Dharmendra M. Jani vs The Union Of India And 3 Ors on 9 June, 2021

Here's a summary of the judgment Dharmendra M. Jani vs The Union Of India And 3 Ors on 9 June, 2021:

1. Outcome
The Bombay High Court (majority opinion, per Ujjal Bhuyan, J.) declared Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) as ultra vires the IGST Act and unconstitutional. The Writ Petition was allowed to this extent. (A separate opinion by Abhay Ahuja, J. was to be pronounced later).

2. Core Issue
The core issue was the constitutional validity of Section 13(8)(b) read with Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (IGST Act). These provisions effectively deem intermediary services provided to overseas customers (which would otherwise be considered export of services) as an 'intra-state supply' of services, thereby making them liable for Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) in India. The petitioner challenged this as being contrary to the fundamental principles of GST, ultra vires constitutional articles, and discriminatory.

3. Key Facts
* Petitioner: Dharmendra M. Jani, proprietor of M/s. Dynatex International, engaged in providing marketing and promotion services to customers located outside India.
* Service Nature: The petitioner solicits purchase orders for foreign customers in India and promotes their goods. Indian purchasers directly order from overseas customers, who then ship goods to India and receive payment from Indian purchasers. The overseas customer then pays a commission to the petitioner in convertible foreign currency.
* Petitioner's Status: The petitioner is an "intermediary" as defined under Section 2(13) of the IGST Act.
* Tax Implication: Despite receiving payment in foreign exchange from overseas customers (which typically signifies export of service), Section 13(8)(b) of the IGST Act, read with Section 8(2) of the IGST Act, deems the place of supply for intermediary services to be the location of the supplier (i.e., in India). This classifies the service as an 'intra-state supply', making it subject to CGST and SGST.
* Financial Impact: The petitioner paid CGST and SGST under protest, claiming a significant increase in tax burden (from 28% in 2012 to 43.81% in 2017), impacting net revenue.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioner):
* Constitutional Violation: The levy of tax on export of services is ultra vires Articles 14, 19(1)(g), 245, 246A, 269A, and 286 of the Constitution.
* GST Principle Violation: GST is a destination-based consumption tax. Services provided from India but consumed abroad (export of service) cannot be taxed in India. This artificial deeming fiction in Section 13(8)(b) contradicts this fundamental principle.
* Ultra Vires Charging Sections: Section 13(8)(b) and 8(2) of the IGST Act are ultra vires the charging sections (Section 9 of CGST Act and Section 5 of IGST Act) which levy tax on intra-state and inter-state supplies respectively, not on deemed local supplies for exports.
* Arbitrary and Discriminatory: The provision denies a level playing field to intermediaries compared to other service exporters, violating Article 14. It imposes unreasonable restrictions on trade, violating Article 19(1)(g), and could lead to businesses moving abroad.
* Double Taxation: The service is taxed in India and potentially in the importing country, leading to double taxation.
* Parliamentary Intent: The 139th Parliamentary Committee Report recommended amending Section 13(8) to exclude intermediary services and treat them as exports.
* Precedent (Gujarat HC): The Gujarat High Court judgment on the same issue was rendered sub silentio on key constitutional articles and is not a binding precedent.

Revenue (Respondents):
* Presumption of Constitutionality: A statute enjoys a presumption of constitutionality, and the burden to prove otherwise lies on the challenger. Greater latitude is given to taxing statutes.
* Historical Precedent: A similar provision existed under the erstwhile service tax regime (Place of Provision of Service Rules, 2012, effective October 1, 2014), under which the petitioner had paid service tax, implying acceptance.
* Definition of Export: The services do not qualify as "export of services" under Section 2(6) of the IGST Act, as one of the conditions (place of supply being outside India) is not met due to Section 13(8)(b).
* Value Addition: Value addition by an intermediary generally occurs at the intermediary's location.
* Make in India: Taxing such services incentivizes foreign companies to establish manufacturing units in India, aligning with the "Make in India" initiative.
* No Double Taxation: There are two distinct supplies – import of goods and intermediary services – taxed under different statutes.
* Binding Precedent: The Gujarat High Court in Material Recycling Association of India vs. Union of India upheld Section 13(8)(b) as constitutional. This decision, concerning an all-India statute, should be followed.

5. Court’s Reasoning
* GST as Destination-Based Consumption Tax: Reaffirmed the Supreme Court's view in All India Federation of Tax Practitioners that service tax (and by extension GST) is a destination-based consumption tax leviable only on services provided within the country. Services consumed abroad cannot be subjected to Indian GST.
* Constitutional Limitations:
* Articles 246A & 269A: These articles empower Parliament to legislate on inter-state trade/commerce and determine the place of supply. However, they do not permit taxing services exported from India by artificially deeming them as local supplies.
* Article 286(1)(b): This Article explicitly prohibits state laws from imposing taxes on supplies occurring in the course of export out of India. Section 13(8)(b) read with Section 8(2) creates a "deeming fiction" that is an "artificial device" to circumvent this constitutional embargo, treating an export as a local supply.
* Article 245 (Extra-Territorial Operation): While Parliament can legislate with extra-territorial effects, it must have a "real connection" or "nexus" with India (GVK Industries Limited, Sondur Gopal). The impugned provision, by seeking to tax services consumed abroad, lacks this real connection and runs counter to the fundamental principle of GST.
* Ultra Vires Charging Sections: The artificial deeming provision in Section 13(8)(b) is contrary to the overall scheme and charging sections of both the CGST Act (Section 9 for intra-state supply) and the IGST Act (Section 5 for inter-state supply, Section 7(5) specifically treating supplier in India and place of supply outside India as inter-state supply). It attempts to bring export services within the ambit of local taxes.
* Parliamentary Committee Report: The Court noted the 139th Parliamentary Standing Committee Report, which advocated for treating intermediary services to overseas recipients as exports and amending Section 13(8) accordingly, reinforcing the petitioner's argument.
* Rejection of Revenue's Arguments:
* The Court found the reliance on the defunct Place of Provision of Service Rules, 2012, irrelevant, stating that constitutional challenges cannot be estopped.
* The "Make in India" argument was dismissed as unsubstantiated.
* The Court expressly disagreed with the Gujarat High Court's judgment in Material Recycling Association of India, stating it was not binding and had not considered the key constitutional articles raised in the present petition (sub silentio).

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 21, 245, 246, 246A, 254, 265, 269A, 276, 279A, 286, 300A.
* Integrated Goods and Services Tax Act, 2017 (IGST Act): Sections 2(6), 2(13), 2(14), 2(15), 5(1), 6(1), 7(1), 7(3), 7(4), 7(5), 8(2), 10, 12, 13(1), 13(2), 13(3) to (13), 13(8)(b).
* Central Goods and Services Tax Act, 2017 (CGST Act): Sections 1(2), 2(93), 2(102), 7, 9, 15.
* Maharashtra Goods and Services Tax Act, 2017 (MGST Act): Sections 7, 9.
* Finance Act, 1994: Sections 64(1), 65B(52), 83, 35G (Central Excise Act, 1944).
* Customs Act, 1962.
* Place of Provision of Service Rules, 2012: Rules 3, 4-12.
* Constitution (101st Amendment) Act, 2016.
* Civil Procedure Code: Section 20(c).
* Industrial Disputes Act, 1947: Section 17A.
* States Re-organisation Act, 1956.

7. Precedents Cited
* By Petitioner (and considered by Court):
* All India Federation of Tax Practitioners Vs. Union of India, 2007 (7) STR 625 (SC)
* Reliance Energy Limited Vs. MSRDC, (2007) 8 SCC 1 (SC)
* Union of India Vs. N. S. Rathnam, (2015) 10 SCC 681 (SC)
* K T Moopil Nair Vs. State of Kerala, AIR 1961 SC 552 (SC)
* State of Travancore - Cochin Vs. Bombay Company Limited, AIR 1952 SC 366 (SC)
* Central India Spinning and Weaving and Manufacturing Company Limited Vs. Municipal Committee, Wardha, AIR 1958 SC 341 (SC)
* GVK Industries Limited Vs. ITO, (2011) 332 ITR 130 (SC)
* BSNL Vs. Union of India, 2006 (2) STR 161 (SC)
* Adani Power Ltd. Vs. Union of India, 2015 (330) ELT 883 (Guj. HC)
* Union of India Vs. Adani Power Ltd., 2016 (331) ELT 129 (SC)
* Sondur Gopal Vs. Sondur Rajini, AIR 2013 SC 2678 (SC)
* M/s. Electronics Corporation of India Limited Vs. Commissioner of Income Tax, AIR 1989 SC 1707 (SC)
* Commissioner of Service Tax Vs. SGS India Pvt. Ltd., 2014 (34) STR 554 (Bom HC)
* State of UP Vs. Deepak Fertilizers & Petrochemical Corporation Ltd., (2007) 10 SCC 342 (SC)
* Valliamma Champaka Pillai Vs. Sivathanu Pillai, (1980) 1 SCR 354 (SC)
* CIT Vs. Thane Electricity Supply Limited, (1994) 206 ITR 727 (Bom HC)

• By Revenue (and considered by Court):

  • Union of India Vs. Exide Industries Ltd., (2020) 425 ITR (SC) 1 (SC)
  • Shri Ram Krishna Dalmia Vs. Shri S. R. Tendolkar, AIR 1958 SC 538 (SC)
  • R. K. Garg Vs. Union of India, AIR 1981 SC 2138 (SC)
  • Government of Andhra Pradesh Vs. P. Lakshmi Devi, AIR 2008 SC 1640 (SC)
  • Laya Binykumar Panday Vs. Medical Council of India, 2006 (6) Mh.L.J. 438 (Bom HC)
  • Amrit Banaspati Company Vs. Union of India, (1995) 3 SCC 335 (SC)
  • Material Recycling Association of India Vs. Union of India (Gujarat High Court decision dated 24.07.2020)
  • Kusum Ingots & Alloys Vs. Union of India, (2004) 6 SCC 254 (SC)
  • Rehena Begum Vs. State of Assam, Writ Petition (C) No.6968 of 2013 decided on 21.07.2015 (Gauhati HC)
  • Moti Laminates Pvt. Ltd. Vs. Collector of Central Excise, Ahmedabad, 1995 (76) ELT 241 (SC)

• CESTAT Decisions (cited in SGS India Pvt. Ltd.):

  • KSH International Pvt. Ltd. v. Commissioner
  • B.A. Research India Ltd.