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16 June 2021

POS provision of Intermediaries u/s 13(8)(b) of the IGST Act is ultra vires & unconstitutional

In the case of Dharmendra M. Jani vs. Union of India cited in [2021] 127 taxmann.com 639 (Bombay), the petitioner in the case is a proprietor of a proprietorship firm M/s. Dynatex International having its registered office in Mumbai which is engaged in providing marketing and promotion services to customers located outside India. It is registered as a supplier under the provisions of the CGST Act, 2017.

These overseas customers are engaged in manufacture and/or sale of goods. Such overseas customers may or may not have establishments in India. However, petitioner provides services only to the principal located outside India and in lieu thereof receives consideration in convertible foreign currency from the principal located outside India. For providing such services, ordinarily an agreement is entered into with the overseas customers. In terms of such agreement petitioner solicits purchase orders for its foreign customers. As a matter of fact petitioner undertakes activities of marketing and promotion of goods sold by its overseas customers in India.

The Indian purchaser i.e., the importer directly places a purchase order on the overseas customer of the petitioner (viz. foreign manufacturer) for supply of the goods which are then shipped by the overseas customer to the Indian purchaser. Such goods are cleared by the Indian purchaser from the customs. The foreign manufacturer raises sale invoice in the name of the Indian purchaser who directly remits the sale proceeds to the overseas customer. Upon receipt of such payment, the foreign manufacturer pays commission to the petitioner against invoice issued by the petitioner. The entire payment is received by the petitioner in India in convertible foreign exchange.

The writ petition has been filed assailing the constitutional validity of section 13(8)(b) of the IGST Act read with section 8(2) of the said Act on the following:-

  1. Levy of tax on export of service is ultra vires Article 269A of the Constitution of India.
  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 tax on consumption. 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 service to recipient located outside India is violative of Article 14 of the Constitution of India.
  5. Levy of CGST and SGST on the export of service by the petitioner to its overseas customers 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.
  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. Therefore, it is trite that an agent cannot be burdened with GST.
  7. Levy of GST on an intermediary like the petitioner providing services to an overseas customer would lead to double taxation on the same service.

Referring to Article 286, learned counsel for the petitioner submits that clause (1) is very clear in as much as it provides that no law of a state shall impose or authorize the imposition of a tax on the supply of goods or services or both where such supply takes place outside the state or in the course of import of the goods or services or both into the territory of India or export of goods or services out of the territory of India. He submits that this is a prohibitive bar and is couched in negative language. In so far clause (2) is concerned, 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). Thus 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).

The petitioner has contended that section 13(8)(b) read with section 8(2) of the IGST Act would lead to double taxation. Petitioner has also referred to the 139th Parliamentary Committee Report, and submits therefrom that levy of GST on intermediary services is contrary to the basic fundamental concept of GST as a destination based consumption tax. On such basis petitioner asserts that for taxing a service it is not the place of performance but the place of consumption which is relevant; export would take place when the service is provided from India by a person in India but is received and consumed abroad.

The Hon’ble Judge has stated that in so far the present case is concerned, it is certainly a supply of service from India to outside India by an intermediary. Petitioner fulfils the requirement of an intermediary as defined in section 2(13) of the IGST Act. That apart, all the conditions stipulated in section 2(6) for a supply of service to be construed as export of service are complied with. The overseas foreign customer of the petitioner falls within the definition of ‘recipient of supply’ in terms of section 2(93) of the CGST Act read with section 2(14) of the IGST Act. Therefore, it is an ‘export of service’ as defined under section 2(6) of the IGST Act read with section 13(2) thereof. It would also be an export of service in terms of the expression 'export' as is understood in ordinary common parlance. Evidently and there is no dispute that the supply takes place outside the State of Maharashtra and outside India in the course of export.

However, what we notice is that section 13(8)(b) of the IGST Act read with section 8(2) of the said 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?

It has been further stated that with utmost respect we are unable to accept the views of the Gujarat High Court in the matter of Material Recycling Association of India Vs. Union of India decided on 24.07.2020. It is evident that section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of the Constitution. The extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination based consumption tax as against the principle of origin based taxation.

After all the discussions and thorough consideration, single judge of Division Bench Bombay HC has expressed his view stating that section 13(8)(b) of the IGST Act, 2017 is ultra vires the said Act besides being unconstitutional; 2nd judge decision to come on June 16, 2021.