In multiple situations, the GST Law pre supposes a deeming fiction for a particular place to be the place of supply for levying tax. Consequently, it may follow in certain situations that tax is sought to be levied when in effect, no tax ought to be paid.
One such case is that of intermediary services under the GST law. When an intermediary in India renders services to a principal located abroad and earns money in convertible foreign exchange, the Indian intermediary is liable to pay GST in India.
This remains contrary to the general principle wherein place of supply is deemed to be the place of recipient. When the Indian intermediary is made liable to pay GST in India for the services he renders, he will pass on the burden of the same to his foreign principal as well, in turn inflating the bills of the principal located abroad. Such instances might force foreign multinationals and businesses to relocate from India to remain cost effective in the modern-day business scenarios.
This article is an attempt to analyze the constitutional validity of such a levy under the GST Law.
Section 2(13) of the IGST Act, 2017 defines intermediary as a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both between two or more persons.
Section 2(6) of IGST Act defines “export of services” as a supply of any service when :-
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by the Reserve Bank of India]
Overseas foreign customer falls within the definition of “recipient of supply” in terms of Section 2(93) of the CGST Act, 2017 read with definition of “location of recipient of services” under Section 2(14) of the IGST Act, 2017.
In accordance with Section 13(2) of the IGST Act, Place of supply of services where location of supplier or location of recipient is outside India shall be the location of the recipient of services.
Section 7(5) of the IGST Act prescribes that supply of services shall be treated to be a supply of services in the course of inter-state trade or commerce when the supplier is located in India and the place of supply is outside India.
Thus, in the case of intermediary services provided by an Indian supplier to a foreign recipient the place of supply prima facie appears to be the location of the service recipient abroad.
Therefore, intermediary services provided by an Indian supplier to a foreign recipient should technically qualify as an “export of service” as defined under Section 2(6) of the IGST Act read with Section 13(2) thereof and must be eligible for zero rating.
But however, in accordance with Section 13(8)(b) of the IGST Act, place of supply of intermediary services shall be the location of the supplier of services, necessitating the mandatory charge of CGST & SGST.
In the case of Dharmendra M Jani vs. Union of India [2021] 127 taxmann.com 730 (Bombay), the constitutional validity of Section 13(8)(b) of the IGST Act, 2017 was challenged before the Bombay High Court.
A split verdict was rendered by the division bench of the High Court and is currently pending.
Justice Ujjal Bhuyan held as follows:-
The Constitution has only empowered the Parliament to frame law for levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply when such supply of goods or services or both takes place in the course of interstate trade or commerce. Thus, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as local supply.
There is an express bar under Article 286(1) of the Constitution, that no law of a state shall impose or authorize imposition of a tax on the supply of goods or services or both when such supply takes place in the course of import into or export out of the territory of India.
In terms of Article 245 of the Constitution, a law which has extra territorial operation cannot directly be enforced in another state but such a law is not invalid and is saved by Article 245(2) of the Constitution. But Article 245(2) does not mean that a law having extra-territorial operation can be enacted which has no nexus at all with India.
Referring to an earlier decision of the Supreme Court in M/s. Electronics Corporation of India Limited Vs. Commissioner of Income Tax, AIR 1989 SC 1707, it was held that unless a nexus with something in India exists, Parliament would have no competence to make the law. Article 245(1) empowers Parliament to enact law for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India.
Levy of GST on an intermediary providing services to an overseas customer would lead to double taxation on the same service. The same supply would be taxed in the hands of the Indian intermediary and following the destination-based principle it would also be an import of service from India for the foreign service recipient and would be taxed in his hands too in the importing country.
The Parliamentary Standing Committee on Commerce in its Report No. 139 on “Impact of GST on exports” has highlighted that in view of the fact that GST is a destination-based consumption tax, the place of supply of Indian intermediaries of goods is recommended to be the location of the service recipient so that intermediary services can be treated as exports or an exemption can be provided to intermediaries.
Intermediary services are certainly a supply of service from India to outside India by an intermediary. Petitioner fulfils the requirement of an intermediary as defined under Section 2(13) of the IGST Act. That apart, all the conditions stipulated in sub-section (6) of section 2 for the supply of service to be construed as export of service are complied with. The overseas foreign customer of the petitioner falls within the definition of recipient of supply in terms of Section 2(93) of the CGST Act 2017 read with section 2(14) of the IGST Act.
It would also be an export of service in terms of the expression “export” as is understood in ordinary common parlance.
However, Section 13(8)(b) of the IGST Act read with Section 8(2) of the said Act has created a fiction deeming export of service by an intermediary to be a local supply i.e., an intra state supply. This is an artificial device created to overcome a constitutional embargo.
From the scheme of the IGST Act, it is evident that the same provides for 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) of the IGST Act respectively. On the other hand, Section 8(2) of the IGST Act provides that where location of the supplier and place of supply of service is in the same state, the said supply shall be treated as intra-state supply.
However, by artificially creating a deeming provision in the form of Section 13(8)(b) of the IGST Act, where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e., India.
Levy of CGST and SGST on export of service by intermediary is arbitrary, unreasonable, and discriminatory. Intermediary is denied a level playing field vis-à-vis other exporters of service. Activities of marketing agents, marketing consultants, management consultants, market research agents, professional advisors providing similar services are treated as exports and not subject to GST in terms of Section 13(2) of the IGST Act. But by virtue of the exception carved out under section 13(8)(b) of the IGST Act, the service rendered by the intermediary despite satisfying all the conditions of section 13(2) read with section 2(6) of the IGST Act would be subject to GST. Therefore, the levy is thus violative of Article 14 of the Constitution of India upholding that the state shall not deny to any person equality before the law.
This runs contrary to the scheme of the CGST Act as well as the IGST Act besides beyond the charging sections of both the Acts.
The extra territorial effect given by way of Section 13(8)(b) has no real connection or nexus with taxing regime in India introduced by GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination-based consumption tax as against the principle of origin -based taxation.
Justice Abhay Ahuja held as follows:-
When there is a specific provision defining intermediary as in section 2(13) of the IGST Act and when intermediary services are specifically dealt with in Section 13(8)(b), the question of application of general provision of section 2(6) of export of services would not arise.
There is no discrimination between the case of an intermediary and that of other exporters of services. The intermediary services rendered are specifically provided as one of the services in addition to banking services and transport hiring services where the place of supply has been provided as the location of the supplier of services as per section 13(8) of the IGST Act. Intermediary has been specifically defined and does not include a person who renders the services for himself.
Therefore, between the intermediary and others there is no discrimination. Section 13(8)(b) would not be hit by Article 14 on this ground. For the same reason, the ground of discrimination, is also not tenable in as much as the Act has specifically provided for intermediaries.
The power to stipulate place of supply u/s 13(8) of the IGST Act, is pursuant to the provisions of Article 269A(5) read with Article 246A(2).
Article 269A(5):- Parliament, may by law formulate the principles for determining the place of supply when the supply of goods or services or both takes place in the course of inter-state trade or commerce
Article 246A(2):- Parliament has the exclusive power to make laws with respect to GST where the supply of goods or services or both takes place in the course of interstate trade or commerce
As per the powers under Article 246A and 269A the parliament by legislation in section 7 (inter-state supply) and section 8 (intra-state supply) of the IGST Act has provided for determination of the nature of supply and in sections 10 to 14 for place of supply. Hence, enactment of these provisions are well within the powers of the parliament.
A plain reading of Article 245 makes it amply clear that Section 13(8)(b) no way violates Article 245 as the impugned section neither seeks extra territorial operation nor seeks to levy tax on the service recipient outside India. All that Section 13(8)(b) does is to provide for place of supply in respect of intermediary services where the service recipient is outside India to be the location of the supplier of services. Accordingly, there is no question of extra territorial legislation in the instant case.
In terms of Article 19(1)(g) of the Constitution of India all citizens shall have the right to practice any profession or to carry on any occupation trade or business.
There is no restriction imposed on the intermediary services of a person. It is the legitimate power of the parliament to enact a legislation within the constitutional framework i.e., IGST Act, 2017 and Section 13(8)(b) thereon. If the submission of the petitioner was to be considered then any tax levied by the Central or State Government would be a restriction to carry on trade under Article 19(1)(g) of the Constitution of India.
The same supply would be taxed by foreign service recipient in his hands in the importing country, is also not really tenable in the eyes of law as IGST Act is not extra-territorial and generally speaking a commission paid by the recipient of service outside India would be entitled to get deduction of such payment of commission by way of expenses and therefore, it would not be a case of double taxation. Moreover, that would depend on the laws of that country . It is also pertinent to refer that the petitioner is providing intermediary services as an intermediary as defined in the IGST Act to the overseas customer and not as an exporter of service.
Reliance upon reports of Parliamentary Committees are external aids to construction to be used only when there is an ambiguity or incongruity in the statute. The validity of the advice which is tendered by a Parliamentary Committee in framing its recommendations for a legislation cannot be subject to challenge before a court of law. The advice tendered is after all what it purports to be i.e., it is advice to the legislating body. The correctness of or the expediency or justification for the advice is a matter to be considered by the legislature and by it alone.
On the same issue, the Gujarat High Court delivered a contrary judgement in Material Recycling Association of India vs. Union of India [2020] 118 taxmann.com 75 (Guj)
In the dissenting judgement, it was noted that power to stipulate the place of supply as contained in Section 13(8)(b) of the IGST Act is pursuant to the provisions of Article 269A(5) read with Article 246A and Article 286 of the Constitution. It was further observed that once parliament has, in its wisdom, stipulated the place of supply in the case of intermediary services be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction.
Upon a conjoint reading of section 2(6) and section 2(13) which defines “export of service” and “intermediary service” respectively, the person who is an intermediary cannot be considered as an exporter of services because he is only a broker who arranges and facilitates the supply of goods or services or both.
There is no distinction between the intermediary services provided by a person in India or outside India. Merely because the invoices are raised on the person outside India regarding the commission and foreign exchange received in India, it would not qualify to be export of services more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India.
There is no deeming provision in Section 13(8) but there is a stipulation by the Act legislated by the parliament to consider the location of the service provider of the intermediary to be the place of supply.
If the services provided by the intermediary is not taxed in India, which is a location of supply of service, then providing such services by the intermediary located in India would be without payment of any tax and such services would not be liable to tax anywhere.
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