Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Gujarat High Court upholds
constitutional validity of “place of supply” provisions under GST law for intermediary services based on
“location of supplier”
August 5, 2020
In brief
The petitioner had filed a writ petition1 challenging the constitutional validity of section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) as ultra vires Articles 14, 19, 265 and 286 of the Constitution of India. Section 13(8)(b) of the IGST Act provides the place of supply for intermediary services rendered to overseas customers as the “location of the supplier” even if the consideration is earned in foreign exchange.
In detail
Facts
• The petitioner is an association comprising of the recycling industry engaged in manufacturing metals and castings, etc., for various upstream industries in India.
• The members of the
petitioner also act as agents for scrap and recycling companies based outside India, provide business promotion and marketing services and facilitate the sale of recycled scrap for their foreign principals.
• The foreign principals supply the goods to Indian or overseas purchasers directly and the members of the petitioner play no role
1 W.P.(C) 13238/ 2018
in the actual sale and purchase of recycled scrap.
The petitioner merely receives a commission from the foreign principals in convertible foreign currency.
• The petitioner contended that the services that its members provided qualify as “export of service” from India and earn valuable foreign exchange.
Taxpayer’s contentions Provision is ultra vires Article 286 of the Constitution of India
• Article 286 of the
Constitution of India inter alia restricts the imposition of tax on –
− Supply of goods or
service outside the State;
and
- Export of goods or services both outside Indian territory.
• The petitioner submitted that section 13(8)(b) of the IGST Act is in violation of Article 286 of the
Constitution of India. This is because the Parliament is empowered only to
formulate principles for determining when supply is undertaken in the course of export; it is not authorised to legislate and artificially assign the place of supply to be within India, where the services are clearly exported.
• The GST laws clearly define
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the recipient of a service2 as a person who is liable to pay consideration for the supply of goods or services. The services provided are for the benefit of the recipient located outside India, and therefore, such transactions are in the course of export and should fall within the exemption of Article 286(1)(b) of the Constitution of India.
• In addition, Central GST plus State GST is applicable on the supply of intermediary
services, as the place of supply and the location of the
supplier are in the same State.
As per Article 286 of the Constitution of India, the State has no jurisdiction to impose tax when the supply occurs outside the State.
Article 143 of the Constitution of India violated
• Section 13(8)(b) of IGST Act violates Article 14 of the Constitution of India, as it renders differential treatment for intermediary services by using different yardsticks for the determination of the place of supply of intermediary where the location of recipient is in India (place of supply is location of recipient) and where the recipient is located outside India (place of supply is the location of supplier).
• When the nature of
intermediary services and any other management consulting/
advisory services (where the place of supply is recipient basis) is the same, there is no reason why intermediary services should be treated differently.
• An exemption4 has been granted from the IGST on
2 Section 2(92) of CGST Act, 2017
3 Equality before law
4 Notification No. 20/2019-IGST dated 9 September 2019
intermediary services, when the locations of both the supplier and the recipient of goods are outside India. If the recipient of goods is a buyer in India, the exemption does not apply. It results in
discrimination based on the movement of goods and for service transactions (the exemption applies only to goods).
Definition of “intermediary” is vague
The petitioner contended that the definition of “intermediary”
under GST law does not provide a clear explanation of the phrase
“on its own account,” and therefore, results in ambiguity regarding the coverage of the definition. The petitioner relied upon various judicial precedents to contend that the definition of
“intermediary” is vague and is liable to be struck down.
Aberration to the principle of
“destination-based tax” and results in double taxation
• The taxation of intermediary services provided to the recipient located outside India under section 13(8)(b) of IGST Act is against the principle of GST law, which is a
destination-based tax. This also leads to tax cascading and double taxation, because such services will be taxed in the recipients’ country as import of service. This is also against international best practices.
• The petitioner referred to the parliamentary standing committee5, Tax Research Unit circular,6 fitment committee recommendations7 and various other representations made in this regard to
5 139th Parliamentary Standing Committee Report, which was tabled on 19 December 2017
6 Office Memorandum F. No 354/ 352/
2018-TRU dated 17 July 2019
substantiate that no tax should be levied on intermediary services where the recipient is located outside India, as it results in double taxation, despite contributing to foreign exchange earnings in India.
Revenue’s contentions Policy decision of the
Government cannot be held as unlawful or unconstitutional
• The provisions for the place of supply for “intermediary service” are purposeful and a considered policy decision of the Government of India. The provisions are in consonance with the pre-GST era. The Government is empowered to categorise goods and services for the purpose of taxation in such manner so that it meets its policies and objectives.
Such decisions are governed by revenue considerations and are within legislative
competence, as the legislature is free to choose the supply it intends to tax and the manner in which it intends to tax. As it is a policy decision of the Government, the levy cannot be held as unlawful or unconstitutional.
• Article 246A8 of the
Constitution of India provides Parliament with the exclusive power to make laws with respect to goods and services tax, and therefore, Parliament possess wide amplitude for creating deeming fictions under taxation matters to levy tax, which is essentially a question of policy.
• As the OECD suggests, in approach, intermediary services are treated distinctly from other services, even internationally. In many tax
7 37th Meeting held on 20 September 2019
8 Special provision with respect to goods and services tax
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jurisdictions, the services are taxable under reverse charge basis with input tax credit of the taxes paid.
High Court’s decision While holding that the place of supply for intermediary services as the location of supplier under section 13(8)(b) of the IGST Act not ultra vires the Constitution of India, the Gujarat High Court observed the following:
• Article 246A of the
Constitution of India begins with a non-obstante clause and provides the Parliament with the exclusive power to make laws with respect to GST, when the supply is in the course of inter-State trade or commerce. Considering the underlying change brought under GST to shift the base of levy of tax from the point of sale to the point of supply of goods or services, section 13(8)(b) of the IGST Act framed by the Parliament, is in consonance with the
Constitution of India.
• The legislature has thought it fit to consider the place of supply for intermediary services, as the location of the supplier of services. A
combined reading of the definition of “exporter” and
“intermediary” under the IGST Act shows that a person who is an intermediary cannot be considered an exporter, because he is only a broker/
agent who facilitates the supply of goods or services or both. It would not qualify as export of services merely because the invoices are raised on the person outside India with regard to the commission and foreign exchange that is
received in India.
• This is a consistent stand adopted by the Revenue under the erstwhile service tax regime, which continues in the GST regime.
• There is no case of double taxation, as the intermediary services provided by the petitioner would not be taxable in the hands of the recipient, and rather, the commission paid by the recipient of service located outside India would be eligible as an expense. Thus, if the services provided by an intermediary are not taxed in India, as the location of supplier, such services would not be liable to be taxed elsewhere.
• The basic logic or inception of section 13(8) (b) of the IGST Act, considering the place of supply as the location of supplier, is to levy Central GST and State GST, and therefore, such services would be outside the purview of IGST.
• Thus, the High Court held that section 13(8)(b) of the IGST Act is not ultra vires or unconstitutional in any manner. However, the High Court stated that the Revenue is open to consider the representations made by the petitioner to redress its grievance.
The takeaways
This ruling is only on the constitutional validity of the differential treatment adopted for determining the place of supply for “intermediary service” and the issue is not with regard to
whether the service provided by the petitioner would qualify as an
“intermediary service.” The High Court has upheld the provisions considering the specific powers under Article 246A of the
Constitution of India with respect to goods and services tax and the consistent legislative policy/
intent to tax intermediary services, continuing from the erstwhile service tax regime.
The High Court has stated that there is no double taxation on intermediary services, which may be challenged. This would depend on facts and the law prevalent in the recipient’s country, which may not be uniform. The OECD commentaries on VAT/
consumption taxes also examine situations of double taxation or double non-taxation, depending on each country’s VAT laws, and unlike the income-tax law, there are no tax treaties for the avoidance of double taxation in indirect tax laws. Considering the High Court’s observation that the Revenue can consider
representations to redress grievances and the past recommendations of various committees, it will be important to represent this issue with an exhaustive analysis of the double taxation aspect also.
Interestingly, the High Court has stated categorically that the intermediary services are liable to Central GST and State GST and not IGST. Thus, it becomes necessary to evaluate the position that companies adopt for such transactions, considering this judgement.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
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