Intermediaries

In Applause of a Repeal: Place of Supply for Intermediary Services

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The Goods and Services Tax Council (‘GST Council’) in its 56th meeting took multiple decisions and made a series of recommendations. The headline, of course, was dominated by the change in tax rates of various goods. An equal, or to my mind, a more substantive reform was the recommendation for omission of Section 13(8)(b) of the Integrated Goods and Services Tax Act of 2017 (‘IGST Act of 2017’).  

Section 13 of the IGST Act of 2017 prescribes place of supply rules where location of supplier or location of recipient is outside India. Section 13(2) lays down the general rule and states that the place of supply for the above-mentioned services shall be location of recipient of services. Section 13(8)(b) incorporates a deeming fiction – at variance with the general rule – and states that the place of supply for intermediary services shall be the location of supplier of services. Section 13(8)(b) proved be an interpretive challenge producing a split judgment by the Bombay High Court and subsequently an opinion by a third judge to resolve the interpretive disagreement. And yet, no clear resolution seemed to be in sight. I’ve previously commented both judicial opinions here and here.  

In this article, I briefly explain the provision, the interpretive challenge it presented, and the resulting position of law that proved to be unimplementable. I argue that  interpretive approach adopted by the third judge – of the Bombay High Court –  in upholding constitutional validity of Section 13(8)(b) of the IGST Act of 2017 was not incorrect. But, it resulted in a legal position that resembled a riddle wrapped inside an enigma. I conclude that the impending omission of Section 13(8)(b) of the IGST Act of 2017 is a step in the right direction. It will provide much needed clarity for GST liabilities of intermediary services. And the omission aligns with a core feature of GST – a destination-based tax. Finally, the omission reduces an unnecessary complexity in IGST Act of 2017. While one of the Revenue Department’s arguments was that Section 13(8)(b) was introduced for purpose of collecting additional revenue; removing it introduces more simplicity which may prove to be a more meaningful reform of GST in the long run. 

‘Exceptional’ Nature of Section 13(8), IGST Act of 2017  

Section 13(2) of the IGST Act of 2017 lays down the default rule to determine place of supply for services where location of either supplier or recipient is outside India. The location of recipient of services is the default place of supply as per Section 13(2). Section 13(8) contains exceptions to the above rule. Section 13(8)(b) states that for intermediaries, the place of supply shall be the location of supplier of services. Thus, if an intermediary with a registered office in Bombay supplies intermediary services to a recipient located outside India, the place of supply shall be Bombay. But wouldn’t a supply of intermediary services to a recipient outside India amount to export of services and thus outside the net of GST? Ideally, yes. But the deeming fiction under Section 13(8)(b) was introduced precisely to levy tax on export of intermediary services by deeming it to be a domestic service. This was just the first level of complication. 

Section 8(2) of the IGST Act of 2017 states that:

.. 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:

In the above example, the location of supplier and place of supply is Bombay, State of Maharashtra. And as per the mandate of Section 8(2) of the IGST Act of 2017, the supply shall be treated as an intra-State supply. What is the implication of the latter?  

Under GST laws, an intra-State supply is subjected to Central Goods and Services Tax (‘CGST’) + State Goods and Services Tax (‘SGST’). The latter is collected by the State if the place of supply is its jurisdiction. In the above example, the SGST component would be levied and collected by the State of Maharashtra under its State-level GST law. Now, we enter the next level of complication. 

Article 286(1)(b) of the Constitution states that no law of a State shall impose, or authorize the imposition of, a tax on the supply of goods or of services or both, where such supply takes place in the course of the export of the goods or services or both out of the territory of India. 

The embargo placed by Article 286(1)(b) in this context meant that States cannot levy SGST on intermediary services. Why? Because the intermediary services provided by a supplier from India to a recipient outside India are export of services. Section 13(8)(b) via deeming fiction, shifted the place of supply of export of services and deemed it to be a domestic transaction. But a statute cannot incorporate a deeming fiction that empowers State to levy tax beyond the constitutional boundary marked by Article 286(1)(b) of the Constitution. 

The deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017 was the subject of a constitutional challenge. And the resulting judicial opinions did not make the legal position any better.  

A Split Judgment of the Bombay High Court 

In Dharmendra M. Jani v Union of India, the Bombay High Court delivered a split judgment. Justice Ujjal Bhuyan held that Section 13(8)(b) of the IGST Act of 2017 violated Article 286(1)(b) of the Constitution and was unconstitutional. He noted the extra-territorial effect being attempted via Section 13(8)(b) of the IGST Act of 2017 ran counter to a fundamental principle of GST, i.e., it is a destination-based consumption tax. Justice Abhay Ahuja though disagreed and – by applying a convoluted logic – held that Section 8(2) of the IGST Act of 2017 is inapplicable to the transaction of an intermediary providing services to a recipient located abroad. He also stated that the Parliament has the power to determine place of supply for inter-State supplies under Article 246A read with Article 269A of the Constitution. And thus, upheld that vires of Section 13(8)(b) of the IGST Act of 2017 by conveniently ignoring Article 286 of the Constitution.  

The obvious result of this interpretive disagreement was a stalemate. 

Opinion of Justice G.S. Kulkarni: An ‘Unimplementable’ Legal Position  

In view of the split judgment of the Division Bench, the proceedings of case were referred to Justice G.S. Kulkarni. And he issued a peculiar opinion in Dharmendra M. Jani v Union of India. Though to be fair to him, the peculiarity emerged largely from the deeming fiction contained in Section 13(8)(b) of the IGST Act of 2017. He was tasked with unravelling a knot that could have no simple or elegant result. 

Justice Kulkarni accepted that an intermediary service provided by a taxpayer located in India to a recipient located in a foreign jurisdiction amounted to export of services as defined under Section 2(6) of the IGST Act of 2017. And that by virtue of Section 8(2) of the IGST Act of 2017 an export service was deemed to be an intra-State supply of service. But since an intra-State supply is subjected to tax under the CGST Act of 2017 and relevant State GST Act of 2017; Justice Kulkarni added that reading Section 13(8)(b) of the with Section 8(2) amounted to reading a provision of the IGST Act of 2017 into other GST statutes. He observed: 

… that the fiction which is created by Section 13(8)(b) would be required to be confined only to the provisions of IGST Act, as there is no scope for the fiction travelling beyond the provisions of IGST Act to the CGST and the MGST Acts, as neither the Constitution would permit taxing of an export of service under the said enactments nor these legislations would accept taxing such transaction.  

Justice Kulkarni was clear in one crucial respect: the domain of IGST Act of 2017 was separate – inter-State supplies. CGST Act of 2017 and State-level GST laws also operated in their own respective domains – intra-State supplies. In the absence of a specific incorporation of provision of one statute in another – ideally introduced by the legislature expressly – the provisions of the IGST Act of 2017 cannot by a process of interpretation be applied to other GST statutes.

Based on his above reasoning and understanding of the legislative landscape in GST, Justice Kulkarni concluded that operation of Section 13(8)(b) of the IGST Act of 2017 was to be confined only to the IGST Act of 2017. But he refused to term the provision as unconstitutional. Justice Kulkarni, by upholding the vires of Section 13(8)(b) of the IGST Act of 2017, resolved the stalemate caused by the split judgment. However, it presented the challenge of implementing his opinion. How to confine Section 13(8)(b) of the IGST Act of 2017 only to the IGST Act of 2017?  

If the fiction of Section 13(8)(b) was to be confined only to the IGST Act of 2017, it would mean intermediary services exported to other countries could only be subjected to IGST. But IGST is levied only on inter-State supplies. Or imports which are deemed to be inter-State supplies. So, would Justice Kulkarni’s opinion mean that the Union would now levy IGST on export of intermediary services? Such a levy would be diametrically opposite to the underlying policy of levying IGST only on inter-State supplies or imports. Also, wouldn’t levying IGST defeat the fiction contained in Section 8(2) of the IGST Act of 2017? As per Section 8(2) if place of supply and location of supplier are in the same State, the supply is an intra-State supply. But States cannot levy SGST on such supplies by virtue of the opinion of Justice Kulkarni. So, would the net result be that an export of service that is treated as an intra-State supply will be subjected to IGST? If yes, it would not only challenge but practically defeat all fundamental principles that inform the design of GST. One way out of this puzzle would have been to amend the relevant provisions of CGST Act of 2017, and relevant State-level GST laws and specifically incorporate Section 8(2) and Section 13(8)(b) of the IGST Act of 2017 in such legislations. It would address the issue highlighted by Justice Kulkarni but would perhaps risk make the provision even more complex. It is unknown if the option to amend the provisions was seriously considered by the GST Council. 

Irrespective, Justice Kulkarni while did not hold Section 13(8)(b) of the IGST Act of 2017 to be unconstitutional; his peculiar – and internally consistent logic – resulted in making the provision unimplementable. At the very least an appropriate amendment to the relevant provisions was needed to levy tax under the deeming fiction contained in Section 13(8)(b). 

GST Council Recommends Repeal of Section 13(8)(b) of the IGST Act of 2017 

In the face of such a challenge, the GST Council perhaps thought that a repeal of the provision is the best option. But what we don’t know – at least for now – is the precise reason why repeal of Section 13(8)(b) of the IGST Act of 2017 was recommended by the GST Council. Was it truly because the provision has become ‘implementable’? Or is it because an alternate and ‘implementable’ provision to levy tax on cross-border intermediary services is in the works? If one vital reason for incorporation of Section 13(8)(b) of the IGST Act of 2017 was to collect additional tax, is that reason abandoned for good? I guess we will have to wait until at least the minutes of the 56th meeting of the GST Council are made public.          

Section13(8)(b) of the IGST Act of 2017: Repeal Recommended in December 2017 

We currently do not know the reasons why the GST Council recommended repeal of Section 13(8)(b) of the IGST Act of 2017. However, we do know that a suggestion for repeal was made previously but was not adhered to by the Union and States. In December 2017, a report of the Department Related Parliamentary Standing Committee on Commerce was laid before the Rajya Sabha. The 139th Report titled ‘Impact of Goods and Services Tax (GST) on Exports’ made various recommendations for changes to GST from the perspective of promoting exports. One of the recommendations in the Report specifically stated: 

The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available. (para 15.3)

The Committee reasoned that since GST was a destination-based tax, the place of supply should as per the default rule under Section 13(2), i.e., location of the recipient of services. And the amendment to Section 13(8) of the IGST Act of 2017 would ensure that the intermediary services provided from India to foreign recipients are treated as exports and receive an exemption from the levy of IGST. 

The recommendation of the Committee was based on sound logic. Section 13(8)(b) militated not only against the destination-based character of GST; it also stretched the concept of a deeming fiction too far. By treating an export of intermediary service as an intra-State supply of service, the attempt to gain more revenue created a set of complications that the Revenue Department did not anticipate. Or maybe the Revenue Department was blinded by the thirst for additional revenue.       

A Welcome Repeal 

Overall, the GST Council’s recommendation for repeal of Section 13(8)(b) is welcome – to some extent – preserves the integrity of GST as a destination-based tax. At the same time, the repeal will reduce an unnecessary complexity from the GST laws, making compliance with and comprehension of place of supply rules easier. As for potential loss of revenue. I think reduced complexity in tax laws only tends to promote business activities. If not directly and immediately, at least in an incidental manner. And reduced complexity in tax laws is always beneficial for revenue collections in the long run. Export of intermediary services, on principle, should not be within the remit of GST since it is a destination-based tax. A deviation from the basic character of GST should be based on sound justification and sounder reasons. Collection of more revenue was a less-than-ideal reason to incorporate and continue with Section 13(8)(b) of the IGST Act of 2017. A more compelling reason seems to have prevailed even if we yet don’t know the precise reason that motivated the GST Council’s recommendation.           

Limits of Deeming Fiction: Intermediaries under GST – II

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Constitutionality of Section 13(8)(b) and Section 8(2), IGST Act, 2017

Introduction

As elaborated in the first of this two-part post, the constitutionality of Section 13(8)(b), IGST Act, 2017 has attracted varied judicial opinions that deploy superficial and sub-par reasoning. Nonetheless, a Division Bench of the Bombay High Court delivered a split verdict on the constitutionality of Section 13(8)(b) and referred the issue to a third judge. Justice G.S. Kulkarni in his opinion[1] has adopted a unique perspective towards the issue and in the process arrived at a novel conclusion, whose implications are not entirely clear. The conclusion of Justice Kulkarni is that Section 13(8)(b) and Section 8(2) of IGST Act, 2017 are legal, valid, and constitutional if their operation is confined in their operation to IGST Act only and same cannot be made applicable for levy of tax on services under Central and Maharashtra GST legislations (‘CGST Act’ and ‘MGST Act’ respectively). I examine the reasoning and approach of Justice Kulkarni in the following paragraphs. Please refer to the first part for an introduction to the issue.    

Arguments

The Revenue justified Section 13(8)(b), IGST Act, 2017 by articulating several reasons. The Revenue argued that the place of service for intermediaries was the location of intermediary under the service tax regime as well and a similar legal position has been adopted under GST. Also, it referred to the fact that value addition in case of services by intermediaries happens at the location of intermediary. The Revenue also stated – in my view the real reason for Section 13(8)(b) – that if the location of intermediary was not made the place of service under the impugned provision, then the transaction would have escaped the tax net. (para 13)

The petitioners relied on Article 246A, 269A and 286 of the Constitution to argue that the impugned provision, i.e., Section 13(8)(b), IGST Act, 2017 was violative of the Constitutional limits. The petitioners, for example, argued that by deploying the deeming fiction under Section 13(8)(b), IGST Act, 2017 the Revenue was trying to convert the actual place of supply which was in foreign territory to the place of supplier and tax it as an intra-State supply. And the use of deeming fiction contravened Articles 246A, 269A and 286. The other arguments of the petitioners can be enlisted as follows: the levy of IGST on export of services is de hors the fundamental principle of GST as a destination-based tax, its violates the restrictions imposed by Article 286 which forbid States from levying a tax on transactions which take place in the course of import and the Parliament cannot authorize States to levy tax on export of services by deeming it to be a local supply, the levy is extra-territorial and violative of Article 245. Further, the petitioners also alleged that the levy via Section 13(8)(b) was arbitrary, discriminatory, and violative of Article 14.    

Decision

Justice Kulkarni noted that there is no dispute that the transaction undertaken by taxpayers constitutes an export of service. He agreed with the petitioners and stated that: 

In my opinion, the contention of the petitioners appears to be correct that the transactions in question of the petitioners are in fact a transactions of export of service, as the recipient of service is the foreign principal. The destination/consumption of the services as provided by the petitioners takes place in a foreign land. This completely satisfies the test of “export of service” as defined under Section 2(6) of the IGST Act, also as there is no contra indication that “factually” it can be regarded as either inter-State or intra-State sale of services.(para 60)

Justice Kulkarni relied on the definition of export of services under Section 2(6), IGST Act, 2017 and observed that all the ingredients of were satisfied in the impugned case. Section 2(6), IGST Act, 2017 defines export of services to mean 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; 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. Strictly speaking, the third ingredient, i.e., place of supply of service is not satisfied in the impugned case by virtue of Section 13(8)(b), IGST Act, 2017. However, since that was the centrepiece of the petitioner’s case, accepting it on face value would have prevented engagement with the petitioner’s argument.   

Justice Kulkarni stated that the contention of petitioners is that Section 13(8)(b), IGST Act, 2017 is being read into the Central and State GST legislations, i.e., CGST Act and MGST Act to tax export of services indirectly by treating them as a local supply. He framed the issued as: provisions of IGST Act were being imported into CGST Act and MGST Acts. The framing of the issuing as interplay of two distinct legislations rather than as an issue of legislative competence is crucial. By treating the issue of deeming fiction under Section 13(8)(b), IGST Act, 2017 he was able to address the petitioner’s grievance and yet managed to not situate it completely within the Constitutional context. Thus, Justice Kulkarni engaged with inter-connectedness of various GST legislations as the central issue making the petitioner’s argument of the Parliament’s competence to enact the impugned provision as an allied issue.   

Once Justice Kulkarni framed the issue as discussed above, he elaborated on the different spheres of CGST Act, 2017, IGST Act, 2017 and various State GST legislations. He agreed with the petitioner’s argument that the deeming fiction incorporated in Section 13(8)(b), IGST Act, 2017 would amount to double taxation and linking of two separate transactions. He observed that the commission is subsumed in the transaction that the foreign principal undertakes with Indian importer. And that the transaction between Indian intermediary and foreign principal cannot be understood be part of the transaction foreign principal and Indian importer. Interlinking of the two independent transactions would be contrary to the destination-based character of GST. He noted that if Section 13(8)(b), IGST Act, 2017 would be applied to CGST and MGST Acts, it would ‘in my opinion, it would lead not only to a consequence of double taxation but also to an implausible and illogical effect, in recognizing two independent transactions to be one transaction for the purpose of levy of CGST and MGST as intra-State trade and commerce.’ (para 79)

Developing on the issue of distinct but inter-relatedness of the two transactions and legislations, Justice Kulkarni highlighted that there was a tension in IGST Act, 2017 itself. He specifically cited Section 7(5), IGST Act, 2017 which provides that if supplier is located in India and place of supply is outside India then such supply shall be treated as in the course of inter-State trade or commerce. He observed that there is a dichotomy since on one hand the petitioner’s transaction of export of services is treated as inter-State under Section 7(5) while it is treated as intra-State under Section 13(8(b). The aforesaid comparison and ‘dichotomy’ is not a conclusive reason to not accept the deeming fiction incorporated under Section 13(8(b) since a legislation can incorporate a rule and its exception. Justice Kulkarni was however convinced that operation of both provisions would lead to absurdity and uncertainty in the operation of IGST Act, 2017. (para 82)

Based on the above reasoning Justice Kulkarni concluded that inter-State transactions should be confined to IGST Act and intra-State transactions only to CGST Act and MGST Act. He observed: 

Necessarily transactions which are intra-State transactions and those which are inter- State transactions (trade or commerce) are required to be compartmentalized, so as to be recognized under the separate regimes and without creation of any fictional incongruity in regard to the regimes, they need to be taxed, in the given facts and circumstances. It will be too harsh and not fair to the assessees to suffer any uncertainty in regard to the regimes the assessee’s would be taxed. Such uncertainty is neither conducive to trade or commerce nor of any real benefit to the interest of the revenue. (para 83) 

However, Justice Kulkarni did not hold Section 13(8)(b) and Section 8(2), IGST Act, 2017 to be unconstitutional. Relying on a spate of precedents he observed that if a provision could be read down and made workable to further the intent of legislation, Courts should adopt that path instead of striking down a provision as ultra-vires. And in his opinon the impugned provision could be made workable and reflect legislative intent if its operation was confined solely to IGST Act, 2017 and was not imported into CGST and MGST Act. (paras 84 and 89)   

Conclusion

A straightforward and pithy conclusion of Justice Kulkarni’s opinion is that Section 13(8)(b) and Section 8(2), IGST Act, 2017 is not unconstitutional but its operation has been confined to provisions of IGST Act only and cannot be made applicable to tax on services under CGST and MGST Acts. What does this mean? One immediate implication is that Section 13(8)(b) of IGST Act cannot be used to levy GST on intermediary services provided to a foreign principal by treating their export of services as a local/intra-State supply. This also means that such intermediary services cannot be subjected to IGST since exports are ordinarily speaking, not taxed under the destination-based principle of GST. And Justice Kulkarni has noted expressly that the petitioner’s intermediary services amount to export of services. Any further implications are likely to be revealed in due time as and when the CBIC issues some communication from its end. 

It is important to note that the exclusive domains and compartmentalization that Justice Kulkarni refers to is an appropriate approach to understand the multiple GST legislations, their operation and their respective spheres of operation. Justice Kulkarni through his judgment has brought home the fact that while the entire legislative matrix of GST operates on same fundamental principles, e.g., destination-based tax; they intend to levy tax on different transactions. IGST Act is applicable to inter-State transactions while CGST Act and State GST Acts are applicable on intra-State transactions. Going forward, it would be interesting to watch if the strict compartmentalization advocated by Justice Kulkarni would admit of some exceptions and the circumstances when the dilution of such compartmentalization may be allowed.   

Finally, it is worth noting that the opinion of Justice Kulkarni is a satisfactory resolution to the taxation of intermediary services and their treatment as intra-State supplies. However, given the way Justice Kulkarni chose to frame the issue some of the Constitutional questions raised by the petitioners remain unanswered or unsatisfactorily resolved. For example, we are unsure of the applicability of Articles 249A, 269A, and 286 to GST legislations and how the three vital Constitutional provisions interact with each other. Neither do we have a clear view as to the aforesaid Constitutional provisions constrain the Parliament or otherwise the scope of their influence on GST laws.     

[1] Dharmendra M. Jani v Union of India 2023 SCC OnLine Bom 852. 

Limits of Deeming Fiction: Intermediaries under GST-I

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Constitutionality of Section 13(8)(b), IGST Act, 2017

Introduction

Constitutionality of Section 13 (8)(b), IGST Act has attracted the attention of different Courts. The reason for suspect constitutionality of Section 13 (8)(b), IGST Act is that incorporates a deeming fiction whereby the place of supply for services by an intermediary is in India, i.e., place of service provider instead of the place of recipient. The petitioner’s case was that Section13(8)(b), IGST Act departs from the destination-based character of GST, violates Fundamental Rights under Art 14 and Art 19(1)(g) of the Constitution, and is beyond the Parliament’s competence. There are multiple and varied judicial opinions on the issue and I will explore them in a two-part post. In the first part of this post, I will focus on the judgment pronounced by the Gujarat High Court and by a 2-Judge Bench of the Bombay High Court, both of which leave a lot to be desired. I argue that both decisions engage with the underlying issue superficially and adopt less than adequate reasoning to support their conclusions.    

The Gujarat High Court Upholds GST on Intermediaries

In Material Recycling Association of India case[1], petitioners challenged the constitutional validity of Section 13 (8)(b), IGST Act, 2017. Petitioners were intermediaries providing services to their clients located outside India and earning in foreign convertible currency. As per Section 13 (8)(b), IGST Act, 2017 if a supplier provides intermediary service to a person situated outside India, place of supply of services is deemed to be where the supplier is located. This deeming fiction thereby treats such a transaction as liable to GST. The petitioner challenged the provision as ultra vires of Art 265, 286, Art 14, and Art 19 of the Constitution. Petitioner’s various arguments were underpinned by the central idea that their services constituted as export of services. And export of services or goods could not be subjected to GST since it was a destination-based tax whereunder exports were zero-rated. Further, since the supply of services took place outside India the Parliament lacked competence to enact such a provision.

The Gujarat High Court’s analysis is pithy, and essentially gives a free pass to the legislature by stating that the petitioner’s services could not be considered as an export of services ‘in order to levy CGST and SGST’ and that:

            … it would not qualify to be export of services, more particularly when the legislature has thought it fit to consider the place of supply of services as place of person who provides such service in India. (para 66)

It then curiously did not even agree with the petitioner that the provision in question was a deeming provision and instead upheld the constitutionality of the provision by relying on the fact that a similar situation existed in the pre-GST regime and noted: 

            Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “export of services” under the IGST Act, 2017 and therefore, rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST. (para 67)

Both reasons collapse under the burden of scrutiny. First, let’s decode ‘legislature’s wisdom’. As per the Gujarat High Court, the legislature ‘thought it fit’ to include various transactions in the scope of GST to maximize revenue collection. Legislature enacting provisions to increase revenue collection in no way precludes Courts from examining if the provisions under challenge transgress the Constitution. In fact, one would argue that the primary function of a constitutional Court is to examine if the legislature is enacting provisions within the constitutional limits. For example, in this case, it was incumbent on the Gujarat High Court to examine if the impugned provision satisfied the requirements of Art 286 and/or Art 269A of the Constitution, and whether Art 14 and Art 19(1)(g) were not violated; but the judgment is completely bereft of any such analysis. 

The second reason proffered by the Gujarat High Court was that a similar legal position prevailed in the pre-GST regime. To conclude that a similar provision existed in the pre-GST regime is evidence of the constitutionality of a provision enacted under the IGST Act, 2017 is an unwarranted and unreasonable statement especially when the High Court could not cite any precedent that squarely covered the issue. The Gujarat High Court’s reliance on the fact that similar provision existed in service tax regime to conclude that the Revenue Department has a ‘consistent stand’ and creates a presumption of constitutionality in favour of the provision is a dereliction of duty by a constitutional Court. And, even if there was a judicial decision that upheld the constitutionality of the pre-GST provision, it was incumbent on the Gujarat High Court to examine if the decision remained valid after the constitutional changes that accompanied GST. Nonetheless, the Gujarat High Court’s decision did not conclusively settle this matter as a similar matter was argued before a Division Bench of the Bombay High Court.       

Division Bench of The Bombay High Court Issues a Split Verdict 

The Bombay High Court in Dharmendra M. Jani case[2] decided a similar petition almost a year after the Gujarat High Court’s decision in Material Recycling Association of India case, but it ended in a stalemate with the Division Bench rendering a split decision.  

Justice Ujjal Bhuyan, held that Section 13 (8)(b), IGST Act, 2017 was unconstitutional and rested his conclusion on three observations. First, he examined the aforesaid provision on the touchstone of Art 286 of the Constitution and noted that the supply of service by an intermediary was outside Maharashtra and India. As per him, Section 13 (8)(b), IGST Act, 2017 had created a deeming fiction treating the export of service by an intermediary as an intra-State supply and it was definitely ‘an artificial device created to overcome a constitutional embargo.’ (para 49) Second, he observed that creating a deeming provision such as Section 13(8)(b) where the location of the recipient of service provided by an intermediary though outside India has been treated in India ‘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.’ (para 54) His third reason referred to the transaction’s lack of nexus with India and he concluded 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. (para 56)   

While Justice Bhuyan’s opinion was correct in identifying the lack of nexus and that the provision undermined GST’s fundamental principle of destination-based consumption tax, he failed to clearly articulate as to ‘how’ Section13(8)(b), IGST Act, 2017 contravened Art 286 of Constitution. Art 286(1) prevents the State from levying GST on a supply that takes place outside the State or a supply that takes place in the course of import of goods or services into India’s territory or their export out of India’s territory. While Art 286(2) empowers the Parliament to determine principles for determining when a supply of goods or services takes place in any of the two ways mentioned in Art 286(1). It is unclear in Justice Bhuyan’s opinion as to which aspect of Art 286 does Section 13 (8)(b), IGST Act, 2017 specifically contravene and what is the constitutional embargo that the legislature is trying to circumvent. 

At the same time, Justice Bhuyan’s opinion was notable for understanding that while the source of legislative power regarding the inter-State supply of goods or services could be traced to Art 246A and Art 269A of the Constitution, there were constitutional restraints on such power, such as Art 286 of Constitution, and the impugned provision needed to be examined on those touchstones. More importantly, unlike the Gujarat High Court, he did not accept the argument that the existence of a similar provision under the service tax regime precluded a challenge to Section 13 (8)(b), IGST Act, 2017. He instead stated that the validity of Section 13 (8)(b) read with Section 8 of the IGST Act, 2017 had to be examined on the touchstone of relevant constitutional provisions and not by relying on previous legal provisions. Though he fell short of clearly specifying the nature and extent of constitutional transgression.  

Justice Abhay Ahuja in his separate opinion upheld the constitutionality of Section 13 (8)(b), IGST Act, 2017. He gave a ringing endorsement to the Gujarat High Court’s decision in Material Recycling Association of Indiacase, though he added his reasons, which were equally if not less convincing. I will only briefly mention his reasons since his engagement with the petitioner’s argument is almost cavalier. 

Justice Abhay Ahuja pithily observed that Section 13 (8)(b), IGST Act, 2017 was not contrary to the destination-based principle of GST. He observed that since under GST taxation is on supply by intermediaries and the same was characterized as an inter-State supply, there was no conflict thereby completely missing the thrust of the petitioner’s argument. He also incorrectly stated that the definition of export of services being a general provision would be inapplicable since there was a specific provision defining intermediary. Again, not realizing that the two provisions operated independently and performed different functions. 

Justice Ahuja’s examination of the constitutional dimension is worth discussing in more detail. He began by interpreting the scope of Parliament’s power under Art 269A and Art 286 of the Constitution too widely. He noted that while imports had been deemed to be inter-State trade or commerce under IGST Act, 2017, Art 269A of the Constitution did not take away the power of the Parliament to stipulate ‘any other supply’ to be a supply in the course of inter-State trade or commerce. (para 103) Art 269A(5) specifically provides that:

            Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods or of services, or both takes place in the course of inter-State trade or commerce.   

Clearly, Art 269A (5) of the Constitution empowers the Parliament to determine the situs/place of supply for inter-State trade or commerce. Thus, when Justice Ahuja says that Art 269A does not take away power to include any supply as inter-State trade or commerce, it should have been preceded by an examination if the Parliament by exercising its power under Art 269A(5) – to enact Section13(8)(b), IGST Act, 2017 – has acted within the scope of its power and has adhered to the limitations imposed by Art 286 of Constitution. Instead, he held that the ‘whole purpose’ of Art 286(2) of the Constitution was to empower Parliament to determine the situs of supply and since Section13(8)(b), IGST Act, 2017 specifically does that it could not be said to contravene Art 286 of Constitution. His understanding of the nature and purpose of Art 286(2) is partly wrong. And his conclusion about the constitutionality of Section 13 (8)(b), IGST Act, 2017 lacks any examination of the Parliament’s powers under Art 269A read with Art 286 of the Constitution. 

The reasoning adopted by both the Gujarat and the Bombay High Court only contributes to greater uncertainty on GST’s applicability to intermediaries. Further, we have no clarity on the role of Art 286 in the GST regime, no clear articulation on the interplay of Art 246A and Art 269A and a lack of appreciation as to whether and to what extent GST’s identity as a destination-based tax is supposed to constrain Parliament’s legislative power. Are no deviations allowed from the destination-based principle? If they are, on what grounds and to what extent?

Finally, both the Gujarat High Court and Justice Abhay Ahuja of the Bombay High Court endorsed the deeming fiction contained in Section13(8)(b), IGST Act, 2017 by stating that it was essential to bring such intermediary services within the scope of GST to raise revenue. Adopting a revenue-maximising approach is the prerogative of the legislature; but, from the standpoint of Courts, it is crucial that the provision in question is constitutional. The fact that the legislature is better placed to frame a tax policy cannot be cited as a reason to enact provisions that are unconstitutional. We need a more robust examination of the tax dimensions of the Constitution and not a judicial approach that uncritically endorses the view that the legislature deserves a wide leeway in enacting tax laws. Such an approach has a little analytical basis, presumes that the legislature is adequately examining each law minutely and certainly does not warrant giving short shrift to arguments based on constitutional law. 

[1] Material Recycling Association of India v Union of India & Others 2020-VIL-341-GUJ. 

[2] Dharmendra M. Jani v Union of India 2021 SCC OnLine Bom 839. 

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