Bombay High Court Upholds IGST Act: CGST & MGST Not Applicable on Intermediary Services Provided to Companies Located Abroad

Bombay High Court Upholds IGST Act: CGST & MGST Not Applicable on Intermediary Services Provided to Companies Located Abroad

The Bombay High Court in a significant ruling has held that services provided by intermediaries to persons abroad will not attract Central Goods & Services Tax (CGST) and Maharashtra Good & Services Tax (MGST also called SGST). However, it upheld the legality of Integrated Goods & Services Tax (IGST), which stipulates that tax can be imposed on services provided by intermediary persons to clients based outside India.

In the present case, the matter was referred to Justice G.S. Kulkarni, after there were conflicting views of two judges in a division bench.

The brief background of the case is that, the petitioners in both the petitions primarily challenged the constitutional validity of the provisions of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (for short ‘the IGST Act’). There was an additional prayer assailing the constitutional validity of Section 8(2) of the IGST Act. The petitioners had commonly contended that the impugned provisions were violative of Articles 14, 19, 245, 246, 246A, 248, 265, 269A, and 286 of the Constitution.

In the referral order, one of the Hon’ble Judges of the Division Bench, struck down Section 13(8)(b) of the IGST Act as ultra vires, the IGST Act, besides being unconstitutional, whereas the companion Hon’ble Judge upheld the validity of the said provisions on all counts.

The petitioner claimed to be a proprietary firm, engaged in providing marketing and promotion services to its customers located outside India. The overseas customers to whom services are provided by the petitioner are inter alia engaged in the manufacturing and/or sale of goods. Such customers may or may not have an establishment in India. The petitioner provides services only to its foreign principal and receives consideration in convertible foreign exchange. To provide such services, the petitioner enters into an agreement with its overseas customers.

The petitioner contended that the nature of the transaction(s) entered by the petitioner with its overseas customers are transactions of "export of services", as the petitioner was providing services to its overseas clients, which were consumed and used by the overseas clients outside India, for which valuable foreign exchange was earned by the country, hence, such transactions were outside the purview of the CGST and the MGST Acts.

The grievance of the petitioners was in respect of the effect of Section 13(8)(b) categorizing intermediary services which were regarded as 'export of services' undertaken by the petitioners, to be an 'intra-State supply' for the purposes of the CGST and MGST Act. It was thus their contention that the provisions of Section 13(8)(b) remaining in the IGST Act is stated to be of no harm and injury to the petitioners, as any export of services falling under the IGST Act would fall within the ambit of Section 16 providing for ‘zero rated supply’.

The petitioners through advocates Bharat Raichandani and Abhishek Rastogi argued that no double taxation is permitted. But any levy of GST would amount to more than double taxation as customs duty is already paid on imported CIF value of the goods. The argument was that the IGST provisions are invalid as the firm's commission will suffer tax at the hands of the petitioners (CGST + SGST), at the hands of the foreign buyer and at the hands of the Indian purchaser (importer) (IGST). This is a classic case of double taxation.

The Additional Solicitor General (ASG) Anil Singh and Senior Counsel Pradeep Jetly for Central Ministry of Finance opposed stating, Services being rendered by the petitioner take place entirely in India, hence, there is no export of service. Three services i.e., soliciting purchase orders, promotion and marketing are all conducted within India though the recipients of the service may be outside India. Thus, it was argued that on the reading of the petition itself, the services do not amount to export.

The primary question which was required to be decided by the referee Judge was whether Section 13(8)(b) of the IGST Act 2017 is ultra vires the Constitution and the provisions of the IGST Act or otherwise.

The Court while agreeing with the contention of the petitioners that the transactions in question of the petitioners were in fact a transaction of export of service, as the recipient of service is the foreign principal, observed, “the destination/consumption of the services as provided by the petitioners takes place in a foreign land. This completely satisfies the test of ‘export of service’ as defined under Section 2(6) of the IGST Act, also as there is no contra indication that ‘factually’ it can be regarded as either inter-State or intra-State sale of services.”

Thereafter, the Court noted that the IGST Act was enacted to make provision for the levy and collection of tax on “inter-State supply of goods or services or both,” by the Central Government.

The provisions of the CGST Act and the MGST Act are pari materia, hence reference to only the provisions of the CGST Act would suffice, stated the judge.

The judge while applying the ‘destination principle,’ held, “the amount by way of commission, to be paid to the petitioners are already subsumed in the transaction which the foreign principal may have with its customer (the Indian importer) on which the Indian importer is already being taxed. Thus, once such supply has already been taxed at the hands of the Indian importer, it does not fit into any acceptable parameters that the export of services between the intermediaries and the foreign principal (recipient of services) which is an independent transaction, by any analogy, can be even remotely considered to be a part of the transaction between the foreign supplier and the Indian importer, in the light of a destination based principle on which the Goods and Service Tax is founded.”

The judge remarked that, it would be quite fatal nay absurd to recognize two different transactions being clubbed together, merely for the purposes to be included and/or to be brought within the regime of the CGST and the MGST Act.

The Court was of the view that there was no basis or any hypothesis to conclude that the beneficiary of the services provided by the intermediary, becomes an Indian party so as to apply the destination principle and that too at the hands of the exporter of service. The Court averred that it would be too far-fetched to hold that the intention of Section 13(8)(b) read with Section 8(2) of the IGST Act is to reach out to such foreign transactions so as to tax them as an Intrastate trade and commerce, which has no foundation for taxability, either under the IGST Act or CGST/MGST Act.

The Court discerned that it is necessary to confine transactions which are clearly transactions in the course of Inter-State trade or commerce and more particularly transactions of export of services as defined under Section 2(6) of the IGST Act and the intermediary services, to be subjected, relevant and confined only to the provisions of the IGST Act, and transactions which are in the course of Intra-State trade or commerce, shall remain confined to the provisions of the CGST Act and the MGST Act.

The Court, by applying the parameters of Section 13(1) read with sub-Section (b) of the IGST Act insofar as ‘intermediary services’ are concerned, for the purposes of the IGST Act, the place of supply of services in regard to the transaction of export of services shall be the location of the supplier of services namely the location of the intermediary.

The Court concluded that the provisions of Section 13(8)(b) and Section 8(2) are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST Act and MGST Act, on such interpretation, the provisions are intra vires the Constitution, the IGST, the CGST and the MGST Acts.

Lastly, the Court observed, “the provisions of Section 13(8)(b) and Section 8(2) of the IGST Act are legal, valid and constitutional, provided that the provisions of Section 13(8)(b) and Section 8(2) are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST and MGST Acts.”