The constitutional validity of Section 13(8)(b) of the IGST Act, 2017 (Act) has been examined by Gujarat High court and then Bombay High court. While the division bench of the Gujarat High court upheld the said provision, the division bench of the Bombay High court took a divergent view. Justice Ujjal Bhuyan of the Bombay High court struck down the said section, whereas Justice Abhay Ahuja held it to be constitutionally valid. This article examines the legality of levying tax on the export of intermediary services. Section 13(8)(b) read with Section 8(2) of the Act deals with the intermediary services made to a foreign recipient outside the territory of India. It stipulates that the place of supply in such cases shall be the place of the supplier i.e the place of the intermediary. As a result, the Centre and State governments are levying taxes on these intermediaries.
In this article, first, I will lay down related provisions. Second, the opinions of the Gujarat and Bombay High court will be discussed. Third, the conundrum will be analysed.
Article 245 of the Constitution confers powers to the Parliament to make laws for the whole or part of India, and the State legislatures to make laws for the whole or part of that respective State. Article 245(2) states that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Article 246 grants power to the Parliament and the State legislatures to make laws in line with the seventh schedule of the Indian Constitution (List-1 includes matters where Parliament has exclusive powers, List-II where the State legislature has the exclusive powers and List III where both have powers. The residuary matters not falling under any list are within the Parliament’s power to make laws). Taxing powers between the Centre and State are distributed accordingly. Article 264A(2) stipulates that Parliament has exclusive power to impose taxes where the supply of goods, services, or both takes place in the course of inter-state trade or commerce. Article 269A says that the Union government will collect the tax on supplies in the course of inter-state trade or commerce and such will be apportioned between them and State governments in the manner prescribed by the GST Council. Article 286(1) and (2) mention that the State shall not have the power to impose taxes on the supply of goods and services, where such service takes place outside the State or in the course of import or export outside the territory of India. States are allowed to impose taxes only within their territories.
Pursuant to the Parliament’s power under Article 246A and Article 269A, IGST Act, 2017 has been enacted. Section 2(6) of the Act provides for five conditions to fulfil the export of services. The supplier of the service shall be located in India, the recipient of the service shall be outside India, the payment shall be made in convertible foreign exchange or as such permitted by Reserve bank of India, and that the supplier and recipient of the services are not merely establishments of a distinct person per Explanation 1 under Section 8 of the Act. Section 2(13) of the Act defines an intermediary as a broker, agent, or any other person, by whatever name who facilitates the supply of goods or services of both but does not include a person who supplies such goods or services to both or securities in his own account. Section 2(14) of the Act deals with the location of the recipient of services. Ordinarily, it is the place where the supply is received at the place of business, or such other fixed establishment, or location of the residence of the recipient. Section 2(15) of the Act defines the location of the supply of services. Ordinarily, it is the place from where the supply is made, or such fixed establishment, or location of the residence of the supplier. Section 7 of the Act says that when the supply of goods or services or both is between two States, one State, and one Union territory or between two Union territories, it amounts to inter-state supply. Also, supplying the goods or services or both imported into India amounts to inter-state supply. Section 8(2) of the Act says that supply services made within the same State or Union territory amounts to intra-state supply. Section 13 of the Act deals with the place of supply where the location of the supplier or the recipient is outside India. Section 13(8) says that the place of supply of services falling under that clause shall be the location of the supplier. Section 13(8)(b) states intermediary services and it is deemed that the place of supply of services of an intermediary made outside India would still be regarded as the location of the intermediary. Section 13(8)(b) read with Section 8(2) of the Act would make the export of intermediary services as intra-state supply.
In the Gujarat High court, the constitutional validity of Section 13(8)(b) was assailed stating that it violated Articles 14,19, 265, and 286 of the Indian Constitution. But the division bench of the Gujarat High court upheld the section. It was opined, by the Gujarat High court, that the non-obstante clause of Article 246A confers Parliament an exclusive power to make laws relating to the inter-state supply of trade and commerce. There was no violation of Article 14, according to the Gujarat High court, as the export of intermediary services and export of other services are distinguished on intelligible differentia with an object to be achieved. This is because the intermediaries, as opposed to ordinary exporters, are merely middlemen facilitating goods or services and are to be treated separately. It held that the aim of Section 13(8)(b) is to levy CGST and SGST and shall be understood in the light of GST. It was also opined that a similar practice was started under the Service Tax regime from 2014 and the same is being continued in the GST era.
The Bombay High court has examined the same provision after a few months. Justice Abhay Ahuja found the Section to be constitutionally valid. Whereas Justice Ujjal Bhuyan held it to be unconstitutional. Justice Abhay Ahuja sought textualism while upholding this tax provision. It was opined that the role of the courts in examining the validity of a law made by the Parliament is limited and literal interpretations shall be made in scrutinising a taxing statute and financial hardship cannot be considered. Justice Abhay held that when a specific provision is made, the general rules shall not be applicable. Therefore the definition of export of services under Section 2(6) was not applied to intermediary services as special provisions dealt with it under Section 2(15) and 13(8)(b) of the Act. He mooted that the distinction between intermediary services and other services was made under Parliamentary wisdom and that it shall be recognised. It was also held, by Justice Ahuja, that the said law cannot be invalid per Article 245(2) of the Constitution i.e no Section 13(8)(b) does not have an extra-territorial operation.
Meanwhile, Justice Bhuyan Struck down the provision as unconstitutional. The intermediaries, according to Justice Bhuyan, satisfied the conditions stipulated under Section 2(6) of the Act and their foreign services would amount to the export of services. Also, the overseas foreign customers would fall under Section 2(93) of CGST and 2(14) IGST. When the services are taken outside India, claiming them to be within India is artificially deemed to overcome constitutional embargo. While examining the principle of extra-territorial operation, it was held that the law was laid down by the constitutional bench in Gvk Inds. Ltd & Anr vs The Income Tax Officer & Anr is undermined. The extra-territorial operation of tax laws shall have some rational nexus for its validity and Section 13(8)(b) does not have one.
The plight of the intermediaries is that despite them exporting their services outside India, Section 13(8)(b) read with section 8(2) of the Act creates a deemed legal fiction that enables both the Union and State governments to levy tax on that said service. When the actual place of supply is outside India, the law reads the place of supply as the place of the intermediary. The thumb rule of GST is the destination-based consumption tax. In the same analogy, the export of services is not taxed as GST shall be applicable based on the place of supply. This discrimination made to the intermediaries in treating their services, not on par with the ordinary exporters is incongruous to that thumb rule. The Parliamentary committee report also recommended putting the export of intermediary services on the same footing as that other export of services. Albeit the Parliamentary supremacy is unquestionable, the reason to distinguish these services is unfathomable. Double taxation is another plight. While our governments are imposing taxes on the said services, the recipient countries may tax the same service as they would consider it as an import of services. The Supreme Court in Gvk Inds. Ltd & Anr vs The Income Tax Officer & Anr makes clear that extra-territorial operation under Article 245(2) is not an intrinsic power of the Parliament but only can extend to its subjects provided there is some reasonable nexus. The Parliament, thereby, may be empowered to make such laws, but that power shall be exercised diligently. Provisions with stark discrimination and caprice shall be avoided in making laws with extra-territorial operations. Taxation is the power of the sovereign but over-stretching that power will undermine its value.