In a significant judgment, the Bombay High Court has upheld the constitutional validity of a provision under the Integrated Goods and Services Tax Act, 2017 (IGST Act), which stipulates that tax can be imposed on services provided by intermediary persons to clients based outside India.
However, Justice Girish Kulkarni said that the same cannot be made applicable for levy of tax on services under the Central Goods Services Tax Act (CGST) and Maharashtra Goods Services Tax Act (MGST) Act as Article 286 of the Constitution bars it from doing so on services that are consumed outside its jurisdiction.
“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 and the same cannot be made applicable for levy of tax on services under the CGST and MGST Acts,” said Justice Kulkarni in a detailed 112-page judgment passed on Tuesday.
The matter was referred to justice Kulkarni in June 2021 after there were conflicting views of two judges in a division bench. Following Justice Kulkarni’s ruling, Section 13(8)(b) and Section 8(2) of the IGST Act are held valid.
“It also cannot be overlooked that there is likelihood that there are categories of transactions in relation to the intermediaries which may stricto sensu (in narrow sense) fall under the provisions of the IGST Act only,” said the judge, adding hence to dislodge the provisions of Section 13(8)(b) from the IGST Act merely because it is deemed to have an application under the CGST Act and the MGST Act with regard to the export of service, in regard to such categories of person who can also be classified as intermediaries, “would be a fatal proposition”.
Division bench to decide what type of tax to be imposed
Now the division bench will decide, based on these findings, what kind of tax – whether one that is integrated GST or some other tax – can be imposed on these transactions, if the provision is constitutionally valid.
Justice Kulkarni was hearing petitions filed by A.T.E. Enterprises Private Limited and one Dharmendra Jani challenging Section 13(8)(b) of the IGST Act, which stipulates that the place of supply of intermediary services will be the location of the supplier of such services, if such a supplier is based in India and the recipient is based abroad. The said provision causes 18% GST to be imposed on services meant to be consumed outside India.
Bombay HC observations
The HC noted that Jani’s firm was engaged in providing marketing and promotion of goods sold by its overseas customers in India. The overseas customers to whom services are provided by the petitioner are manufacturers and selling 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 such services, the petitioner enters into an agreement with its overseas customers. Jani’s plea contended that such transactions are of export of services, for which valuable foreign exchange was earned by the country. Hence such transactions were outside the purview of the CGST and the MGST Acts.
The firm was aggrieved by section 13(8) (b) categorising intermediary services that are regarded as ‘export of services’ to be an ‘intra-State supply’ for the purposes of the CGST and SGST Act. Its counsels argued that this amounted to double taxation, which was not permissible.
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