading of these provisions, it is seen that both the sub-sections are clear in their nature and what they provide. GST is a destination-based tax wherein, it is taxed in case of an intra-state transaction where a supplier or recipient of services is located.
31. On the aforesaid premise, it is submitted that the petitions deserve to be dismissed.
Submissions on behalf of the State Government
32. Ms. Jyoti Chavan learned AGP has made submissions on behalf of the State Government. Her first submission is that the principal foreign company had entered into an Agency Agreement with the petitioner, as such foreign party was desirous of selling the goods in India. It is submitted that the commission payable to the petitioner is for a particular item, contract, or buyer, and it may change from time to time by mutual consent, which is also clear from the facts that the invoices raised by the petitioner would show that the petitioner is entitled to commission as per the orders placed by the Indian customers and therefore, the petitioner’s commission depends upon the orders placed by the Indian Customers and thus the services rendered by the petitioner are of the peculiar nature and, therefore, under Section 2(13) of the IGST Act, the petitioner has been classified as “Intermediary”. This classification of the petitioner is a reasonable classification due to the peculiar nature of services provided by him. In fact, it is the petitioner’s case (para 4.7 of the petition) that only on receipt of the payment from the Indian Purchasers the petitioner gets his commission. Therefore, the contentions of the petitioner that the transaction is one of export of services is factually incorrect, as the petitioner is a facilitator. Similar is the position in respect of the petitioner in Writ Petition Lodging No.639 of 2020 (A.T.E. Enterprises Private Limited vs. The Union of India & Ors.)
33. In so far as the legal position is concerned, it is submitted that before the Constitution of 101 st Amendment Act, 2016 and more particularly, prior to the 6th Constitution Amendment Act 1956, the State legislature under Article 246(3) had exclusive power to make a law for the State or any part thereof, with respect to any matters enumerated in List II in the Seventh Schedule. Further, before the Constitution of 6th Amendment Act 1956, sub-clause 4 of Article 246 empowered the Parliament to make laws in respect of any matter for any part of the territory of India not included in a State List, notwithstanding that such matter is a matter enumerated in the State List. Thus, the State legislature under Entry No.54 of List II in the Seventh Schedule had powers to levy taxes in respect of the sale or purchase of goods other than newspapers. The power of the State to levy tax was further subject to the provisions of Article 286. It is submitted that Article 286 sub-clause (1) barred the State from imposing tax on the sale or purchase of goods that took place outside the State (Clause 1(a)) and in the course of the import of the goods into or export of the goods out of, the territory of India (Clause 1(b)). However, sub-clause (2) of Article 286 empowers that the Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Clause(1) of Article 286. Thus, the Parliament had the power to make a law to determine the principles of what constitutes sale or purchase of goods outside the States and also what are Imports and Exports.
34. It is submitted that prior to the 101st amendment, the power of the State Government and Central Government to levy taxes germinated in accordance with entries in the State list and Union list under Article 246, namely Entry No.54 (State List) and Entry Nos.92-A, 92-B & 92-C Union List.
35. It is submitted that the 101st amendment to the Constitution has brought a key change to the powers of the Central Government and State Government to levy taxes. The following changes were brought about. The Central Government and the State Government were granted simultaneous powers to levy taxes, by the introduction of Article 246-A, and by introducing Article 269-A, the Union has derived power to levy inter-State tax on supply of services. By virtue of Entry No.54 of the State List, which was amended to include only five goods, and Entry No.92-C of the Union List, which pertains to taxes on services, came to be deleted. Also, by 101st amendment, Articles 246, 248, 249, 250, 268, 270, 286 & 366 and the entire Article 268-A, which pertains to service tax levy by the Union and collected and appropriated by the Union and State was deleted. The said changes in the Constitution have resulted in bringing about the following position:-
i) The concept of one nation one tax was introduced by this amendment and the Goods and Service Tax was introduced;
ii) Both the Union of India and State Government derived simultaneous powers under Article 246-A to levy Goods and Service tax. This tax is defined under Article 366 (12-A). The Union of India has enacted the CGST Act under Article 246-A and the State has enacted the MGST Act under Article 246-A.
iii) Entry No.54 of the State List was amended to include five goods, similarly Entry No.92 (C) was deleted from the Union List and Article 246-A and Article 269-A were introduced respectively.
36. It is submitted that Article 269-A is in respect of the levy and collection of Goods and Service tax in the course of inter-State Trade and Commerce. Under Article 269-A(5), the Parliament has analogous powers as contained in Article 286(2). The Parliament, under Article 269-A, is powered by law to formulate the principles for determining the place of supply and when a supply of goods or services or both take place in the course of inter-State Trade or Commerce. The source of power of Parliament to enact the IGST Act is under Article 269(A). Article 269(5) specifically empowers the Parliament to formulate for determining the place of supply and when the place of supply of Goods and Services or both takes place in the course inter-State Trade and Commerce. Thus, the Parliament has power to determine what is a place of supply under the IGST Act, under Article 269-A, and also under Article-286. The Parliament thus has rightly, in the exercise of its power, enacted Section 13(A), (B) of the IGST Act, determining the place of supply in respect of “Intermediary” services.
37. It is submitted that the contention of the petitioner that only in the case of “Intermediary” service provider, there is a 360 Degree deviation on the incidents of levying of tax, and hence it is ultra vires to Articles 14, 19, 245, 246-A, 269-A & 286 is without any substance as “Intermediary” services provider is a separate class of services provider.
38. Furthermore, Section 12 of the IGST Act, in sub-section (2)(ii), determines that the place of supply of services will be the location of supply of services and in other cases, where the service providers are not specified in sub-sections (3) to (14) of section 12 and where the supply is not made to the location of the registered person or the location of the recipient is not on record. Thus, Section 12 of the IGST Act provides that in relations to the incidents as contained herein, the location of the supplier of services shall be the place of supply.
39. The IGST Act, though enacted for levy and collection of tax on the inter-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto, provides for what is inter-State supply under Section 8 and under Section 13, which provides the place of services where the location of supplier or location of recipient is outside India. It is submitted that neither the CGST Act nor the MGST Act defines what is inter-State supply of goods or services, however, Sections 2(64) and Section 2(65) define “Intra-State supply of goods” and “Intra-State supply of services”. Thus, Sections 2(64) and 2(65) of both the CGST Act and the MGST Act are the bridging provisions to determine what is inter-State supply, and Section 9 of both the CGST and the MGST Act are the charging Sections for the levy of inter-State tax.
40. It is submitted that once the Parliament has legislative Competence to enact the provisions of law to determine as to what is the place of supply and in exercise of the said powers, the Parliament has enacted Section 13(8)(b) providing that for “Intermediary” services, the place of business is location of the supplier, when the recipient is outside India, the same cannot be said to be ultra vires the provisions of the Constitution.
41. It is submitted that prior to the 101st Amendment to the Constitution. The incidence of tax, and the levy of tax in respect of Union of India and the State were distinct incidences, however, with the introduction of Article 246-A, both the Union of India and State are given simultaneous powers, and therefore the reliance of the petitioner to pass incidences of the manner of levy of the taxes prior to introduction of the GST regime will not hold any substance.
42. It is next submitted that petitioners are not fulfilling the requirement of export as defined under Section 2(6) of the IGST Act as all 5 requirements are required to be fulfilled, and even in the absence of one of the same, it cannot be termed export of service.
43. It is next submitted that once a class of person can be distinguished by the test of reasonable classification and once the Parliament has legislative competence to provide for a distinction between different classes, the impugned provision cannot be violative of the provision of either Article 14 or Article 19(1)(g) of the Constitution. It is submitted that being a distinct class of “Intermediary” service provider, the petitioners cannot contend that there is a violation of Article 14 of the Constitution.
44. In light of the above submission, it is submitted that Section 13(8)(b) is Constitutional, valid.
Analysis & Conclusion
45. At the outset it is required to be observed that the Division Bench has not framed any formal question to be answered by the referee Judge, as a result of the disagreement between their Lordships.
46. However, on the conspectus of the contentions raised on behalf of the parties and in the context of the difference of opinion between their Lordships of the Division Bench, and as agreed at the Bar, the primary question which is required to be decided by this Court, is whether Section 13(8)(b) of the IGST Act 2017 is ultra vires the Constitution and the provisions of the IGST Act or otherwise.
47. At the inception, as to what is the nature of the Goods and Service Tax, which is the subject matter of the three enactments, namely the IGST Act, the CGST Act and the MGST Act, would be required to be discussed.
48. The concept of the GST as succinctly explained by the learned author Shri Avinash Poddar, C.A. can be noted.
Goods and Service tax (GST) or Value Added Tax (VAT) is a form of consumption tax levied on goods and services. It is categorized as an indirect tax, as it is not imposed on income or wealth but on the consideration for the supply of goods and services. The liability to discharge such tax is generally with a manufacturer or seller or service provider in the value chain. However, the incidence of the tax is borne by consumers as the tax is passed on along with the price charged by the suppliers. The GST/VAT design of imposing a tax on value addition at each stage of production and distribution and the set-off of taxes paid on purchases by each supplier in the supply chain, except the final consumer, ensures the neutrality of tax. Mr. Maurice Laure, Joint Director of the France Tax Authority, is considered to have built upon the idea of GST/VAT and was the first to introduce such taxation system in France on April 10, 1954. Manufacturing-level VATs were introduced shortly in the 1960s. Brazil also introduced a traditional VAT by the fiscal reform of 1965 that applied at all stages of production. It is said that countries choose to introduce GST/VAT as the preferred form of consumption tax for different reasons, depending on their pre-existing tax systems. In the case of the European Union, which was formerly known as European Economic Community (EEC), adopting VAT was a pre-condition for its membership. The European Union adopted VAT to replace turnover taxes on account of the ease of handling cross-border transactions, facilitating the development of common market, and reducing trade and economic distortions. Another reason for countries adopting GST/VAT was to increase revenue from general consumption to cut down rate of income taxes. Revenue neutral approach was another reasons (Norway, New Zealand etc.) and some other countries moved to GST/VAT to consolidate and modernize their existing tax structure, comprising multiple Sales Taxes at different rates. This increasing trend towards GST/VAT can be attributed to key factors such as (i) eliminates weaknesses of single stage taxation system, such as cascading and compounding effect; (ii) GST/VAT preserves tax neutrality by taxing the Value Added Tax by each factor equally; (iii) Consumption tax is a large and more stable source of revenue; and (iv) It is potentially self-enforcing in nature.
At present, it is stated that more than 162 Countries across the globe have implemented GST/VAT system of taxation. One of the key principles of GST is that as a general rule, place of taxation of goods and services is determined based on the “destination principles”. Exports are to be taxed at zero rate and imports are to be taxed under reverse charge i.e., tax is payable by the recipient of imported goods/services. As per the destination-based consumption principle, regardless of the fact that the tax shall be collected by the supplier, the same is retained by the State in which the goods or services are finally consumed. By such principle, wherever there is an inter-State supply, whether of goods or services, the tax also travels along with the goods or services.
49. On the concept of GST, being a destination-based tax, as founded on the principle of Value Added Tax (VAT), a reference to the decision of the Supreme Court in All India Federation of Tax Practitioner (supra) is required to be made, when the Supreme Court observed that VAT is a destination based consumption tax, logically leviable only on services provided within the country. The following are the observations of the Supreme Court:-
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 additioin 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.
17. As stated above, the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of Service Industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of Finance Act, 1994, the Central Government derive d its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note, that service tax is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client.
(emphasis supplied)
50. The petitioners have placed reliance on the 139th report of the “Department-Related Parliamentary Standing Committee On Commerce” on ‘Impact of Goods and Services Tax (GST) on Exports’, presented before Rajya Sabha and Lok Sabha on 19 December 2017, being a report made on the place of supply of services observing that Section 13(8) of the IGST Act needs to exclude “Intermediary services”, and make it subject to default Section 13(2), so that benefit of Export of services would be available. The following are the observations in the report:
“PLACE OF SUPPLY OF SERVICES
15.1 The Committee noted that service provider providing services to overseas suppliers of goods earn commission in convertible foreign exchange. IGST @ 18% is leviable on such commission because the Government does not recognize their services as “Export of Services”. Section 13(8) provides that Place of Supply of services will be the location of service supplier and not the location of overseas customers. Even in cases where both supplier and buyer are located outside India, commission earned for such transaction also attract IGST @ 18%.
15.2 In view of the fact that GST is a destination based consumption tax, the Committee is of the view that following steps may be taken:
