Bombay High Court in the case of Dharmendra M. Jani on Wednesday delivered a split verdict in a challenge to constitutional validity of section 13(8)(b) of Integrated Goods and Services Tax (IGST) Act that imposes a liability on service provided by intermediaries to persons located abroad.
Justice Ujjal Bhuyan declared the section unconstitutional. Justice Abhay Ahuja, who was on the division bench that heard the challenge in a petition filed in 2018 by Dharmendra Jani, dissented. His dissenting verdict is to be pronounced on June 16.
Justice Bhuyan said “what we notice is that section 13(8)(b) of the IGST Act read with section 8(2) of the Act has created a fiction deeming export of service by an intermediary to be a local supply i.e., an inter-state supply. This is definitely an artificial device created to overcome a constitutional embargo. Question for consideration is whether creation of such a deeming provision is permissible or should receive the imprimatur of a constitutional court?”
And he said he has “no hesitation in holding that section 13(8)(b) of IGST Act, 2017 is ultra vires the Act besides being unconstitutional.”
The Judge said, “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.”
But Justice Ahuja said he begs to differ, for reasons to be pronounced next week.
Jani’s case was that he is a Mumbai-based proprietary concern providing marketing and promotion services to customers outside India. It solicits purchase orders for its foreign customers and promotion of goods sold by its overseas customers in India.
Section 13 deals with situation where the location of supplier or recipient is outside India and section 13(8) says the place of supply of service shall be the location of supplier which is the intermediary service under sub-clause (b).
Section 8(2) of the IGST Act says that in case of supply of services where location of supplier and place of supply of service are in same state it would be treated as -intra-state supply. Thus, the export service by the petitioner as intermediary would be treated as inter-state supply rendering such transaction liable to payment of central goods and services tax (CGST) and State goods and services tax (SGST), which he paid in protest and assailed the validity on grounds of right to equality as well. Source: timesofindia.com
You can read/download the order of Bombay High Court at end of the article.
Decision of Gujarat High Court on the issue
It may be noted that Gujarat High Court in case of Material Recycling Association of India vs Union of India had on the issue of constitutionality of Section 13(8)(b) of the IGST Act,2017 vide dated 24.07.2020 held as under:
- The basic underlying change brought in by the GST regime is to shift the base of levy of tax from point of sale to the point of supply of goods or service.
- Conjoint reading of Section 2(6) and 2(13), which defines export of service and intermediary service respectively, then the person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitate the supply of goods or services or both.
- Only because, the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services
- There is no deeming provision as tried to be canvassed by the petitioner, but there is stipulation by the Act legislated by the parliament to consider the location of the service provider of intermediary to be place of supply. Similar situation was also existing in service tax regime w.e.f. 1st October 2014
- The contention of the petitioner that it would amount to double taxation is also not tenable as 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.
- It cannot be said that the provision of Section 13(8)(b) r.w. Section 2(13) of the IGST Act,2017 are ultra vires or unconstitutional in any manner.
Relevant statutory provisions:
Export of Services: Section 2(6) of the IGST Act,2017
(6) ―export of services means the 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; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;
Intermediary: Section 2(13) of the IGST Act,2017
(13) ―intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;
Intra State Supply of Services: Section 8(2) of the IGST Act,2017
(2) Subject to the provisions of section 12, 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:
Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.
Explanation 1.––For the purposes of this Act, where a person has,––
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment
outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
Place of Supply for Intermediary: Section 13(8)(b) of the IGST Act,2017
(8) The place of supply of the following services shall be the location of the supplier of services, namely:––
(a) ……………………….
(b) intermediary services;
(c) ……………………….
READ / DOWNLOAD ORDER:
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CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.
