Indirect Tax Alert

Historical Background

Dharmendra M. Jani and A.T.E. Enterprises Pvt. Ltd. (hereinafter referred to as the ‘Taxpayer’) had filed Writ Petition before the Hon’ble Bombay High Court [WP 2031 of 2018 and WP(L) 639 of 2020, respectively] inter alia challenging the constitutional validity of Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’).
Justice Abhay Ahuja and Justice Ujjal Bhuyan had given divergent views as follows:
- Justice Bhuyan: Section 13(8)(b) of IGST Act not only falls foul to the overall scheme of Central Goods and Services Tax Act, 2017 (‘CGST Act’) and IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of the Constitution of India (‘Constitution’).
- Justice Ahuja: Section 13(8)(b) and Section 8(2) are constitutionally valid and operative for all purposes.
In light of the divergent views, the matter was referred to a third judge.

Observations of the Hon’ble High Court in reference order of the third judge

The Hon’ble High Court observed that the Division Bench has not framed a formal question to be answered by the referee Judge. Accordingly, the Hon’ble High Court noted the following question which is required to be decided:
“Whether Section 13(8)(b) of the IGST Act is ultra vires the Constitution and the provisions of the IGST Act or otherwise?”
The findings as regards the cumulative effect of Articles 246A, 269A and 286 of the Constitution are as follows:
- Parliament has exclusive power to make laws in respect of GST where the supply of goods or services or both takes place in the course of inter-State trade or commerce and to determine the place of supply.
- The State legislature is not empowered to levy tax on supplies taking place outside the State or in the course of import in or export outside India.
The Hon’ble High Court observed that the transaction in question is in fact ‘export of service’ as the recipient of service is the foreign principal and hence, the destination/consumption of the said services takes place in a foreign land which satisfies the test of ‘export of service’ as defined under section 2(6) of the IGST Act. Further, there is no contra indication that ‘factually’ the transaction can either be regarded as an inter-State or intra-State supply of services.
A foreign transaction (as in the present case), by a legal fiction (under Section 7(5) of the IGST Act), for the purposes of the IGST Act, is treated as an inter-State supply of services.
Section 8(2) of the IGST Act inter alia provides that subject to the provisions of Section 12 of the IGST Act, where the location of the supplier and the place of supply of service are in the same State or Union Territory, such supply would be treated as an intra-State supply of services. Thus, Section 8(2) of the IGST Act incorporates the effect of Section 12 of the IGST Act.
The plain consequence of Section 13(8)(b) of the IGST Act is that when the location of the recipient of service is outside India, the place of supply of such service shall be (is deemed to be) the location of supplier of service. Thus, the aforesaid provision has a cascading effect on what Section 12(1) read with 12(2)(ii) of the IGST Act would provide. As a result of such deeming combination, a supply of service of the nature of ‘intermediary service’, which is in the nature of ‘export of service’ becomes an intra-State supply falling under the charging provision (i.e., Section 9) of the CGST Act.
Once a transaction is an export of services (not defined under the CGST Act or the Maharashtra Goods and Services Tax Act, 2017 (‘MGST Act’)), Section 13(8)(b) of the IGST Act cannot by a legal fiction/implication form any transaction to be taxed under the CGST Act/MGST Act by categorizing it to be an intra-State supply.
By mere inclusion of Section 8 of the IGST Act in Section 2(65) of the CGST Act (i.e., definition of ‘intra-State supply of services’), a legal effect which emerges is not only Section 8 of the IGST Act, but also the accompanying provisions i.e., Section 12 of the IGST Act stands embedded, implanted and/or incorporated, and are deemed to form an integral part of the CGST Act.
Similarly, Section 2(86) of the CGST Act (definition of ‘place of supply’) makes a reference to Chapter V of the IGST Act, and the Hon’ble High Court was observed that not only Section 8 but all the provisions the provisions of Chapter V of the IGST Act stands incorporated in the CGST Act so as to create a legal fiction, that for the purposes of levy and collection of tax under the CGST Act, place of supply is required to be considered to be the location of the supplier.
There is a polarity which is brought about in so far as taxing export of services supplied by the intermediaries are concerned as a result of interplay of the enactments viz., IGST Act on one hand and CGST Act and MGST Act on the other.
It would be too far-fetched to hold that the intention of Section 13(8)(b) read with Section 8(2) of the IGST Act is to reach out to such foreign transactions so as to tax them as an intra-State supply, which has no foundation for taxability, either under the IGST Act or CGST Act/MGST Act. If the contention urged by the Tax Authorities is accepted, then the definition of ‘export of services’ under Section 2(6) of the IGST Act and the consequences of export of services (including Section 16 of the IGST Act), would stand nullified and/or rendered meaningless which cannot be the intention of the legislature.
There is an apparent dichotomy that on one hand, the transaction of export of services (as in the present case), is treated as an inter-State supply under Section 7(5) of the IGST Act whereas on the other hand, the same transaction is treated as an intra-State supply by virtue of Section 13(8)(b) of the IGST Act.
In determining the legality of Section 13(8)(b) of the IGST Act, on first principles, the necessary implication would be that the provisions of Section 13 of the IGST Act is confined only to the IGST Act for the following reasons:
- IGST Act indicates a statutory mechanism created for the IGST Act and in so far as the export of services by the intermediary is concerned, the same would be governed by the IGST Act. It would be far-fetched to consider that certain provisions of the IGST Act are framed not of any relevance to the IGST Act but for the CGST Act / State GST Acts.
- By a legal fiction, although the location of recipient of service is outside India i.e., the transaction itself is consumed outside India, Section 13(8)(b) of the IGST Act provides that the place of supply of such intermediary service would be the location of supplier of service, thus making the transaction as an intra-State supply.
The entire concept of ‘export of services’ has been specifically stipulated and provided only under the provisions of the IGST Act and reading the said concept in the provisions of the CGST Act/MGST Act, especially in the absence of an express incorporation would not be the correct interpretation of Section 2(86) and 2(65) of the CGST Act.
The cumulative effect of Section 13(8)(b) read with Section 8(2) and 12 of the IGST Act can neither be read nor can be said to be of any relevance for the purpose of CGST Act/MGST Act when it comes to the levy of GST under the said Acts on intermediary services falling within the scope of Section 2(6) of the IGST Act.
As a result, the fiction created by Section 13(8)(b) of the IGST Act would be required to be confined only to the provisions of the IGST Act, as there is no scope for the fiction travelling beyond the provisions of IGST Act to the CGST Act/MGST Act, as neither the Constitution would permit taxing an ‘export of service’ nor these legislations would accept taxing such transaction.
The Hon’ble High Court was not inclined to hold that Section 13(8)(b) and Section 8(2) of the IGST Act be struck down as unconstitutional being violative of the provisions of Articles 14, 19(1)(g), 245, 246, 246A, 265, 269A and 286 of the Constitution. Further, since there is a likelihood that certain intermediaries may fall under the provisions of the IGST Act, dislodging Section 13(8)(b) from the IGST Act merely because it is deemed to have an application under the CGST Act/MGST Act qua export of service would be a fatal proposition.
The present transaction does not involve any extra-territorial operation of law as the subject matter of the legislation purely pertains to inter-state trade or commerce in respect of which, GST can be levied and hence, would be covered under Article 245(2) of the Constitution.
Referring to the observations made by the ‘Department-Related Parliamentary Standing Committee on Commerce’ in its 139^th Report on Impact of Goods and Services Tax on Export, the Hon’ble High Court observed that the said report had made substantive observations that the amendment to Section 13(8) would be required so as to exclude ‘intermediaries’ from its purview. Such observations certainly must have fallen for consideration of the Tax Authorities.
Therefore, the Hon’ble High Court concluded that the operation of Section 13(8)(b) and Section 8(2) of the IGST Act is confined to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST Act and MGST Act, on such interpretation, the provisions are intra vires the Constitution, IGST Act, CGST Act and MGST Act.
While the Hon’ble High Court observed that the view taken in the present ruling is distinct from the view taken by the Hon'ble members of the Division Bench, as a referral Judge, there is no bar in expressing an independent opinion while deciding the reference by assigning reasons which would support such opinion.
In view of the above, the Hon’ble High Court did not consider it necessary to examine validity of the impugned provisions on the touchstone of Articles 14 and 19(1)(g) of the Constitution.
The aforesaid observations would now be placed before the Division Bench of the Hon’ble High Court.

BDO Comments

The referee judge has pronounced his judgment, with a different legal position on the issue. The industry would now await for the final position.

[Dharmendra M. Jani and Ors. Vs. Union of India and Ors. [WP No. 2031 of 2018 & WP(L) 639 of 2020], dated 18 April 2023]

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