In our Update dated 10 June 2021, we had apprised you of the divergent views of division bench of the Bombay HC on the constitutional validity of intermediary service provision under GST. While Justice Ujjal Bhuyan had opined that intermediary service to be unconstitutional, Justice Abhay Ahuja had a dissenting view, upholding the constitutional validity of the intermediary service provision. In his dissenting view pronounced on 16 June 2021, Justice Ahuja has inter alia made following broad observations:
Constitutional Challenge
- As a settled principle of law, there is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature;
- The amendment to the Constitution for introduction of GST, has defined the term to mean inter alia any tax on supply of goods, or services, or both by including the same in sub-Clause 12A of Article 366 of the Constitution of India;
- The term ‘supply’ has been defined under the GST Law and not under the Constitution to keep the process of future amendment simple whereas the terms ‘goods and services’ are defined under both. The expression ‘goods’ was already defined under Article 366 to include all the materials, commodities and articles. Further, the term ‘services’ has been defined under Article 366 to mean anything other than goods;
- In a similar challenge to the GST Compensation Act and Rules, in the case of UOI vs. Mohit Minerals Private Limited and Anr. [Civil Appeal No. 10177 of 2018], the SC had relied upon the statement of Objects and Reasons to the Constitution 101st Amendment Act, 2016 for the introduction of GST. Thereafter, the SC quoted Art. 246A, 269A and others and sections of the Constitution (101st) Amendment Act which were relevant in respect of deciding the challenge relating to the Compensation to States for loss of revenue on account of introduction of GST to finally hold that that the Compensation Act as well as the Rules were not unconstitutional or ultra vires the Constitution of India;
- Similar to the analogy in the case of Mohit Minerals (supra), it was observed that as per the Statement of Objects and Reasons of the IGST Act, the same has been enacted for levying GST on the supply of goods or services or both which takes place in the course of inter-State trade or commerce;
- It is apparent that the IGST Act has been enacted by the Parliament for levy of IGST on inter-state supply of goods or services, inter alia, pursuant to the exclusive power contained in Art. 246A(2);
- Under Article 269A, Parliament has powers to make laws (i) with respect to GST where the supply of goods or services or both takes place in the course of inter-State trade or commerce or (ii) on the principles determining place of supply, and when a supply of goods or services takes place in the course of inter-state trade or commerce;
GST Provisions
- Under the IGST Act, the only exception is that if the intermediary has provided the service on his own account in which case, he may claim to be an exporter of the service if he otherwise falls within the definition. It would not be an export of services in as much as Intermediary Services are specifically provided in Section 13 (8)(b) under the authority of the Constitution of India provided in Article 269A read with Article 246A;
- In the instant case, the Petitioner is providing intermediary service of arranging, marketing, facilitating the export of his overseas customers to Indian importers and therefore he receives commission. It is in respect of these intermediary services that Section 13(8)(b) refers to the place of supply of such service as the location of the supplier;
- Intermediary services are specifically dealt with, where it has been specifically provided that where the supplier or the recipient is outside India, then in respect of Intermediary services, the place of supply shall be the location of the supplier. There is no quarrel with the definition of export of services contained in Section 2 (6) of the IGST Act;
- When there is a specific provision defining Intermediary u/s. 2(13) of the IGST Act and Intermediary Services are specifically dealt with in section 13(8)(b), the question of application of general provision of Section 2(6) of export of services would not arise. Accordingly, there would therefore be no question of deeming Petitioner’s supply of intermediary services to be intra-State supply;
Deeming Fiction
- Section 8 of the IGST Act deals with nature of supply and Section 13 deals with place of supply. Both the provisions have different purposes. While Section 8(2) refers to a situation to be intra-state if location of supplier and place of supply is in the same State, Section 13(8) refers to place of supply being the location of the supplier of service in case of intermediary services whereas in the instant case the service recipient is outside India;
- In Section 8(2) the reference is to the same State in India, whereas in Section 13 (1) read with Section 13(8)(b) it is location of the service recipient being outside India. Once the Parliament has in its wisdom stipulated the place of supply in case of Intermediary Services be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction;
Article 286 of the Constitution
- Firstly, Article 286 prevents one State in India from imposing any tax on supply of goods and services within another State as that is the prerogative of individual States i.e., no authority to any State to impose tax on intra state supply within another State except that other State;
- Secondly, it does not permit any State in India to authorize imposition of tax on import into or export out of the territory of India of goods and services as that is the prerogative of the Central Government;
- Thirdly, it states that the Parliament alone and not the State Legislatures will formulate the principles for determining when supply of goods or of services or both is outside the State or import into or export out of India;
- Accordingly, the whole purpose of Article 286(2) is to empower the Parliament to formulate principles to determine the situs of supply, which is also stated in Article 269A;
Scheme of the IGST Act
- In terms of Section 5 of the IGST Act, all that on inter State supplies of goods and services, there shall be levied IGST, which shall be paid by the taxable person. There is no divergence of view that the scheme, scope and object of the IGST Act is a levy on inter-State supplies and the supply in this case is an inter-State supply;
- Parliament, can by law determine the place of supply, which pursuant to Article 269A(5) of the Constitution of India, it has done by enacting Sections 10 to 14 on place of supply. Section 13(8)(b) pertains to the case of intermediary services, where the service recipient is outside India and where the place of supply has been provided to be the location of the supplier;
- When the Constitution has empowered the Parliament to formulate principles determining the place of supply, Section 13(8)(b) cannot be said to be ultra vires the charging section as the same does not violate the levy on the supply made by the intermediary, particularly in view of Section 7, which designates such supplies to be inter-State supplies.
In light of the above observations, Justice Ahuja, agreeing with the judgement of the Gujarat HC in the case of Material Recycling Association of India vs. UOI and Ors. [R/Special Civil Application No. 13238 of 2018 with R/Special Civil Application No. 13243 of 2018] held that the legitimacy of Section 13(8)(b) or Section 8(2) of the IGST Act cannot be doubted. Accordingly, the Constitutional validity of Section 13(8)(b) or Section 8(2) of the IGST have been upheld.
Failing to attain finality on the matter at hand due to the contrary views of the Division Bench, the same has now been directed to be placed before the Chief Justice on the administrative side for his decision.
Disclaimer:
The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned hereinrra quis.