Bombay HC third judge upholds constitutional validity of place of supply provision for intermediary services confining only to IGST

This tax alert summarizes the recent ruling by the third judge of the Bombay High Court (HC). The issue relates to constitutional validity of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act). The place of supply as per the said provision in case of intermediary services is the location of supplier.

Earlier, the petitions were heard by the Division Bench of HC, wherein the first judge struck down Section 13(8)(b) as ultra vires IGST Act and the Constitution. However, the second judge took a dissenting view and upheld the validity of the said provision. In view of the Division Bench recording the disagreement, matter was referred to a third judge.

The key observations of the third judge are summarized below:

• Goods and Services Tax (GST) is a destination-based tax and hence, intermediary services provided in the present case are “export of services” as recipient of the service is a foreign principal and consumption of said services takes place outside India.
  
• On cumulative reading of Article 246A, 269A and 286 of the Constitution, no law of State can impose tax on supply which takes place outside its State and in the course of import or export.
  
• The transactions in question would fall within the framework of IGST Act only. It is too far-fetched to consider that certain provisions of IGST Act are framed not to give relevance to the IGST Act but for Central Goods and Services Tax Act, 2017 (CGST Act) and State Goods and Services Tax Acts.
  
• None of the provisions under IGST Act can be considered to be meaningless if they are applicable within the framework of the IGST Act. Therefore, Section 13(8)(b) and section 8(2) cannot be struck down.
  

Accordingly, the third judge held that Section 13(8)(b) and 8(2) of the IGST Act are valid, provided that these provisions are confined in their operation to the said Act only. The same cannot be made applicable for levy of tax under the CGST Act or the Maharashtra Goods and Services Tax Act, 2017.

Comments:

• As all the three judges have divergent opinions, it is likely that the matter will be placed before the Full Bench for consideration.
  
• In view of this ruling, businesses may have to analyze the type of tax required to be paid on intermediary services due to the observation of third judge that CGST and State GST cannot be levied on intermediary services. Further, on plain reading of the provisions of IGST Act, such transactions may not fall within the ambit of inter-state supplies. 
  
• One may also need to evaluate the taxability of other services provided to overseas recipient where the law treats place of supply of such services to be in India.
  
• In case it is concluded that CGST and SGST is not leviable, taxpayer may explore possibility of claiming refund of tax already paid.
  
• It is relevant to note that Gujarat HC had earlier upheld the constitutional validity of Section 13(8)(b) and considered the intermediary services provided to overseas customers as intra-state supplies [2020-TIOL-1274-HC-AHM-GST].
  
• While on one hand, the validity of place of supply of intermediary service is under question, on the other hand there is an ambiguity in interpreting the scope of intermediary which is leading to unwarranted disputes between Revenue and taxpayers.