GST UPDATE ON HC DECISION ON INTERMEDIARY SERVICES PART-3 120/2020-21

We had discussed the controversy regarding applicability of CGST/SGST on the transaction of intermediary located in India providing services outside India in our earlier update. The present update seeks to discuss the contention regarding violation of Article 286 of the Constitution of India pleaded by the petitioner and the aspect of double taxation as considered in the HC decision.

The petitioner pleaded that as per Article 286 of the Indian Constitution, States cannot impose tax in cases where supplies are made outside the State or takes place in the course of import or export of goods or services. It was contended that since the provision contained in section 13(8) of the IGST Act, 2017 determines place of supply as location of supplier, then the tax to be levied is CGST/SGST because the location of supplier and place of supply are in the same State. However, in reality, the recipient is located outside India and so it was contended that levy of SGST on such transaction is violative of Article 286 of the Constitution of India. In this respect, in our view, the contention does not appear to be correct as there are situations wherein CGST/SGST is being levied even when the location of recipient is outside India. To illustrate- in case of hotel services provided to a foreigner, the hotel charges CGST/SGST because as per provision contained in section 13(3)(b) of the IGST Act, 2017, the place of supply in case of hotel services is the location of hotel. Consequently, the location of supplier and the place of supply is in same State and CGST/SGST is being levied. In case of hotel services, it does not matter who is the recipient of service. Therefore, even if services are provided to a foreigner, CGST/SGST is being levied and so there is no embargo in imposition of State tax in cases where recipient of service is located outside India. Hence, in our opinion, the Hon’ble High Court has correctly stated that there is no violation of Article 286 of the Constitution of India because as per Article 246A, Parliament is empowered with exclusive right to make laws with respect to GST where supply takes place in the course of inter-state trade or commerce and so the place of supply provisions implemented are in consonance with the powers given to the Parliament. Therefore, the pleading that State tax cannot be imposed is fallacious at the outset and was rightly rejected by the Hon’ble High Court.
However, another aspect regarding double taxation was not accepted in the manner in which the petitioner placed it before the Hon’ble High Court. It was pleaded that levy of tax on such transaction would lead to payment of tax by the intermediary in India and the recipient situated abroad thereby leading to double taxation. However, the Hon’ble High Court stated that the recipient located outside India would be claiming the amount paid as an expense and so tax is being levied only once in India on the said transaction. In this regard, it is pertinent to mention that whether tax is levied in the recipient’s country or not depends on law prevalent in respective country and this cannot be generalised. Consequently, the aspect of double taxation is to be examined on the basis of laws prevalent in each country and it cannot be said that there is no double taxation.

We will discuss other points related to this landmark HC decision in our next update.

This is solely for educational purpose.
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GST UPDATE ON HC DECISION ON INTERMEDIARY SERVICES PART-3 120/2020-21

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