Constitutionality Of Taxing Intermediary Services Under GST: Bombay High Court Upholds Validity Of Section 13(8)(b) Of IGST Act

The Bombay High Court has upheld the constitutionality of taxing intermediary services under the 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 the IGST Act only, and the same cannot be made applicable for the levy of tax on services under the CGST and MGST Acts," the bench of Justice G.S. Kulkarni observed.

The petitioners have challenged the constitutional validity of the provisions of Section 13(8)(b) of the IGST Act.

Section 13 of the IGST Act deals with situations where the location of the supplier or the location of the recipient is outside India. While sub-section (2) generally provides that the place of supply of services shall be the location of the recipient of services, exceptions are carved out in sub-sections (3) to (13). As per sub-section (8), the place of supply of the services mentioned shall be the location of the supplier of those services, which is an intermediary.

The petitioner, a proprietary firm, is engaged in providing marketing and promotion services to its customers located outside India. The overseas customers to whom services are provided by the petitioner are inter alia engaged in the manufacturing and/or sale of goods. Such customers may or may not have an establishment in India. The petitioner provides services only to its foreign principal and receives consideration in convertible foreign exchange. To provide the services, the petitioner enters into an agreement with its overseas customers.

Under the agreement, the petitioner provides services to enable his foreign principal to get purchasers for its goods in India or elsewhere. The petitioner thus undertakes activities of marketing and promotion of goods sold by its overseas customers in India.

The petitioner's establishment is registered as a supplier under the provisions of the CGST Act. The petitioner on transactions has deposited CGST at a rate of 9% and the state GST under the MGST Act at a rate of 9% under self-assessment. At no point in time was there any independent demand by the authorities for payment of GST, either under the IGST Act, the CGST Act, or the MGST Act.

The department contended that until 2014, the place of supply (POS) for intermediary services was governed by the 'Place of Provision of Service Rules 2012' (POPSR) brought into effect on July 1, 2012, which defined an intermediary under Rule 2F. It is stated that Rule 9(c), providing for the place of provision of specified services, stipulates that the place of provision of the intermediary services shall be the location of the service provider'. The affidavit also refers to Rule 3, which speaks in regard to the 'place of provisions' generally to mean the place of provision of a service, which is the location of the recipient of services.

The department contended that no double taxation is allowed, as in the case of intermediary services in relation to the import of goods from India, there are two distinctly identifiable supplies involved. Firstly, the supply of goods by the overseas supplier to the Indian importer. Secondly, the supply of services by the intermediary to the overseas supplier of goods. It is stated that 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.

The petitioner contended that Section 13(8)(b) of the IGST Act read with Sections 2(13) and 2(6) to the extent that these provisions seek to levy GST on services provided by the petitioner to its overseas customers, which are consumed by such customers or recipients outside India, are treated, by fiction of law as created by these provisions, as an intra-state supply, making GST levyable on such exports of services 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, and this is particularly true when the nature of the transaction entered into by the petitioner involves overseas customers.

The court held that it does not involve any extra-territorial operation of law made by the Parliament inasmuch as the subject matter of the 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. 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 is dealing in the 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 extraterritorial operation and, therefore, would fall within the purview of Clause (2) of Article 245 insofar as its validity is concerned," the court said.

Case Title: Dharmendra M. Jani Versus UOI

Case No.: Writ Petition No.2031 Of 2018

Citation: 2023 LiveLaw (Bom) 209

Date: 18/04/2023

Counsel For Petitioner: Bharat Raichandani

Counsel For Respondent: Anil C. Singh

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