Dharmendra M. Jani vs The Union Of India And 3 Ors on 18 April, 2023

Outcome
The Bombay High Court (referral Judge) held that Section 13(8)(b) and Section 8(2) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) are legal, valid, and constitutional, PROVIDED that their operation is confined solely to the provisions of the IGST Act, and they cannot be applied for the levy of tax on services under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Maharashtra Goods and Services Tax Act, 2017 (MGST Act).**

2. Core Issue
The primary issue was the constitutional validity of Section 13(8)(b) and Section 8(2) of the IGST Act. Specifically, whether these provisions, by deeming "intermediary services" provided to recipients outside India as an "intra-State supply," were ultra vires the Constitution (Articles 14, 19, 245, 246, 246A, 248, 265, 269A, 286) and the IGST, CGST, and MGST Acts, particularly given that GST is a destination-based consumption tax. The petitioners argued that this leads to an impermissible taxation of "export of services" under local GST laws.

3. Key Facts
* Petitioners' Business: Dharmendra M. Jani (proprietary firm) and A.T.E. Enterprises Private Limited are engaged in providing marketing, promotion, and sole selling agent services to overseas customers (foreign principals).
* Service Nature: The petitioners facilitate the sale of goods by their foreign principals to Indian purchasers. The foreign principals directly ship goods to Indian purchasers, raise invoices on them, and receive direct payments.
* Commission: Petitioners receive a commission from their foreign principals (in convertible foreign exchange) based on these sales.
* Tax Payment: Petitioners are registered under the CGST Act and have paid CGST/SGST on these commissions under protest.
* Grievance: Petitioners contend that their services constitute "export of services" as the recipient is outside India, payment is in foreign exchange, and the benefit/consumption of service is abroad. They argue that the impugned provisions (Section 13(8)(b) and 8(2) of IGST Act) wrongly classify these services as "intra-State supply," thereby subjecting them to CGST and MGST, which is contrary to the destination-based principle of GST and constitutional mandates.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioners):
* Unconstitutionality: Section 13(8)(b) and 8(2) of IGST Act violate Articles 14, 19, 245, 246, 246A, 248, 265, 269A, and 286 of the Constitution.
* Destination-Based Tax: GST is a destination-based consumption tax; services consumed outside India should not be taxed in India.
* Lack of Legislative Competence: Parliament cannot tax "export of services" as a "local supply" under Articles 246A, 269A, and 286 (especially Article 286(1)(b) which prohibits State taxes on exports).
* Arbitrariness & Discrimination: The levy is arbitrary, unreasonable, and discriminatory, violating Article 14, by treating intermediary service exports differently from other service exports.
* Double/Triple Taxation: The same supply is taxed in India (CGST/SGST on commission), potentially in the importing country, and already suffers customs duty on the imported goods (which includes the commission in the landed cost).
* Ultra Vires Charging Sections: Section 13(8)(b) is ultra vires the charging sections (IGST Act Section 5, CGST/MGST Act Section 9) as it converts an inter-State/export supply into an intra-State supply.
* Violation of Article 19(1)(g): The levy constitutes an unreasonable restriction on the right to carry on trade, potentially leading to business closures and encouraging foreign principals to set up liaison offices to escape tax.
* Read Down: Alternatively, Section 13(8)(b) should be read down to apply only where tax escapes in both taxing jurisdictions to avoid non-taxation or double taxation (in line with IGST Section 13(13)).

Revenue (Union of India & State of Maharashtra):
* No Export of Services: The services are rendered entirely within India (soliciting, marketing, promoting), thus condition (iii) of "export of services" (place of supply outside India) under IGST Section 2(6) is not met.
* Legislative Competence: Constitutional amendments (101st Amendment, Articles 246A(2), 269A(5), 286) grant Parliament unbridled power to determine the "place of supply" and define inter-State/intra-State supplies.
* Distinct Category: Intermediaries are a distinct category of service providers; the value addition occurs where the intermediary is located.
* No Extra-Territorial Operation: Article 245(2) allows Parliament to make laws with extra-territorial operation; however, the IGST Act treats this as an intra-State transaction, not an extra-territorial one.
* Make in India: Taxing Indian intermediaries promotes "Make in India" by encouraging foreign companies to manufacture in India or allowing Indian manufacturers to claim input tax credit (ITC).
* No Double Taxation: Two distinct supplies are involved: goods from overseas supplier to Indian importer, and services from Indian intermediary to overseas supplier. Indian importers can avail ITC on the GST paid by the intermediary.
* POPSR Precedent: The Place of Provision of Service Rules, 2012 (prior regime) also treated the location of the service provider as the place of provision for intermediary services.
* Reasonable Classification: Intermediaries form a distinct class, so there is no violation of Article 14 or 19(1)(g).

5. Court’s Reasoning
* GST Principles: The Court affirmed that GST is a destination-based consumption tax, where tax accrues at the place of consumption. Exports are generally zero-rated to avoid double taxation and maintain neutrality in international trade.
* Factual Export of Services: The Court agreed with petitioners that their transactions are factually "export of services" as the recipient is foreign, payment is in foreign exchange, and the benefit/consumption of the service is outside India.
* Legislative Dichotomy: The Court identified a fundamental incongruity:
* IGST Act Section 7(5)(a) treats supply where the supplier is in India and the place of supply is outside India (i.e., export of services) as "inter-State trade or commerce."
* However, IGST Act Section 13(8)(b) specifically for "intermediary services" (where the recipient is outside India) deems the "place of supply" to be the "location of the supplier" (India).
* This, through IGST Act Section 8(2) (which refers to Section 12 for place of supply where both are in India) and the definitions in the CGST Act (Section 2(65) for "intra-State supply of services" and 2(86) for "place of supply" referring to IGST Chapter V), effectively converts an "export of services" into an "intra-State supply" taxable under CGST/MGST.
* Purpose of Legal Fictions: Legal fictions are limited to their defined purpose. The fiction in Section 13(8)(b) to deem the place of supply at the supplier's location (in India) for intermediary services must be strictly confined to the IGST Act's framework.
* Contextual Interpretation: The introductory clause of Section 2 of the CGST/MGST Acts ("unless the context otherwise requires") mandates contextual interpretation. Since CGST/MGST Acts are designed for intra-State supplies and do not define "export of services" or "intermediary" or contain provisions akin to IGST Section 12 or 13, the specific IGST provisions related to export/intermediary services cannot be imported to levy CGST/MGST on exports.
* Constitutional Scheme: The 101st Constitutional Amendment compartmentalized GST into inter-State (Parliament's exclusive domain under Article 246A(2) and 269A) and intra-State (concurrent powers under Article 246A). Article 286(1)(b) prohibits State laws from taxing exports. Allowing IGST Act provisions to facilitate CGST/MGST levy on export of services would violate this constitutional scheme and legislative intent.
* No Precedent for Revenue: The Court distinguished or found unhelpful the precedents cited by the Revenue (e.g., Material Recycling Association of India, GVK Industries, and old POPSR rules). The 139th Parliamentary Committee Report, which suggested amending IGST Section 13(8) to exclude intermediary services, reflected genuine concerns about taxing export of services.
* Conclusion: The legislative intent cannot be to tax export of services under CGST and MGST Acts by creating a convoluted legal fiction. Such an interpretation would lead to absurdity, double taxation, and violate the fundamental principles of GST and constitutional provisions. Therefore, Section 13(8)(b) and 8(2) of the IGST Act, while valid for the IGST Act itself, cannot be used to impose CGST/MGST on intermediary services that are factually exports.

6. Statutory References

• Constitution of India: Articles 14, 19, 245, 246, 246A, 248, 265, 269A, 279A, 286, 366.
• Integrated Goods and Services Tax Act, 2017 (IGST Act): Sections 2(6), 2(13), 2(14), 2(15), 5, 7(5)(a), 8(2), 12, 13 (specifically 13(1), 13(2), 13(3), 13(8)(b), 13(13)), 16, Chapter IV, Chapter V.
• Central Goods and Services Tax Act, 2017 (CGST Act): Sections 2(57), 2(58), 2(62), 2(64), 2(65), 2(70), 2(71), 2(72), 2(86), 2(98), 9, 15, 17(5), 54, 174.
• Maharashtra Goods and Services Tax Act, 2017 (MGST Act): (Pari materia to CGST Act).
• Customs Act, 1962: Section 12.
• Customs Tariff Act, 1975: Section 3.
• Finance Act, 1994: Sections 66C, 94(2)(hhh) (contextually, as repealed).
• Place of Provision of Service Rules, 2012: Rules 2F, 3, 9(c) (contextually, as repealed).

7. Precedents Cited

• Supreme Court of India:
  • All India Federation of Tax Practitioners v/s. Union of India (2007)
  • GVK Industries Limited vs. Income Tax Officer & Anr (2011)
  • Gujarat Ambuja Cement Limited vs. Union of India (2005)
  • State of Travancore-Cochin and Others vs. The Bombay Co.Ltd. (1952)
  • Central India Spinning & Weaving and Manufacturing Co. Ltd. The Express Mills Nagpur vs. Municipal Committee Wardha (1958)
  • Sunil Batra vs. Delhi Administration and Ors. (1978)
  • Bengal Immunity Company vs. State of Bihar (1955)
  • Himmatlal Harilal Mehta v. State of Madras (1954)
  • BSNL v. Union of India (2006)
  • V.S. Rice and Oil Mills Vs. State of Andhra Pradesh (1964)
  • Amrit Banaspati Co. Ltd vs Union Of India And Ors. (1995)
  • Shri Ram Krishna Dalmia Vs. Shri. Justice S. R. Tendolkar & Ors. (1958)
  • Government of Andhra Pradesh & Ors. vs. Smt. P. Laxmi Devi (2008)
  • Union of India & Ors. Vs. Exide Industries Ltd. & Anr. (2020)
  • A.H Wadia V. Income Tax Commissioner (1949)
  • CIT, Bombay City-I, Bombay vs. Amarchand N. Shroff, by his Heirs and Legal Representatives (1963)
  • Voltas Ltd., Bombay vs. Union of India & Ors. (1995)
  • State of Punjab & Ors. vs. Dr. R.N. Bhatnagar & Anr. (1999)
  • Prafulla Kumar Swain vs. Prakash Chandra Mishra & Ors. (Cited for G.P. Singh's commentary on legal fiction)
  • M/s. Khemka & Co. (Agencies) Pvt. Ltd. vs. State of Maharashtra (For legislation by incorporation)
  • Whirlpool Corporation v. Registrar of Trade Marks, Mumbai (1998)
  • TATA Power Company Ltd. v. Reliance Energy Ltd. (2009)
  • M/s. Kusum Ingots & Alloys Ltd vs. Union of India And Anr. (2004)
• High Courts:
  • Commissioner of Service Tax, Mumbai-II vs. SGS India Pvt. Ltd. (Bombay High Court, 2014)
  • Mohit Minerals vs. Union of India (Gujarat High Court, 2020)
  • Adani Power Ltd. vs. Union of India (Gujarat High Court, 2015)
  • Material Recycling Association of India vs. Union of India and others (Gujarat High Court, 2020)
  • Amiyo Bhusan Das vs. United Bank of India & Ors. (Calcutta High Court, 2019)