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THE INSIGHT

A Divided Opinion by Bombay High Court on Levy of GST on Intermediary Services
By CA Vaishali Kharde
Jun 22, 2021

RECENTLY, Hon'ble Bombay High Court has a divided opinion of the division bench of Hon'ble Justice Ujjal Bhuyan and Hon'ble Justice Abhay Ahuja in case of Dharmendra M. Jani on matter of levy of GST in case of supply of intermediary services to outside territory. This article aims to decode this judgement in the below para's

Meaning of Intermediary and its taxing history

The term 'Intermediary' has been defied u/s 2(13) of the IGST Act, which read as,

"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;

Thus, basically it means a party or broker or agent working or arranges a supply between two parties. Thus, minimum 3 parties are involved, wherein service provider providing intermediary service so that to facilitate service in between other two parties.

Erstwhile, in Service Tax Era on 01.07.2003, Business Auxiliary Services category was introduced wherein the term Commission Agent was defined. Afterwards, on 1.07.2012 negative list was introduced under Finance Act, 1994 wherein the first time the term intermediary was used and defined [Rule 2(f) of Place of Provision of Services Rules, 2012 (PoPSR, 2012)] and Place of supply prescribed was location of Service Provider (Rule 9 of PoPSR, 2012). On 1.10.2014 the definition of intermediary revised to includes intermediary for 'Goods' also. Now, under GST again scope of term widened to cover 'intermediary' for 'Both' or 'Securities'. Further, as per Section 13(8)(b) of the IGST Act, the place of supply of intermediary services is deemed as the location of the supplier of the service. Thus, even supply result in to bringing convertible foreign currency in India such supply is liable to GST as one of the conditions as prescribed u/s 2(6) of the CGST Act is not fulfilled. From, the history it can be construed that taxing of 'intermediary services' was introduced with a motive to tax cross border transactions wherein services performed are within the territory of India.

Contentions of the Petitioner

In case of Dharmendra M. Jani the brief contention of the petitioner are :

- Section 13(8)(b) and section 8(2) of the IGST Act, 2017 are ultra vires Articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution of India

- Export of other Services like management consultants, market research agents, professional advisers etc. would not be subject to GST. Thus, lead to violation of Article 14 of the Constitution of India.

- By levying GST on the service provided to the overseas customers have imposed an unreasonable restriction upon the right to carry on trade under Article 19(1)(g) of the Constitution.

- The Constitution only grants power to the Parliament to frame laws for inter-state trade and commerce. Thus, Section 13(8)(b) of the IGST Act is ultra vires Articles 246A and 269A of the Constitution.

- As per Article 286(1) of the Constitution of India 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.

- Section 13(8)(b) of IGST Act ultra vires the section 5 of IGST Act (i.e. Charging section of IGST Act) and section of 9 CGST Act [Charging Section of the CGST Act as well MGST Act]. Section 13(8)(b) runs contrary to the overall scheme of the IGST Act because it deems a supply out of India as an intra-state supply. Further, Section 9 provides for levy of CGST on all intra-state supplies only thus cannot be extended to cross border transactions.

- GST is a destination-based tax on consumption.

- GST is an indirect tax.

- GST would be levied twice on the same commission as once by the petitioner on the commission and then by the importer (Indian purchaser of the goods) on the said commission.

Divided Opinion by the Division Bench

In this matter, Justice Ujjal Bhuyan, in the case of Dharmendra M Jani took a view that the section 13(8)(b) of the IGST Act is ultra vires the said Act besides being unconstitutional with certain key observation:

- The Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply.

- The service was complete when the same was delivered to the foreign client.

- It is an 'export of service in terms of the expression 'export' as is understood in ordinary common parlance.

- Express bar by Article 286 (1) that no law of a state shall impose or authorize imposition of a tax on the supply of goods or services or both where such supply takes place in the course of import into or export out of the territory of India.

- This provision 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.

- Section 13(8)(b) of the IGST Act read with section 8(2) of the said Act has created a deeming fiction so that export of service by an intermediary to be a local supply to overcome a constitutional embargo.

Alternatively, Justice Abhay Ahuja has took a view that neither Section 13(8)(b) nor Section 8(2) of the IGST Act are ultra vires the IGST Act and not ultra vires Section 9 of the CGST Act or MGST Act. Also held that Section 13(8)(b) as well as Section 8(2) of the IGST Act are constitutionally valid. Key observations are

- There is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature 1. An Act of the legislature is not to be declared void unless the violation of the Constitution is so manifest as to leave no room for reasonable doubt 2 Thus a Court can declare a statute to be unconstitutional not merely because it is possible to hold this view, but only when that is the only possible view not open to rational question.

- The fundamental concern of the Court should be to inspect firstly the existence of enacting power and once such power is found to be present, then next is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution 3.

- There is a specific provision defining Intermediary [Section 2(13) of the IGST Act] and Intermediary Services are specifically covered in section 13(8)(b). Thus, the question of application of general provision of Section 2(6) of export of services would not arise.

- The power to stipulate the place of supply as contained in Sections 13 (8)(b) of the IGST Act is pursuant to the provisions of Article 269A (5) read with Article 246A and Article 286 of the Constitution

- Parliament can formulate principles for determining a supply when a supply of goods or services or both have taken place either outside the State or in the course of import into or export out of the territory of India. Thus, a central legislation can authorize the State to collect tax

- Not a violation of Article 14 of the Constitution of India as there is no discrimination. The intermediary services provided as one of the services in addition to banking services and transport hiring services where the place of supply has been provided as the location of the supplier of services as per Section 13(8)(b) of the IGST Act. Further, the principles to be borne in mind while considering the constitutional validity of a statute under Article 14. 4

- A foreign exporter would set up a liaison office in India is a matter which is in the individual freedom of such an exporter thus not hit by Article 19(1) (g) of the Constitution of India.

- GST is a tax on supply and not on the sale or production. GST is calculated on "value added" and not the value of the goods or services; Thus, not ultra vires to the principle that GST is destination-based consumption tax.

- Section 13(8)(b) cannot be linked with Section 8(2) of the IGST Act to deem an inter-state supply as an intra-state supply, the said concerns are unfounded. Hence Section 13 (8) (b) is not ultra vires Section 9 of the CGST Act and MGST Act.

- IGST is not extra-territorial. Also, a 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.

Way forward

As discussed in the aforesaid paras as there is a difference in opinion, the matter is placed before Hon'ble Chief Justice. Further, it is observed that export and import have not been defined under the Constitution or that the same would be of wide construction. However, the relevance to this fact has not been given while forming opinion by Justice Abhay Ahuja.

Definitely, a difference in Opinion has created another misperception in the mind of the taxpayer. It is pertinent to note that whatever may be the decision, certain group of the taxpayers are going to affect as in case of import of intermediary services GST has not been discharged whereas in case of export of services GST has been discharged considering it as local supply. Thus, it is necessary for taxpayers to ascertain the impact on the payments of GST already made taking into account risk and accordingly take an appropriate step to minimise the impact.

(The Author is a Chartered Accountant, Founder and CEO of CA Vaishali B Kharde and Company. The Author has authored and co-authored books on GST and litigation. The views expressed in this article are strictly personal.)

1 Rakesh Kohli & Another [(2012) 6 SCC 312] - TOG-23-SC-MISC-2012

2 Commonwealth ex. Rel. O'Hara V. Smith 4 Binn. 117 (Pg.1811).

3 Exide Industries Ltd. (supra),

4 R.K. Garg [AIR 1981 Supreme Court 2138]