Bombay High Court Division Bench gives split verdict in challenge to validity of Section 13(8)(b) of IGST Act

A Division Bench of Bombay High Court gave a split verdict in a challenge to the Constitutionality of Section 13(8)(b) of the Integrated Goods and Services Tax (IGST) Act (Dharmendra M Jain v. Union of India). .While Justice Ujjal Bhuyan struck down the provision as unconstitutional, Justice Abhay Ahuja differed. Justice Ahuja is yet to give his reasoned opinion which will be pronounced on June 16. Justice Bhuyan held that "Section 13(8)(b) of the IGST Act is ultra vires the said Act besides being unconstitutional".Justice Bhuyan further opined that 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."Rather it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination based consumption tax as against the principle of origin based taxation.".After perusing the opinion pronounced by Justice Bhuyan, Justice Ahuja recorded his dissent."Being unable to persuade myself to share the opinion of my Learned Brother, I would like to record my separate opinion in the matter," his order said. He will pronounce his reasoned dissenting opinion on June 16, 2021..The petitioner, Dharmendra Jain, claimed in his petition that for intermediary services where the location of the recipient is outside India, the place of supply shall be the location of the supplier of services which is in India, thus bringing into the tax net what is basically export of services.The provisions in question were:Section 8(2) of IGST Act - 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 would be treated as an intra-state supply.Section 13(8)(b) of IGST Act - Section 13 pertains to situations where the location of the supplier or the location of the recipient is outside India. Sub-section (8) states the place of supply of the services shall be the location of the supplier of services which is intermediary services as per clause (b)..Jain's stand in the petition was that export of service as an intermediary would be treated as intra-state supply of services under section 13(8)(b) read with section 8(2) of the IGST Act rendering such transaction liable to payment of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). He claimed he had paid CGST and SGST from his pocket under protest without collecting the same from his foreign customers, bearing the net tax burden of about 40 percent of the total revenue.He added that the tax burden increased post implementation of GST and has been impacting his entire revenue earning.In these circumstances, he filed the present petition challenging the maintainability of the two provisions of IGST Act claiming they are ultra vires articles of the Constitution of India and the provisions of the CGST and SGST Act..Jain raised the following grounds in his petition.That once the services are consumed outside India, the Indian legislature had no jurisdiction to levy tax on such services consumed outside India; That levying tax on export of service was violative of the Article 269A of the Constitution;That levy of GST on an intermediary was violative of Article 14 of the Constitution; "GST is an indirect tax and must be capable of being passed on to the end receiver of the service, there an agent cannot be burdened by it," Jain submitted;That levying CGST and State Goods and Services Tax (SGST) on export of service constituted an unreasonable restriction upon the intermediary's right to trade and business;That GST was "destination based tax on consumption" which meant that for taxing a service it is not the place of performance but the place of consumption which is relevant;That levying of GST on an intermediary like himself providing services to an overseas customer would lead to double taxation on the same serviceThat the services provided by a service provider in India to a service receiver in India cannot be taxed. .The Principal Commissioner of CGST sought dismissal of the petition through his affidavit on the following grounds:As per the Place of Provision of Service Rules, for intermediary of services place of supply was location of service provider and for intermediary of goods, place of supply was location of service recipient;To eliminate any ambiguity between the place of supply of intermediary services provided in relation to goods and services and to bring both at par, place of supply for both was made the location of intermediary;Taxing such services provided by Indian service providers to foreign companies incentivised foreign companies to choose manufacturing in India to offset the liability against the tax on goods cleared domestically or get refund of taxes on goods exported from India. "Taxing such services in India is in consonance with the Make in India program," the affidavit stated;That there is no double taxation by the tax authorities. For intermediary services pertaining to import of goods, the custom duty is imposed on the importer of goods; whereas the IGST is levied on the commission paid by the overseas supplier to the Indian intermediary..Justice Bhuyan observed that while section 8(2) of the IGST Act defines intra-state supply, by artificially creating a deeming provision in the form of section 13(8)(b), where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e., in India."This 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", Justice Bhuyan held.[Read Justice Bhuyan's judgment here]