Dharmendra M. Jani vs The Union Of India And 3 Ors on 16 June, 2021

Here's a summary of the judgment Dharmendra M. Jani vs The Union Of India And 3 Ors delivered by the Bombay High Court:

1. Outcome
   The Bombay High Court (majority opinion by Ujjal Bhuyan, J.) allowed the writ petition, declaring Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) as ultra vires the IGST Act itself and unconstitutional. (A dissenting opinion by Abhay Ahuja, J., held the provisions to be constitutionally valid).

2. Core Issue
   The core issue was the constitutional validity of Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), specifically whether these provisions, by deeming "intermediary services" provided to recipients outside India as "intra-state supply" liable to CGST and SGST, violated Articles 14, 19(1)(g), 245, 246, 246A, 269A, and 286 of the Constitution of India, and were ultra vires the IGST Act, Central Goods and Services Tax Act, 2017 (CGST Act), and Maharashtra Goods and Services Tax Act, 2017 (MGST Act).

3. Key Facts

   • The Petitioner, Dharmendra M. Jani, operating as M/s. Dynatex International, provides marketing and promotion services to foreign customers (principals) located outside India.
   • The overseas customers export goods to Indian importers. The Indian importers directly place orders with the overseas customers and remit sale proceeds to them.
   • Upon receipt of payment from the Indian importers, the overseas customers pay commission to the Petitioner in India, in convertible foreign currency.
   • The Petitioner is registered as a supplier under the CGST Act and is considered an "intermediary" under Section 2(13) of the IGST Act.
   • The Petitioner considered these services as "export of services" under Section 2(6) of the IGST Act.
   • However, Section 13(8)(b) of the IGST Act specifies that for "intermediary services," the "place of supply" is the "location of the supplier of services" (i.e., in India). Read with Section 8(2) of the IGST Act, this resulted in the Petitioner's services being treated as "intra-state supply" subject to CGST and SGST.
   • The Petitioner paid these taxes under protest and contended that this classification was illegal, arbitrary, and significantly increased his tax burden.

4. Arguments (Taxpayer vs Revenue)

   • Taxpayer (Petitioner):

     • Constitutional Violation: Section 13(8)(b) read with Section 8(2) violates Articles 246A, 269A, 286(1)(b) (prohibition on state tax on exports), and 245 (extra-territorial operation without sufficient nexus) by converting an export of service into a local supply for taxation.
     • Ultra Vires GST Acts: The provisions are ultra vires the charging sections (Section 5 of IGST Act, Section 9 of CGST/MGST Acts) as the IGST Act taxes inter-state supply, while CGST/MGST Acts tax intra-state supply, and deeming export as intra-state contradicts their fundamental scheme.
     • Against GST Principles: GST is a destination-based consumption tax. Services consumed abroad should not be taxed in India.
     • Discrimination (Article 14): Arbitrary and discriminatory as other service exporters are not treated as local supply, disadvantaging intermediaries.
     • Restriction on Trade (Article 19(1)(g)): The levy imposes an unreasonable restriction on the right to carry on business, potentially leading to business closure or relocation of intermediaries.
     • Double Taxation: The service is taxed in India and potentially in the foreign recipient's country.
     • Parliamentary Report: Cites the 139th Parliamentary Committee Report recommending changes to Section 13(8) for intermediary services.

   • Revenue (Union of India):

     • Presumption of Constitutionality: Statutes are presumed constitutional, especially taxing statutes, and courts should not question legislative wisdom.
     • Historical Consistency: Similar provisions existed under the pre-GST Service Tax regime (Place of Provision of Service Rules, 2012), which were accepted.
     • Make in India: Taxing these services in India promotes the "Make in India" initiative by encouraging foreign companies to set up units in India.
     • Not Export of Services: The services do not qualify as "export of services" under Section 2(6) of the IGST Act because the place of supply (condition iii) is determined to be in India by Section 13(8)(b).
     • No Double Taxation: Two distinct taxable supplies are involved: goods (Customs Act) and intermediary services (IGST Act).
     • Gujarat High Court Precedent: The Gujarat High Court in Material Recycling Association of India v. Union of India upheld the constitutionality of Section 13(8)(b) of the IGST Act.

5. Court’s Reasoning
   The Court found Section 13(8)(b) to be unconstitutional and ultra vires based on the following reasoning:

   • GST as Destination-Based Consumption Tax: Reaffirmed that GST, like service tax (citing All India Federation of Tax Practitioners v. Union of India and Commissioner of Service Tax v. SGS India Pvt. Ltd.), is a destination-based consumption tax. It is leviable only on services provided and consumed within the country. Export of services, where consumption is abroad, should ideally not be taxed in India.
   • Constitutional Scheme:
     • Article 245 (Extra-territoriality): While Parliament can legislate for extra-territorial aspects, there must be a "real connection or nexus" with India (GVK Industries Ltd. v. ITO). Deeming an export of service as an intra-state supply, where the recipient and consumption are outside India, lacks this real connection and amounts to an artificial device.
     • Articles 246A & 269A (GST Powers): These articles empower Parliament to levy GST on inter-state trade/commerce and determine the place of supply. However, they do not grant power to tax services exported out of India by treating them as local supplies.
     • Article 286(1)(b) (Prohibition on State Tax on Exports): This article explicitly prohibits any state law from taxing supplies in the course of export out of India. Section 13(8)(b) read with Section 8(2) effectively allows state tax (SGST) on exports by deeming them as intra-state supplies, which "foils or thwarts the scheme of clause (1)" of Article 286, despite Parliament's power to formulate principles under 286(2).
   • IGST Act Scheme: The charging sections (Section 5 of IGST Act for inter-state; Section 9 of CGST/MGST Acts for intra-state) are clearly demarcated. Section 13(8)(b) by artificially deeming an export as an intra-state supply, runs contrary to the overall scheme and legislative intent of these Acts.
   • Rejection of Revenue's Defences:
     • Prior Regime (Place of Provision of Service Rules, 2012): The fact that similar provisions existed under the previous service tax regime, and were not challenged, does not preclude a challenge to the new GST provisions.
     • "Make in India" Rationale: This policy argument lacks evidentiary support and cannot justify constitutional infirmities.
     • Gujarat High Court Decision: The Bombay High Court respectfully disagreed with the Gujarat High Court's decision in Material Recycling Association of India. It noted that the Gujarat HC did not adequately consider the arguments under Articles 246A, 269A, and 286, and that its reasoning was insufficient to address the constitutional challenge. It reiterated that one High Court's decision is not binding on another.

6. Statutory References

   • Constitution of India: Articles 14, 19(1)(g), 245, 246A, 269A, 286(1)(b).
   • Integrated Goods and Services Tax Act, 2017 (IGST Act): Sections 2(6), 2(13), 2(14), 5(1), 8(2), 13(1), 13(2), 13(8)(b).
   • Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2(93), 9.
   • Maharashtra Goods and Services Tax Act, 2017 (MGST Act): Section 9.

7. Precedents Cited

   • All India Federation of Tax Practitioners Vs. Union of India, 2007 (7) STR 625 (SC)
   • Commissioner of Service Tax Vs. SGS India Pvt. Ltd., 2014 (34) STR 554 (Bom.)
   • State of Travancore - Cochin Vs. Bombay Company Limited, AIR 1952 SC 366
   • Central India Spinning and Weaving and Manufacturing Company Limited Vs. Municipal Committee, Wardha, AIR 1958 SC 341
   • GVK Industries Limited Vs. ITO, (2011) 332 ITR 130 (SC)
   • Sondur Gopal Vs. Sondur Rajini, AIR 2013 SC 2678
   • Kusum Ingots & Alloys Vs. Union of India, (2004) 6 SCC 254 (Discussed in context of applicability of one HC judgment to another)
   • Rehena Begum Vs. State of Assam, Writ Petition (C) No.6968 of 2013, decided on 21.07.2015 (Discussed in context of applicability of one HC judgment to another)
   • Valliamma Champaka Pillai Vs. Sivathanu Pillai, (1980) 1 SCR 354 (On binding nature of HC precedents)
   • CIT Vs. Thane Electricity Supply Limited, (1994) 206 ITR 727 (On binding nature of HC precedents)
   • Material Recycling Association of India Vs. Union of India, R/Special Civil Application No. 13238 of 2018 (Gujarat HC, 2020) (Discussed and disagreed with)