The controversy over the services provided by the intermediary to his foreign clients not treated as export of services has finally reached the doorstep of the Chief Justice of Supreme Court. The two member division bench of Bombay High Court could not come to any conclusion and both the judges gave contrary view on the matter. The case of Dharmendra M Jani has reached a very important stage and the call taken by Chief Justice will finally give the view of the judiciary on the matter which has been raging from service tax days.
The petitioner has filed a writ petition in High Court under Article 226 pf the Constitution of India and has prayed for a declaration that section 13(8)(b) and section 8(2) of the IGST Act are Ultra Vires articles 14, 19, 245, 246A, 269A and 286 of the Constitution of India and also Ultra Vires the provisions of CGST Act, 2017, IGST Act, 2017 and MGST Act, 2017. The case is, the petitioner provides services to customers located outside India who are engaged in manufacture and / or sale of goods. Such overseas customers may or may not have establishment in India. However, the petitioner provides services only to the principal located outside India and the amount also is received in convertible foreign currency. The petitioner has to solicit orders for the principal and the goods are supplied directly by the principal located outside India to its customers in India and after the payment is received by the principal, the petitioner gets his commission from his principal located outside India.
Essentially this transaction will be treated as export of service within the meaning of section 2(6) of the IGST Act, 2017.
Section 2(6) of the IGST Act, 2017 defines export of services means 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 of such service has been received by the supplier in convertible foreign exchange (or Indian Rupees wherever permitted by RBI); and
(v) the supplier of service and the recipient of service are not merely establishment of a distinct person.
All the conditions in 2(6) of the IGST Act, 2017 is met by the petitioner, then where is the problem? The problem lies in section 13(8)(b) of the IGST Act, 2017.
Section 13 of the IGST Act, 2017 is applicable to determine the place of supply of services where the location of the supplier or the location of the recipient is outside India. By default, as per section 13(2) of the IGST Act, 2017 “the place of supply except the services specified in sub -sections (3) to (13) shall be the location of recipient of services”.
As per section 13(8) of the IGST Act, 2017 the place of supply of the following services shall be the location of the supplier of services:
(b) Intermediary services
Section 7 of the IGST Act deals with inter-state supply and section 8 of the IGST Act deals with intra state supply. We refer to section 13 of the IGST Act because it is applicable if either the location of the supplier of services or location of the recipient of services should be outside India. Subsection (8) clause (b) deems the place of supply of intermediary service as place where the service is provided, that is the location of the service provider. Now, since as per the deeming provision the place of supply is the location of the service provider, section 8 of the IGST Act becomes applicable, because as per sub section (2) of section 8 of the IGST Act, where the location of the supplier and place of supply of services are in the same State or same Union Territory shall be treated as intra state supply. Such cases CGST and SGST / UTGST needs to be charged.
rounds on which this writ petition was filed:
1. Levy of tax on export of service is ultra vires Article 269A of the Constitution of India. (Article 269A – Levy and collection of goods and service tax in course of inter-state trade or commerce.
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 consumption tax. 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 is violative of Article 14 of the Constitution of India. (Article 14-Right to equality)
5. Levy of CGST and SGST on the export of service 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. (To practice any profession, or to carry on any occupation, trade or business)
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 and agent cannot be burdened with GST.
7. Levy of GST on intermediary will lead to double taxation.
The argument given by the department is that the said provision was in existence from the service tax era and the changes in intermediary services was changed in service tax from 01.10.2014 to bring consistency with respect to the place of supply of goods with services. Though the argument had some merits in pre-GST period but post GST, the goods are anyways taxed based on its movement and there is no requirement to bring the place of supply at par for goods and services. The argument of the department that the value addition of the service provided by an intermediary is at the place where he is located is also not valid and tenable. Further argument by the department that this kind of arrangement will encourage manufacturers outside India to start domestic manufacturing and will boost Make in India program also is totally out of the subject and understanding.
The petitioner has challenged that he has been denied a level playing field vis-à-vis other exporters of services like marketing consultants, management consultants, market research agents, professional advisers etc., who provide similar services.
The petitioner also submits therefrom that levy of GST on intermediary services is contrary to the fundamental concept of GST as a destination-based consumption tax. Petitioner asserts that for taxing a service it is not the place of performance but the place of consumption which is relevant. 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.
Further arguing 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. Article 286 prohibits state to levy any tax on the supply of goods or services in course of import or export out of India. No state has authority to levy local tax on export of services. Section 13(8)(b) of the IGST Act has deemed an export of service as local supply which is in violation of Article 286(1). The petitioner has also challenged the charging section 9 under CGST / MGST Act and section 5 of the IGST Act. Section 9 of the CGST/MGST Acts gives power to tax intra state supplies of goods or services or both and section 9 of the IGST Act gives power to tax the inter state supplies. When Section 9 of the CGST/MGST Acts does not give power to tax inter state supplies, then the deeming section 13(8)(b) cannot give such powers.
The petitioner has also challenged that such provisions in law have imposed an unreasonable restriction upon the right of the petitioner to carry on trade under Article 19(1)(g) of the Constitution. Such provision would result in the closure of the business besides encouraging foreign companies to set up liaison office in India and escape taxes.
Finally, the petitioner submitted that section 13(8)(b) of the IGST Act leads to double taxation, firstly it will be taxed in India under this provision and also considering the principle of destination-based consumption tax followed in most parts of the world, it would be taxed to the service recipient as import of service.
The Additional Solicitor General representing the department raised some interesting points. It submitted that there is always a presumption in favour of constitutionality of a statute. It is a settled proposition that for declaring a statute as unconstitutional, Court has to see whether there is a legislative competence to enact the statute or not and whether the impugned provision is violative of any fundamental rights enshrined in Part III of the Constitution or not. Elaborating further he submits that no statute can be stuck down as arbitrary unless it is unconstitutional.
After the arguments from both the sides, the two-judge division bench of Bombay Hight Court could not come to conclusion and Hon. Judges Shri Abhay Ahuja and Shri Ujjal Bhuyan passed contrasting judgements. On 9th June 2021 Shri Ujjal Bhuyan passed favourable order holding section 13(8)(b) of the IGST Act as ultra vires the said Act besides being unconstitutional. On 16th June 2021 another Judge Shri Abhay Ahuja passed his order and very beautifully presented and deliberated his views and concluded that section 13(8)(b) read with section 8(2) of the IGST Act is constitutionally valid and is not ultra vires.
Important highlights of his order are as below:
1. The Court should ordinarily defer to the wisdom of the legislature unless it enacts a law about which there can be no manner of doubt about its unconstitutionality.
2. Article 246A is a non obstante power to anything contained in Article 246 and Article 254 and will override the general powers, even if a subject-matter of taxation is contained in the Seventh Schedule.
3. When there is a specific provision defining intermediary services as in section 2(13) of the IGST Act and intermediary services are specifically dealt with in section 13(8)(b) of the IGST Act the question of application of general provision of section 2(6) of export of services does not arise. Specialia derogant generaliabus, which means when special provisions derogate from general, but generalia specibus non derogant which means general provisions does not derogate special provisions, then we should follow special provisions.
4. Section 8 deals with nature of supply and section 13 deals with place of supply and no fault can be found with the provision by artificially attempting to link it with each other and demonstrating constitutional or legislative infraction.
5. On the argument to the petitioners grievance on violation of Article 14 of the Constitution for not being treated as export of service thereby discriminating with other exporters, the Hon. Judge said that the said service of intermediary is provided along with other two services and since petitioner who is providing intermediary service to recipient outside India is on different footing, the objective is to prevent revenue from escaping.
6. On the argument whether section 13(8)(b) Ultra Vires Article 19(1)(g), he says GST is a tax on supply of goods and services and taxation is on supply.
Now the fate of this case lies with the Chief Justice of India and after hearing the orders of both the Hon Judges, it will be very interesting to watch out for how the case will unfold.