Material Recycling Association Of ... vs Unoin Of India on 24 July, 2020

Outcome**
The petition challenging the constitutional validity of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act, 2017) was dismissed. The Gujarat High Court held that the provision is not ultra vires or unconstitutional. The Rule issued was discharged.

2. Core Issue
The core issue was the constitutional validity of Section 13(8)(b) of the IGST Act, 2017, read with Section 2(13) (definition of "intermediary") and Section 8(1) of the IGST Act, 2017. The petitioner contended that this provision unconstitutionally subjects "intermediary services" provided by Indian entities to overseas clients (for which payment is received in foreign exchange) to CGST and SGST, instead of treating them as "export of services" and thus "zero-rated supply." The challenge invoked Articles 14, 19, 265, and 286 of the Constitution of India.

3. Key Facts
* The petitioner is the Material Recycling Association of India, an association whose members act as agents for foreign scrap and recycling companies.
* These members provide business promotion and marketing services for foreign principals located outside India, facilitating the sale of recycled scrap goods to customers both in India and other non-taxable territories.
* The members do not participate in the actual sale/purchase; goods are shipped directly by foreign clients to purchasers, and payments are remitted directly to the foreign clients.
* The petitioner's members receive commission from their foreign clients in convertible foreign exchange.
* Under Section 2(6) of the IGST Act, "export of services" requires, among other conditions, that "the place of supply of service is outside India."
* However, Section 13(8)(b) of the IGST Act specifies that for "intermediary services" where the location of either the supplier or recipient is outside India, the place of supply shall be the "location of the supplier of services."
* Since the supplier (petitioner's members) is located in India, their services are deemed to be supplied within India, thus attracting CGST and SGST, and preventing them from being classified as "export of services" or "zero-rated supplies."

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Material Recycling Association of India):

  • Section 13(8)(b) is ultra vires Articles 14, 19, 265, and 286 of the Constitution.
  • Article 286: Parliament is authorized to define when a supply is an export, not to artificially deem a supply as internal when it is clearly an export (payment in foreign exchange, benefit to overseas recipient).
  • Article 14: The provision creates an unintelligible differentia by treating intermediary services differently based on whether the recipient is in India (place of supply is recipient's location under Section 12) or outside India (place of supply is supplier's location under Section 13(8)(b)). This is discriminatory compared to other advisory services.
  • Vagueness: The definition of "intermediary" in Section 2(13) IGST Act, particularly "on his own account," is vague, leading to uncertainty.
  • GST Principles: GST is a "destination-based consumption tax"; taxing services consumed outside India (benefit accruing to overseas recipient) violates this fundamental principle and leads to "export of taxes."
  • Double Taxation: Services are taxed in India and potentially in the recipient's country as import of service, causing double taxation and hindering India's competitiveness in service exports.
  • The provision prevents access to input tax credit (ITC) refunds available for zero-rated supplies.
  • Cited parliamentary committee reports and TRU office memorandums that acknowledged concerns about taxing intermediary services and suggested amendments.

• Revenue (Union of India & Others):

  • Legislative Competence: Parliament has exclusive power under Article 246A to legislate on inter-State GST, including determining the place of supply. This includes the power to create deeming fictions for taxation, provided there is a real nexus to India.
  • Policy Decision: The rule under Section 13(8)(b) is a conscious policy decision, consistent with the pre-GST service tax regime (post-October 2014) for intermediary services. Policy decisions are generally not subject to judicial review unless they are unconstitutional, outside statutory provisions, beyond delegated powers, or contrary to a larger policy.
  • No Export of Service: For a service to be an "export of service" under Section 2(6)(iii) of the IGST Act, the "place of supply of service" must be outside India. Section 13(8)(b) specifically designates the supplier's location in India as the place of supply for intermediary services, thus failing this condition. Therefore, these services cannot be considered zero-rated.
  • No Article 14 Violation: The legislature has broad powers to classify goods and services for taxation. Intermediary services are inherently distinct due to their "go-between" nature and the difficulty in ascertaining a single recipient for a destination-based tax if the general rule were applied.
  • No Double Taxation: The commission income is taxable in the hands of the Indian intermediary. Any IGST paid on goods imported due to the intermediary's services is eligible for ITC by the importer. If not taxed in India, these services might escape taxation entirely.
  • Parliamentary/TRU Reports: These are advisory and preliminary views, not binding legal decisions. The GST Council is the proper constitutional body to consider and recommend changes.

5. Court’s Reasoning
* Legislative Competence and Constitutional Validity: The court emphasized Parliament's exclusive power under Article 246A of the Constitution to legislate on inter-State GST. It held that the "place of supply" determination in Section 13(8)(b) is a legitimate exercise of this power. The court cited Supreme Court precedents affirming that legislative competence in taxation allows for the choice of collection points and the creation of deeming fictions, provided there's a real nexus to India (which the services provided by an Indian entity clearly have).
* Definition of Export of Service vs. Intermediary: A combined reading of Section 2(6) (export of service) and Section 2(13) (intermediary) of the IGST Act confirms that intermediary services, by statutory design, do not meet all conditions to qualify as "export of services" because Section 13(8)(b) explicitly places their supply at the supplier's location in India. The intermediary arranges and facilitates but does not supply goods or services "on his own account."
* No Arbitrary Deeming Fiction: The court viewed Section 13(8)(b) not as an arbitrary deeming fiction, but as a deliberate statutory stipulation to determine the place of supply for a specific category of services (intermediary services), consistent with the tax regime existing prior to GST. This ensures that services provided from India are subject to CGST and SGST.
* No Violation of Article 14: The court rejected the argument of discrimination under Article 14. It affirmed the legislature's broad discretion in classifying goods and services for taxation. The distinction for intermediary services is justifiable due to their unique nature as a "go-between" two parties, making the default "recipient's location" rule impractical or unsuitable for revenue considerations. The court found no lack of intelligible differentia.
* No Double Taxation: The court held that the taxation of intermediary services in India does not necessarily lead to double taxation. It noted that the commission is taxable for the Indian intermediary, and if it relates to imports into India, the IGST paid by the importer would be eligible for ITC. If these services were not taxed in India, they might escape taxation entirely.
* Exemption Notification: The court acknowledged Notification No. 20/2019, which provides a 'Nil' rate of IGST for intermediary services when both the supplier and recipient of goods are outside the taxable territory (India). This demonstrates the government's consideration of certain scenarios, suggesting that other situations are intentionally taxed.
* Advisory Nature of Reports: The court confirmed that parliamentary committee reports and TRU memorandums are advisory and lack legal force. The GST Council is the appropriate body for recommending statutory changes.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 226, 246, 246A (and Clause 2), 254, 265, 279A(5), 286 (and Clause 1(a), (b), (2)).
* Integrated Goods and Services Tax Act, 2017: Sections 2(6) (and sub-clause iii), 2(13), 8(1), 8(2), 10, 12, 12(1), 12(2)(a), 12(2)(b), 12(3) to 12(14), 13, 13(1), 13(2), 13(3) to 13(14) (specifically 13(3), 13(4), 13(5), 13(6), 13(7), 13(8)(a), 13(8)(b), 13(8)(c), 13(13)), 16(1), 16(2), 16(3).
* Central Goods & Service Tax Act, 2017: Section 2(93), Schedule III (Entry No. 7).
* Finance Act, 1994: Section 66B.
* Information Technology Act, 2000: Section 66A.
* Notification No. 20/2019 - Integrated Tax (Rate) dated 9th September 2019 / 30th September 2019 (inserting entry 12AA in Notification No. 9/2017 - Integrated Tax (Rate)).

7. Precedents Cited
* Kartar Singh Vs. State of Punjab, (1994) 3 SCC 569 (on vagueness of laws).
* Shreya Singhal vs. Union of India, (2015) 5 SCC 1 (on vagueness, striking down S. 66A IT Act).
* Repro India Ltd., 2009 (235) ELT 614 (Bombay High Court, on Cenvat credit for exports).
* M/s. Global Reach Education Services Pvt Ltd., 2018 (15) G.S.T.L. 618 (App. A.A.R.-GST, Kolkata).
* Sabre Travel Network India Pvt. Ltd., 2019 (21) G.S.T.L. 87 (A.A.R.-GST. Maharashtra).
* Vishakhar Prashant Bhave, 2019 (20) G.S.T.L. 494 (A.A.R.-GST Maharashtra).
* Vservglobal Pvt. Ltd., 2018 (19) G.S.T.L. 173 (A.A.R. - GST, Maharashtra).
* Ms. Gujarat Ambuja Cements Vs UOI, 2005 (182) ELT 33 (SC) (on legislative competence and machinery for tax collection).
* A.H. Wadia v. CIT, AIR 1949 FC 18 (on extra-territoriality of legislation).
* GVK Industries Ltd. V. Income Tax Officer, (2011) 4 SCC 36 (on limitations of Parliament for extra-territorial aspects).
* East India Tobacco Co. v. State of Andhra Pradesh, 1982 AIR 1733, 1963 SCR (1) 404 (on state's power to classify for taxation).
* Raja Jagannath Baksh Singh v. The State of UP., 1962 AIR 1563, 1963 SCR (1) 220 (on legislature's freedom to determine what to tax).
* M/s. Jindal Stainless Ltd. V. State of Haryana, CA No. 3453/2002 dated 11.11.2016 (on tax levy under Article 265).
* Delhi Development Authority & Anr, 2008 (2) SCC 672 (on judicial review of policy decisions).