GST UPDATE ON HC DECISION ON INTERMEDIARY SERVICES PART-1 118/2020-21

We all know that in order to consider a transaction as export of service, all the conditions as prescribed in section 2(6) of the IGST Act, 2017 should be fulfilled, i.e., supplier is located in India, recipient is located outside India, place of supply of service is outside India, payment is received in convertible foreign exchange and supplier of service and recipient are not merely establishments of a distinct person. However, in case of ‘intermediary services’ provided by service provider in India, GST is being leviable due to the fact that place of supply according to section 13(8) of the IGST Act, 2017, is location of service provider, which is in India, thereby not satisfying the condition that place of supply should be outside India. Consequently, the provision contained in section 13(8) of the IGST Act, 2017 has been challenged before the Hon’ble Gujarat High Court in the case of MATERIAL RECYCLING ASSOCIATION OF INDIA VERSUS UNION OF INDIA but theHon’ble High Court has upheld the validity of section 13(8)(b) and has confirmed that the service provided by intermediary in India cannot be treated as “export of services” under the IGST Act, 2017 and thus will be subject to CGST and SGST. The present update seeks to discuss the contentions and reasoning adopted by the High Court in summarised manner.
The contentions made by the petitioner can be categorised as follows for the sake of easy understanding:-
1.    Violation of Article 286 of the Constitution of India:-It was pleaded that according to Article 286 of Constitution, States cannot impose tax where supply takes place outside State or in the course of import or export of goods or services. However, Parliament is not authorised to legislate and artificially assign place of supply to be within India when clearly services are being exported out of India. It was contended that since the section 13(8) states place of supply to be location of service provider, the tax to be levied is CGST and SGST which is impermissible as State cannot levy tax on services which are provided outside State. Hence, it was contended that the provision of section 13(8) is violative of provisions contained in Article 286 of Constitution of India.
2.    Violation of Article 14 of the Constitution of India:-It was contended that section 13(8) (b) renders differential treatment when services are supplied within territory of India and when supplied outside India. If supplier and recipient were located in India, then as per section 12 of the IGST Act, 2017 there was no special provision for determining place of supply for intermediary and general rule being location of recipient was applicable. Hence, different yardsticks prescribed for same set of services when both parties are situated within and outside India.
3.    GST is destination based taxation system:- It was pleaded that as GST is consumption based/destination based tax reform, provision of section 13(8) prescribing place of supply as location of service provider as against the location of recipient of service is against the basic framework of law.
4.    Leads to double taxation:- It was submitted that Section 13(8)(b)of the IGST Act, 2017 contributes to taxcascading and double taxation contrary to theobjectives of the GST. It was submitted thattransaction of providing intermediary serviceswould be subject to tax in the country where therecipient is located as it would be an import ofservice for such recipient. It was therefore,submitted that the transaction would suffer GSTin India and tax in the country outside India.
5.    Exemption under Notification No. 20/2019-IGST dated 09.09.2019:- There is exemption to services provided by an intermediary when location of both supplier and recipient of goods is outside the taxable territory. Hence, there is distinction made regarding intermediary services rendered on the basis of movement of goods. The intermediary services provided in respect of goods have been exempted if the movement of goods is outside India but in case of intermediary services not involving movement of goods, CGST and SGST is payable which is discriminatory despite the fact that foreign exchange is being earned for the country.
Reasoning adopted by the High Court:- The reasoning adopted by the Hon’ble High Court is summarized as follows:-
1.    Article 246A of the Indian Constitution:-It was mentioned that Article 246A was introduced by the Constitution (One Hundred First Amendment Act, 2016 which provides special provision for GST. Clause 2 of Article 246A provides exclusive power to Parliament to make laws with respect to GST where supply takes place in the course of inter state trade or commerce. The basic underlying change brought inby the GST regime is to shift the base of levy oftax from point of sale to the point of supply ofgoods or service. In that view of the matter,Section 13(8)(b) of the IGST Act,2017 which isframed by the parliament inconsonance with theArticle 246(2) of the Constitution of India isrequired to be considered.
2.    Intermediary cannot be considered as exporter of service:-After perusing the provision of export of service under section 2(6) of IGST Act, 2017 and intermediary under section 2(13) of the IGST Act, 2017, it was held that person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitates supply of goods or services or both. The High Court held that the law does not seeks to discriminate between intermediary located in India and providing services abroad as the provision is drafted so as to levy CGST and SGST so that it is out of purview of IGST.
3.    Similar provision in erstwhile service tax regime:- It was concluded thatsimilar provision was existing in service tax regime w.e.f. 01.10.2014 and same situation is continued in GST regime as well. Therefore, it is consistent stand of the government to levy tax on services provided by intermediaries in India and so the same cannot be considered as export of services.
4.    No double taxation as contended by petitioner:- The contention of the petitioner that itwould amount to double taxation is also nottenable in eyes of law because the servicesprovided by the petitioner as intermediary wouldnot be taxable in the hands of the recipient ofsuch service, but on the contrary a commissionpaid by the recipient of service outside Indiawould be entitled to get deduction of suchpayment of commission by way of expenses andtherefore, it would not be a case of doubletaxation. If the services provided byintermediary is not taxed in India, which is alocation of supply of service, then, providingsuch service by the intermediary located in Indiawould be without payment of any tax and suchservices would not be liable to tax anywhere.

In view of the above reasoning, it was concluded by High Court that provision of section 13(8)(b) of IGST Act, 2017 is not ultra vires or unconstitutional in any manner.
The decision has opened new areas of disputes as it confirms levy of CGST and SGST on the services rendered by intermediaries to the service recipient located outside India while there being contrary opinions of various Advance Rulings. The detailed scrutiny on various points discussed above would be taken up in the forthcoming series of updates.

This is solely for educational purpose.
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GST UPDATE ON HC DECISION ON INTERMEDIARY SERVICES PART-1 118/2020-21

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