Bombay High Court (3rd Judge) has upheld the constitutional validity of Section 13(8)(b) of the IGST Act – Dharmendra M Jani & Ors Vs. Union of India

• The Petitioner is an Indian entity providing marketing and promotion services to overseas customers to facilitate the sale of goods in India or elsewhere. They receive a commission from their foreign principal when an Indian purchaser directly places an order on the foreign principal for the supply of goods, which are then shipped directly to the Indian purchaser. The Petitioner had already deposited GST (CGST & MGST) on such transactions, and no demand was made by the authorities for payment of GST.
• According to Section 13(8)(b) read with Section 8(2) of the IGST Act, the place of supply for such services would be the location of the supplier, and thus, CGST and SGST would be levied as applicable to an intra-state supply. The Petitioner challenged the constitutional validity of these provisions in a Writ petition before the High Court^[1]. One of the Hon’ble Judges of the Division Bench struck down Section 13(8)(b) of the IGST Act as ultra vires (besides being unconstitutional).However, the companion Hon’ble Judge upheld the validity of the said provisions on all counts. In view of such a difference in opinion, the matters were placed before Hon’ble the Chief Justice for doing the needful.

• Section 13(8)(b) of the IGST Act read with Section 2(13) and 2(6) seeks to levy GST on services provided by the petitioners to its overseas customers, which are consumed by such customers/ recipients outside India. Therefore, by fiction of law 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[2].
• The definition of “intermediary services” under Section 13(8) of the IGST Act are the services provided by the Petitioner in India, which violates the principles of GST based on the destination-based principle. It was contended that 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.
• 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. The Petitioner referred to the Model GST Law and the final version of the IGST Act, highlighting that the former did not include “intermediary” services in Section 13(8)(b) while the latter did.
• The provisions of the GST Law 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 servicesout of the territory of India – by treating the same as a local supply.
• The levy is arbitrary, unreasonable and discriminative and, hence, violative of Article 14 of the Constitution. The levy does not provide a level playing field to the petitioner 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.
• Section 13(8)(b) of the IGST Act is ultra vires Section 5 of the IGST Act which provides for a levy on all inter-State supplies of goods or services or both. However, section 13(8)(b) seeks to run contrary to the scheme of the IGST Act and deem an inter-State supply as an “intra-State” supply. To this extent, Section 13(8)(b) is also ultra vires Section 9 of the CGST Act.
• 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. The action of the respondents would encourage foreign service recipients to set up liaison offices in India and escape taxation.
• 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. It would form a part of the cost of the goods sold to Indian buyers and thus, the said tax would again be imported into India. This is a classic case of double taxation.

• The services provided by the Petitioner did not meet the conditions required to qualify as an export of service, as they were conducted entirely within India. Despite the recipients of the service being located outside India, the services, namely soliciting purchase orders, promotion, and marketing, were all carried out within India. According to Section 2(6) of the IGST Act, an export of service must meet five conditions, including the requirement that the place of supply be outside India. However, in this case, the place of supply was within India as per Section 13(8)(b) of the IGST Act, which states that the location of the supplier is the place of supply.
• No double taxation is involved, 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. 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.
• Petitioner’s challenge to the constitutional validity of Section 13(8)(b) was unfounded, as the Petitioner was not being taxed as an intermediary but as a simple agent. Thus, the challenge itself is vague and bereft of particulars, and thus the Court ought not to delve into the legality and validity of the provisions.
• Intermediary is a distinct category of service provider and is treated as such by the law, since in 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 second 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.
• This classification of the petitioner is a reasonable classification due to the peculiar nature of services provided by him. 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.
• The Parliament has power to determine what is a place of supply under the IGST Act, under Article 269-A, and 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.

• The Division Bench had not framed any formal question to be answered by the referee Judge, as a result of the disagreement. However, the primary question which was required to be decided by the Court, was whether Section 13(8)(b) of the IGST Act 2017 is ultra vires the Constitution and the provisions of the IGST Act or otherwise.

• The transactions in question of the petitioners are in fact a transaction of export of service, as the recipient of service is the foreign principal. The destination/consumption of the services as provided by the petitioners takes place in a foreign land. This completely satisfies the test of “export of service” as defined under Section 2(6) of the IGST Act, also as there is no contra indication that “factually” it can be regarded as either inter-State or intra-State sale of services.
• The provision of Section 13(8)(b) has a cascading effect, namely, that the place of supply of services for an intermediary shall be where the location of supplier of services, i.e., the location in India. Section 12 has a further reverse cascading effect, namely, when the location of the supplier of services and the place of supply by virtue of Section 12 is in India, in that event, such supply of services is to be treated as “intra-State” supply of services[3].
• The export of services for a commission to be received by the Petitioner fructifies only after the goods are supplied by foreign principals who are beneficiaries of the export of services provided by the intermediaries. Recognizing two independent transactions as one for the purpose of levying CGST and MGST as intra-State trade and commerce would lead to double taxation and an implausible and illogical effect.
• It is too far-fetched to hold that the intention of Section 13(8)(b) read with Section 8(2) of the IGST Act is to tax foreign transactions as intra-State trade and commerce, which has no foundation for taxability, either under the IGST Act or CGST/MGST Act. There is no basis or any hypothesis to conclude that the beneficiary of the services provided by the intermediary becomes an Indian party to apply the destination principle and that too at the hands of the exporter of service.
• There is an apparent dichotomy. A transaction of export of services as that of the petitioners, on one hand is treated as inter-State trade or commerce by virtue of Section 7(5)[4], and on the other hand, the same transaction is treated as an intra-State trade and commerce by virtue of Section 13(8)(b) of the IGST Act.
• The intention of the legislature is not to tax such transaction of export of services, also categorized as an intermediary service both under the IGST Act as also under the CGST and the MGST Acts. If it is to havesuch an effect, then interpretation and operation of these two provisionswould lead to an absurdity making the provisions unworkable. It would also create an uncertainty in the operation of the statutory mechanisms, as neither there could be a desire of double taxation nor would such a consequence would be acceptable under the regime of both the legislations (legislations governing Inter-State and Intra-State trade and commerce) .
• It is necessary to confine transactions which are clearly transactions in the course of Inter-State trade or commerce and more particularly transactions of export of services as defined under Section 2(6) of the IGST Act and the intermediary services, to be confined only to the provisions of the IGST Act. Whereas those transactions which are in the course of Intra-State trade or commerce, shall remain confined to the provisions of the CGST Act and the MGST Act.

• On first principles, the necessary implication of Section 13 would be to the effect that Section 13 is required to be specifically confined only to the IGST Act. This becomes clear from the different legislative indications which are discernible from the provisions of the IGST Act itself.
• In the context of such provisions of the IGST Act, CGST Act and the Constitution, it is difficult to conceive that the CGST Act, which has been enacted only for the purpose of levy of GST on intra-State trade and commerce and the MGST Act, which is also an enactment to levy tax on intra-State trade and commerce, would be legislations which would recognize tax on “export of services”, as governed and contained within the domain of IGST Act.
• The 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. The same cannot be made applicable for levy of tax on services under the CGST and MGST Acts.

The 3rd Judge has upheld the constitutional validity of Section 13(8)(b) of the IGST Act; however, this is subject to the said provisions being 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 SGST Acts. As a result, it appears that ‘intermediary services’ provided by a supplier from India will neither be liable to CGST + SGST or IGST. A similar consequence could arise for all such situations where the Place of Supply is deemed to be in India by virtue of the provisions of Section 13 of the IGST Act.

Further, ‘intermediary services’ provided by a supplier located outside India to a recipient in India will not be liable in terms of Section 13(8)(b) of the IGST Act as Place of Supply is outside India and the levy continues to be under the purview of IGST Act only.

The matter will be now placed before the Division bench for a final determination on the issue. Needless of the  outcome, the same is likely to be challenged before the Supreme Court in an SLP. Hence, even if Bombay High Court rules in favour of the Petitioner, until the SLP is finally disposed off by the Supreme Court, the issue will remain inconclusive for the other Petitioners and taking any benefit arising of the Judgement could be litigious. Also, different High Court across the States may not necessarily take a similar view.

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Varun Parmar, Associate Partner – Email – varunparmar@elp-in.com
Atharva Javalekar, Associate –Email –  atharvajavalekar@elp-in.com

[1] Writ Petition No. 2031 of 2018 (Dharmendra M. Jani vs. The Union of India & Ors.)
[2] Article 246A : Special provision with respect to goods and services tax; Article 269A – Levy and collection of goods and services tax in course of inter-State trade or commerce; 286 –  Restrictions as to imposition of tax on the sale or purchase of goods
[3] Section 8(2) of the IGST Act
[4] Section 7(5) provides that in regard to supply of goods or services or both, when a supplier is located in India and the place of supply is outside India, such supply of goods or services shall be treated to be a supply of goods or services or both, “in the course of Inter-State trade or commerce”.