GST UPDATE ON CONSTITUTIONAL VALIDITY OF SECTION 13(8)(b) OF IGST ACT, 2017 PART-I:-

The grievance of the intermediaries providing services to foreign customers as regards levy of tax stems from the erstwhile regime as even when services are provided to foreign customers and payment is received in convertible foreign currency, it is not considered as export of service by way of deeming fiction of law. The similar provision is incorporated in GST regime in section 13(8)(b) of the IGST Act, 2017. M/s DHARMENDRA M. JANI had challenged the constitutional validity of the provision contained in section 13(8)(b) of the IGST Act, 2017 before the Hon’ble Bombay High Court which is the subject matter of discussion of the present update.
The petitioner challenged the validity of section 13(8)(b) of the IGST Act, 2017 on following grounds:-
1.     Levy of tax on export of service is ultra vires Article 269A of the Constitution of India.
2.     Section 8(2) and section 13(8)(b) of the IGST Act are ultra vires section 9 of the CGST Act which is the charging section.
3.     GST is a destination based tax on consumption. Therefore, services provided by a service provider in India to a service receiver located outside India which is treated as export of service cannot be taxed; for taxing a service it is not the place of performance but the place of consumption which is relevant. Once the services are consumed outside India, Parliament has no jurisdiction to levy tax on such services consumed outside India.
4.     Levy of GST on an intermediary like the petitioner is violative of Article 14 of the Constitution of India.
5.     Levy of CGST and SGST on the export of service by the petitioner to its overseas customers constitute 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.
6.     GST is an indirect tax. The cardinal rule of indirect taxation is that it must be capable of being passed on to the end receiver of the service. Therefore, it is trite that an agent cannot be burdened with GST.
7.     Levy of GST on an intermediary like the petitioner providing services to an overseas customer would lead to double taxation on the same service.
The departmental representative emphasised on the fact that similar provisions were there in Place of Provision of Service Rules, 2012 which were upheld as proper under erstwhile regime. They also contended that the provision under section 13(8)(b) of the IGST Act, 2017 supports the Make In India concept. Reliance was also placed on Gujarat High Court decision given in the case of Material Recycling Association of India upholding the validity of section 13(8)(b) of the IGST Act, 2017.
One of the judges supported the contentions of the petitioner and opined that provision contained in section 13(8)(b) of IGST Act, 2017 are ultra-vires and un-constitutional. The reasoning adopted is discussed as follows:-
Reliance was placed on the decision given in the case of All India Federation of Tax Practitioners wherein it was held that service tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities. It is not a charge on business but on the consumer and it would be logically leviable only on services provided within the country.
Reference was also made to the decision given in the case of Commissioner of Service Tax Vs SGS India Pvt. Ltd. [2014 (34) STR 554 (Bom)] wherein it was held by the hon’ble Bombay High Court that service tax is not payable on the technical testing and analysis service provided in respect of goods imported from the customers located abroad as it was to be considered as export of services because delivery of test report to the foreign client is essential part of service and the consideration was also received in foreign convertible currency.
Thereafter, Article 245 of the Constitution was analysed so as to conclude that the Parliament is incompetent to make law having extra-territorial operation.
Reference was also made to Article 246 of the Constitution of India dealing with powers of Parliament to make laws. Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List. However, Article 246A pertaining to levy of GST overrides Article 246 and Article 254 of the Constitution of India. Article 269A states that Parliament has exclusive power to make laws with respect to GST where the supply of goods or of services or both takes place in the course of inter-state trade or commerce. Furthermore, Parliament may formulate the principles for determining the place of supply and when a supply of goods or services or both takes place in the course of inter-state trade or commerce. Thus, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply. Moreover, Article 286 restricts State to impose tax on export of services or supply of goods or services outside State.
In so far the present case is concerned, it is certainly a supply of service from India to outside India by an intermediary. Petitioner fulfills the requirement of an intermediary as defined in section 2(13) of the IGST Act. That apart, all the conditions stipulated in sub-section (6) of section 2 for a supply of service to be construed as export of service are complied with. The overseas foreign customer of the petitioner falls within the definition of ‘recipient of supply’ in terms of section 2(93) of the CGST Act read with section 2(14) of the IGST Act. Therefore, it is an ‘export of service’ as defined under section 2(6) of the IGST Act read with section 13(2) thereof. It would also be an export of service in terms of the expression 'export' as is understood in ordinary common parlance. Evidently and there is no dispute that the supply takes place outside the State of Maharashtra and outside India in the course of export. However, it was noticed that section 13(8)(b) of the IGST Act read with section 8(2) of the said Act has created a fiction deeming export of service by an intermediary to be a local supply i.e., an intra-state supply. This is definitely an artificial device created to overcome a constitutional embargo.
Furthermore, reliance was placed on the recommendations of the Parliamentary Standing Committee wherein it was recommended that the government may cause amendment to section 13(8) of the IGST Act so as to change the provision of place of supply of intermediary services and make it subject to the default section 13(2) so that the benefit of export of services would be available. This is for the reason that it is the long standing policy of the Government of India to export services without exporting taxes and duties.
Reliance was placed on the Apex Court decision given in the case of GVK Industries Limited wherein it was held that Parliament does not have the powers to legislate for any territory, other than the         territory of India or any part of it. Any laws enacted by the Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra-vires and would be laws made for a foreign territory. Similar view was held in the case of Sondur Gopal wherein the Apex Court held that Article 245(2) does not mean that law having extra-territorial operation can be enacted which has no nexus at all with India. Parliament is incompetent to make laws having extra-territorial operation. It was also held by the Hon’ble Supreme Court in the case of M/s Electronics Corporation of India Limited Vs Commissioner of Income Tax that unless a nexus with something in India exists, Parliament would have no competence to make the law.
It was further held that charging section 9 of the CGST Act levies tax on all intra-state supplies of goods or services whereas the charging section 9 of the IGST Act levies tax on all inter-state supplies of goods or services. Hence, it is apparent that section 9 of the CGST Act cannot be invoked to levy tax on cross-border transactions, i.e. export of services. Therefore, the provision contained in section 13(8)(b) of the IGST Act, wherein CGST and SGST is levied on services provided by intermediary located in India to recipient outside India runs contrary to the scheme of CGST Act and IGST Act and against the charging sections of both the Acts.
The hon’ble judge also disagreed with the judgment of Gujarat High Court in the case of Material Recycling Association of India concluding that the section 13(8)(b) of the IGST Act cannot be said to be ultra-vires or unconstitutional. It was stated that the decision of one High Court is not binding on another High Court though it deserves due consideration and certainly has a high persuasive value.
Apart from the above reasoning, the contention that similar provision was prevalent in Place of Provision of Service Rules, 2012 was rejected on the grounds that the present challenge on the constitutional validity of section 13(8)(b) of IGST Act, 2017 cannot be rejected by referring to a non-existent provision. Moreover, the contention made by department counsel regarding Make In India program of government was also rejected in absence of supporting statistics and analysis.
The hon’ble judge concluded that section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1) (b) of the Constitution. The extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system; rather it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination based consumption tax as against the principle of origin based taxation. Hence, it was concluded that provision contained in section 13(8)(b) of IGST Act was unconstitutional.

It is pertinent to mention here that the above analysis pertained to the opinion of one of the judge. As the other judge differed in the opinion, the analysis of the second judge will be discussed in our next update on this decision.

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GST UPDATE ON CONSTITUTIONAL VALIDITY OF SECTION 13(8)(b) OF IGST ACT, 2017 PART-I:-

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