“Explore the Bombay High Court’s verdict on GST Intermediary Services in the case of Dharmendra M. Jani. Detailed analysis of orders dated 09.06.2021, 17.06.2021, and 18.04.2023.”
Analysis of the Bombay High Court Order with different views by Judges in the case of Dharmendra M. Jani Vs Union of India And Others GST on ‘Intermediary Services’ and Constitutionality of section 13(8)(b) of IGST Act, 2017. Also Read
Order Dated 09.06.2021 – GST: Validity of Section 13(8)(B) ‘Intermediary Service’ – HC Judges Differs
Order Dated 17.06.2021 – Constitutionality of section 13(8)(b) of IGST Act, 2017 | Bombay HC
Order Dated 18.04.2023 – Bombay High Court on validity of Section 13(8)(b) & Section 8(2) of IGST Act
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Analysis of the HC Order with different views by Judges in the case of Dharmendra M Jani on “Intermediary Services”: |
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| W.P No 2031 OF 2018 Dated 17-06-2021 | W.P No 2031 OF 2018 AND W.P No 639(2020) Dated 18-04-2023 | ||
| Honourable Judiciaries | First Judge Ujjal Bhuyan | Second Judge J. Abhay Ahuja | Third Judge (Chief Justice) G.S Kulkarni |
| Appellants | Dharmendra M. Jani, Proprietor of M/s. Dynatex International | Dharmendra M. Jani, Proprietor of M/s. Dynatex International. | 1. Dharmendra M. Jani, Proprietor of M/s. Dynatex International.
2. A.T.E Enterprises Pvt Ltd |
| Respondent | Union of India & Others | Union of India & Others | Union of India & Others |
| IGST Act- Section 13(8)(b) | Unconstitutional | Constitutional | Constitutional |
| Section 2(6) Vs Section 2(13) | Export of service cannot be deemed to be intra-State supply (Section 2(6) is applicable | Specific provision prevail over general provision and section 2(13) is applicable and not section 2(6).
(Para 106) |
Section 2(6) is satisfied and there are no contradictions factually, this service can be regarded as either intra state supply or interstate supply. (Para 60) |
| Article 14 Equality before law Level playing field | Similar services like management consultants, Marketing agents, professional advisers who provide similar service are treated as export. Hence violates Article 14
(Para Number 16.5) |
Intermediary is specifically defined. Hence does not violate Article 14.
There is a reasonable classification founded on intelligible differentia which has a rational relation/nexus to the object sought to be achieved. (Para 110 to 110.13) |
The validity of the impugned provisions on the touchstone of Articles 14 and 19(1)(g) of the constitution not to be burdened on the principles of constitutional provisions which is well settled.
(Para 111 and Para 112) |
| Article 19(1)(g) Right to carry the business | Section 13(8)b results in violation of carry-on business – Petitioner contention are there but no contra submissions by the judge-
It will result in foreign investments to set up liaison office in India. (Para Number 16.1.0) |
It is a legitimate power of the parliament to enact IGST Act including Section 13 (8)(b).
How it will be considered as closure of business. There are no restrictions imposed. If the submission of 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. (Para 111.3 to 111.7) |
The validity of the impugned provisions on the touchstone of Articles 14 and 19(1)(g) of the constitution not to be burdened on the principles of constitutional provisions which is well settled.
(Para 111 and Para 112) |
| Article 246A | Article 246A(1) empowers the Parliament and the State to make law on GST imposed by Union and State and
Article 246A(2) empowers only Parliament to make law with respect to GST on supply in the course of inter-state trade or commerce. Hence it violates Article 246A. |
Article 246A(2) empowers only Parliament to make law with respect to GST on supply in the course of inter-state trade or commerce. Hence it does not violate Article 246A (2).
(Para 91) |
Thus, by virtue of Clause (2) of Article 246-A, it is further significant that the State legislature would not have the power to make laws with respect to goods and services tax, where the supply of goods or services, or both takes place in the course of inter-State trade or commerce.
Parliament does not have legislative competence nor does the State Legislature has the legislative competence to tax export of services under the CGST and the MGST Acts, which in disputedly pertain to intra-State supply of goods and services. (Para 55 & Para 60) |
| Article 269A | Article 269A provides for levy and collection of GST, in the course of inter-state trade or commerce. Explanation specifically provides import is in the course of inter-state trade or commerce, but nothing about export.
Article 269A(5) empowers the Parliament to specify place of supply in the course of inter-state trade or commerce. It does not permit imposition of tax on export of services out of the territory of India by treating the same as a local supply. Hence it violates 269A. |
The import into India has been deemed to be inter-state trade or commerce, that under Article 269A, in no way would take away the power of the Parliament to stipulate any other type of supply to be a supply in the course of inter-State trade or commerce; firstly because the Explanation deeming import to be inter-state is restricted to clause (1) of Article 269A and secondly clause (5) (which not being bound by the Explanation to clause (1) of Article 269A), empowers the Parliament to legislate on principles for determining the place of supply and when the supply would be in the course of inter-state trade or commerce. A conjoint reading of Article 269A(1) with Article 269A(5) exclusively empowers the Parliament to make law on what is inter-state supply and what is not.
(Para 103) |
By virtue of Clause 269(5), the Parliament is empowered by law to 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. (Para 56)
In regard to levy of goods and services tax on supplies in the course of inter-State trade or commerce, is one such aspect, with which it would be the Parliament which would have the legislative competence, which is clear from the provisions of Clause (1) of Article 269A read with Clause (5) thereof. (Para 95) |
| Article 286 | 286(1):- State cannot impose tax on supply which takes place outside the state or in the course of import into the territory of India or export out of the territory of India.
Article 286(2) provides Parliament may by law formulate principles for determining a supply of goods or of services or both in any of the ways mentioned in clause (1). No state has authority to levy local tax on export of services. Section 13(8)(b) of the IGST Act has deemed an export to be a local supply. This is violation of Article 286(1). |
As per the powers under Article 246A, 269A and 286 the Parliament by legislation, in Sections 7 (inter-State supply) and 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 is within the powers of the Parliament. (Para 106) | The contention of the petitioners appears to be correct that the transactions in question of the petitioners are in fact a transactions of export of service, as the recipient of service is the foreign principal.
(Para 60) |
| Article 245 | A law which has extraterritorial 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 clause (2) does not mean that law having extra-territorial operation can be enacted which has no nexus at all with India. Unless such contingency exists, Parliament shall be incompetent to make law having extra-territorial operation. (Cases of GVK Industries Limited- Article 245 does not mean that law having extraterritorial operation can be enacted which has no nexus at all with India. Unless such contingency exists, Parliament shall be incompetent to make law having extra-territorial operation.) | The impugned section in no way violates this provision as from the plain language of the said section it is clear that the same do not seek extra territorial operation nor seek to levy tax on 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. Therefore, there is no question of extra territorial legislation here.
(Para 107) |
In the context of the present proceedings, the reliance on behalf of the respondents on the decision of the Supreme Court in G. V. K. Industries Ltd. Vs. Income Tax Officer (supra) is not well founded for more than one reason. Firstly, there can be no doubt that no law made by the Parliament would be invalid on the ground that it has an extraterritorial operation as Clause (2) of Article 245 would provide. The present case, in my opinion, does not involve any extra-territorial operation of law made by the Parliament inasmuch as the subject matter of legislation purely pertains to inter-State trade and commerce in respect of which goods and services tax can be levied in the spheres as covered by the legislation. Further, in the context of the transaction in question to say that a law has been enacted to have an extra-territorial operation, would be a complete misnomer inasmuch as the IGST Act under Section 13(8)(b) has treated the transaction as undertaken by the intermediary who are dealing in export of services as an intra-State trade and commerce. It is, therefore, difficult to accept the proposition as canvassed on behalf of the respondents that the IGST Act is a law having an extra territorial operation, and therefore, would fall within the purview of Clause (2) of Article 245 insofar as its validity is concerned.
(Para 105) |
| Make in India Programme | Levy of GST on export of services by intermediary has created an exodus of intermediaries to places like Singapore, Dubai, Hong Kong etc. thereby depriving the central government not just GST but also income tax, valuable foreign exchange and employment to thousands of people. | It is however clarified that no view is being expressed with respect to the claims or counterclaims on the Make in India program referred to above as that is clearly a matter of the policy of the Government of India, which needless to say is the prerogative of the Government.
(Para 110.10) |
No comments |
| Sec 9 of CGST Act, Sec 5, sec 7, Sec8(2) of the IGST Act, | Sec 9 of the CGST Act provides for levy of GST on all intra-State supply. Sec 5 provides for levy of GST on all inter-State supply. Section 8(2) provides that where the location of the supplier and place of supply is within the same State/UT, the supply shall be 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., in India. This runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts. | Sec 13(8)(b) and Sec 8 are there for different purposes. One is to determine the place of supply and other one is to decide the nature of supply. The recipient is located outside India, hence sec 13 is applicable and sec 8(2) is not applicable. Hence these provisions are intra-virus the Articles 246, 246A, 269A.
(Section 9- Para 114 Section 5- Para 113 Section 7- Para 112) |
Section 5 of the IGST Act is the charging section providing that there shall be levied a tax called the integrated goods and services tax on all “inter-State supplies” of goods or services or both, inter alia as provided under the said provision. Section 7, providing for “inter-State supply”, falls under Chapter IV of the IGST Act, being the chapter pertaining to “Determination of Nature of Supply”. It provides that subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in:
(a) two different States, (b) two different Union territories or (c) a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce. In the context of the present proceedings, we are concerned with sub-section (5)(a) of Section 7, which provides for the supply of goods or services or both, when the supplier is located in India, and the place of supply is outside India; it shall inter alia be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Thus, a foreign transaction by a legal fiction for the purposes of the IGST Act is treated as an inter-State trade or commerce. Hence, necessarily by virtue of sub-section (5) of Section 7, a transaction as in question wherein the supplier (petitioner) is located in India and the place of supply of goods or services or both is outside India, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. (Para 65) Bare reading of Section 9 of the CGST Act would indicate that subject to the provisions of sub-section (2) thereof, there shall be levy of a tax called the Central Goods and Services Tax on all “intra-State supplies of goods or services or both”. By virtue of Section 2(65) of the CGST Act ‘intra-State supply of services’ is required to have the same meaning as assigned to it in Section 8 of the IGST Act. As noted above, Section 8 of the IGST Act provides for ‘intra-State supply’. Section 8(2) of the IGST Act provides that subject to the provisions of Section 12, the supply of services where the location of the supplier and the place of supply of services are in the same State or same Union Territory shall be treated as intra-State supply. Sub-section (2) of Section 8 recognizes the effect of Section 12(2) namely that the place of supply of services made to any person other than a registered person shall be the location of the supplier of services and hence, for transaction of such nature, the supply of services becomes an intra-State supply. The consequence brought about by such provision is that by mere inclusion of Section 8 of the IGST Act within the provisions of Section 2(65) of the CGST Act, which defines ‘intra- State supply of services’, a legal effect which emerges is that not only Section 8 of IGST Act, but also the accompanying provisions, namely, Section 12 relating to the place of supply of services, stands embedded, Implanted and/or incorporated and are deemed to form an integral part of the CGST Act. (Para 75) |
| Section 13(8) Vs Section 12(2)b(ii) | No comments | No comments | None of the provisions under the IGST Act can be considered to be meaningless insofar as they are applicable within the framework of the IGST Act.
Thus, applying the parameters of Section 13(1) read with sub-Section 8(b) of the IGST Act insofar as ‘intermediary services’ are concerned, for the purposes of the IGST Act, the place of supply of services in regard to the transaction of export of services shall be the location of the supplier of services namely the location of the intermediary. Hence, by a legal fiction, although the location of the recipient of services is outside India i.e., the transaction itself is consumed outside India, by such fiction, it has been provided that for the purpose of IGST Act, the place of supply shall be the location of the supplier of the intermediary services. By virtue of Section 13(1) read with sub-section 8(b) of the IGST Act, a corresponding effect to such transaction stands recognized by operation of Section 12(2)(b)(ii) of the IGST Act, that for such transaction, the place of supply of services shall include the location of the supply of services. On a cumulative reading of Sections 13 and 12 of the IGST Act, as can be instantly noted, by virtue of Section 8(2), necessarily such supply becomes an ‘intra-State supply’. This is the second fiction which is created on a cumulative effect of Section 13(8)(b) read with Section 12(2)(b)(ii) read with Section 8(2), albeit that such a transaction is clearly a transaction of “export of services” as defined under Section 2(6), however, for the purposes of the IGST Act, it would amount to an ‘intra-State supply’. It is thus difficult to conceive as to why the IGST Act would take within its ambit any intra-State supply, when the IGST Act itself is a legislation, which concerns GST to be levied on ‘inter-State trade and commerce’ and not on ‘intra-State trade and commerce’. (Para 88) |
| GST is Value Added Tax | In All India Federation of Tax Practitioners, Supreme Court referred to the concept of VAT which is a general tax that applies in principle to all commercial activities involving production of goods and provision of services where after it was concluded that VAT is a consumption tax as it is borne by the consumer. It was held that service tax is a VAT which in turn is a destination-based consumption tax in the sense that it is on commercial activities. It is not a charge on the business but on the consumer and it would logically be leviable only on services provided within the country, service tax is a value added tax. | There are three methods of calculation of indirect taxes viz. specific duty, ad valorem tax and value added tax (VAT). GST uses the method of value added tax of calculation which removes the cascading effect. GST is calculated on “value added” and not the value of the goods or services; value addition is the value added to the raw materials and other things purchased by the producer which means that the cost of purchase inputs would be excluded. This method of levy of tax is intended to remove the cascading effect of tax on tax and profit on tax. Therefore, the IGST Act in my view is not VAT but only calculated as VAT.
(Para 112.6) |
Having noted that GST is a destination-based consumption tax, it can now be examined as to what is the legal position of the GST regime as embedded by the 101st Constitution Amendment Act, 2016 insofar as levy of GST is concerned, which replaced the prevailing VAT/Service tax regime prevailing under the provisions of the Finance Act, 1994.
(Para 52) |
| Double Taxation | Section 13(8)(b) of the IGST Act leads to double taxation. The same supply would be taxed at the hands of the petitioner and following the destination-based principle it would be an import of service from India for the foreign service recipient and would be taxed at his hands in the importing country. | The principle is well settled that two taxes which are separate and distinct imposts on two different transactions/supplies is permissible as in law there is no overlapping.
(Para 115) |
In his opinion, it would lead not only to a consequence of double taxation but also to an implausible and illogical effect, in recognizing two independent transactions to be one transaction for the purpose of levy of CGST and MGST as intra-State trade and commerce. It is also for such reason, it would be quite fatal nay absurd to recognize two different transactions being clubbed together, merely for the purposes to be included and/or to be brought within the regime of the CGST and the MGST Act.
(Para 79) |
| Material Recycling Association of India | High Court kept it open for the respondents to consider the representation made by the petitioner so as to redress its grievance in a suitable manner and in consonance with the CGST Act and the IGST Act.
Views expressed in para 65,66,67 are not acceptable. Para 65 is pertaining to section 8, section 12, section 13, Section 2(6), section 2(13), circular 20/2019. Para 66 is specific provision of section 13(8)(b)- it is not described intermediary services are in India or outside India. Para 67 section 13(8)(b) is stipulated by the Act- Similar to service tax. |
Relied upon the para 63 to 68 (64 to 69) Para 63- Check whether it is ultra vires or not Para 64- Article 246(2)
Para 65 is pertaining to section 8, section 12, section 13, Section 2(6), section 2(13), circular 20/2019. Para 66 is specific provision of section 13(8)(b)- it is not described intermediary services are in India or outside India. Para 67 section 13(8)(b) is stipulated by the Act- similar to service tax. Para 68– Double taxation Para 69 (Section 13(8)(b) read with section 2(13) are ultra vires. |
The consideration, on which the validity of the provisions of Section 13(8)(b) being upheld by the Court, was on a different analogy from what is argued before this Court in the present proceedings. For such reason, the scope of the present proceedings cannot be considered to be identical to the scope of the proceedings before the Court in such case.
(Para 104) |
| The Parliamentary Standing Committee on Commerce, Report No.139 | GST is a destination-based consumption tax, the Committee recommended to provide that place of supply of Indian intermediaries of goods will be the location of service recipient so that intermediary services will be treated as exports or exemption is to be given to intermediary services. |
Reliance upon reports of Parliamentary Committees are external aids to construction to be used only when there is ambiguity in the statute. Here, there is no ambiguity. The Recommendation is not mandatory.
(Para 116) |
Such report had made substantive observations that an amendment to Section 13(8) of the IGST Act is required to be thought of, to exclude intermediary services and make it subject to the default Section 13(2) so that, the benefit of export could be made available. Such observations of the Parliamentary Committee certainly must have fell for consideration of the respondents. It would definitely reflect upon the operation of Section 13(8)(2) outside the purview of the IGST legislation.
(Para 107) |
Order as per Third Judge
The provisions of Section 13(8)(b) and Section 8(2) of the IGST Act are legal, valid and constitutional, provided that the:
a. 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,
b. cannot be made applicable for levy of tax on services under the CGST and MGST Acts.
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