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Bombay High Court Delivers a Split Verdict on the Constitutionality of Section 13(8)(B) Of the Integrated Goods and Services Tax Act

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Facts of the case

The petitioner in this case was a proprietor of a firm M/S Dynatex International having its registered office at Andheri, Mumbai which provided marketing and promotion services to customers located outside India. It was registered as a supplier under Central Goods and Services Tax Act 2017 (CGST Act). The firm provided services to customers located outside India. These overseas customers were engaged in the manufacture and sale of goods. The petitioner provided services only to the principal located outside India and received consideration in foreign currency from the principal located outside India.


For providing such services, an agreement was entered into with the overseas customers. Section 13 of the IGST Act deals with situations where the locality of the supplier or the place of the company of the recipient is outside India. While S.13(2) generally provides that the place of supply of services shall be the location of the recipient of services. As per S. 13(8), the place of supply of the services mentioned shall be the location of the supplier of services. The firm has been paying CGST and SGST out of its own pocket without collecting the same from its foreign customers. 


Since 2015-16, the petitioner was bearing a net tax burden of about 40% of the total revenue leading to a significant drop in net revenue of the petitioner. According to the petitioner, the tax burden went up from 28% in the year 2012 to 43.81% in the year 2017. The burden for paying tax had increased after the implementation of goods and services tax (GST) and was impacting the whole revenue earning of the petitioner. Taking this into consideration the present petition was filed challenging the constitutional validity of section 13(8)(b) of the IGST Act read with section 8(2) of the said Act. It was filed challenging that levy of the GST on an intermediary like the petitioner is violative of Article 14 of the Constitution of India. It was further challenged that the levy of CGST and SGST on the export of service by the petitioner to its overseas customers constituted an unreasonable restriction upon the right of the petitioner to carry on trade and business under Article 19(1)(g) of the Constitution of India.


Petitioner contention 

The petitioner argued that GST is a destination-based tax on consumption. Therefore, services provided by a service provider in India to a receiver located outside India were treated as an export of service and cannot be taxed; for taxing a service it was not the place of performance but the place of consumption which was relevant. Since one of the services was consumed outside India, the government had no jurisdiction to levy tax on such services consumed outside India. 


GST is an indirect tax. The most important rule of indirect taxation is that it must be capable of being passed on to the end receiver of the service. Therefore, it is evident that an agent cannot be burdened with GST. The petitioner further argued that this tax imposition on the export of services was arbitrary and discriminatory resulting in violation of Article 14 of the Constitution of India. Also, the provision infringed the right to trade and business under Article 19(1)(g) of the Constitution.


Petitioner has also referred to the 139th Parliamentary Committee Report and submitted that the levy of GST on intermediary services was contrary to the basic fundamental concept of GST as a destination-based consumption tax. The petitioner further stated that taxing a service is not the place of performance but the place of consumption which is relevant. It was argued that export would take place when the service was provided from India by a person in India but was received and consumed abroad. The exception in section 13(8)(b) of the IGST Act was contrary to all principles of interpretation besides being unconstitutional and ultra vires the IGST Act itself. Therefore, the provision could be struck down since it was ultra vires to the fundamental principle of destination-based consumption tax.


Respondents contention 

The respondent argued that the provision could be enacted as per the legislation. Moreover, it was further argued, it was a settled proposition that for declaring a statute as unconstitutional, the court had to see whether there was legislative competence and whether the impugned provision was violative of any of the fundamental rights enshrined in Part III of the Constitution or not. By elaborating this, the respondent submitted that no statute could be struck down unless it was unconstitutional. The respondent had submitted a similar precedent of the Gujarat High Court in Material Recycling Association of India Vs. Union of India decided on 24.07.2020, where an identical challenge made to section 13(8)(b) of the IGST Act was repelled by the Gujarat High Court. 


Court’s observation 

Justice Bhuyan, one of the judges of the division bench, observed that the constitutionality of the statute was determined based on arguments of who challenges it. Justice Bhuyan also denied the views of the Gujarat High Court which was submitted by the respondent. The court had also further observed that section 13(8)(b) of the IGST Act runs completely opposite to the fundamental principle on which GST was based, i.e.,  it was a destination-based consumption tax as against the principle of origin-based taxation.


Court’s Judgement 

The division bench Justice Bhuyan held that section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 was ultra vires the said Act besides being unconstitutional. The Justice  in his judgment also said that 


“ By artificially creating a deeming provision in the form of section 13(8)(b) of the IGST act, where the location of the recipient of service provided by the intermediary is outside India, the place of supply has been treated as the location of the supplier that is in India. This runs contrary to the scheme of CGST act as well as the IGST Act deciding being beyond the charging sections of both the acts.”


Justice Abhay Ahuja stated that he was unable to share the opinion as same as Justice Bhuyan the matter was moved to 16th June 2021 for the pronouncement of his opinion.

Case Title: Dharmendra M. Jani vs Union of India and others

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