Justice Ahuja's dissenting judgement: Upheld the constitutional validity of Section 13(8)(b) of the IGST Act

The Hon’ble Bombay HC in Dharmendra M. Jani v. Union of India [W.P.  No. 2031 of 2018 dated June 09, 2021] Justice Ujjal Bhuyan held that Section 13(8)(b) of the Integrated Goods and Services Act, 2017 ('the IGST Act') is ultra vires of Articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution of India ('the Constitution') and also ultra vires the provision of Central Goods and Services Tax Act, 2017 ('the CGST Act'), IGST Act and Maharashtra Goods and Services Tax Act, 2017 ('the MGST Act'). Justice Abhay Ahuja dissented with the Justice Ujjal Bhuyan and opined that Section 13(8)(b) of the IGST Act is constitutionally valid and operative for all purposes.

Facts

Mr. Dharmendra M Jani ('the Petitioner') is a proprietor of M/s. Dynatex International. The Petitioner is engaged in providing marketing and promotion service to overseas customers.

The overseas customers are engaged in manufacture and sale of goods. As per the agreement the Petitioner solicits purchase orders for these overseas customers. The Indian purchaser i.e. importer directly gives order to the oversea customer. The sale invoice is raised in the name of the Indian purchaser and direct payment is made to overseas customer. The oversea customer pays commission to the Petitioner against the invoice issued by the Petitioner. This payment is received by the Petitioner in India in convertible foreign exchange.

The present writ petition has been filed to challenge the constitutional validity of Section 13(8)(b) read with Section 8(2) of the IGST Act.

Issue

Whether Section 13(8)(b) read with Section 8(2) of the IGST Act is constitutionally valid.

Held

The Hon’ble Bombay HC in W.P. No. 2031 of 2018 dated June 09, 2021 held as under:

Justice Abhay Ahuja

Constitutionality

• Noted that, IGST Act has been enacted under Article 246A(1) of the Constitution, under which Parliament has exclusive power to make GST Laws in case of inter-state supply. Further, under Article 269A(5) of the Constitution the rules or principles for place of supply are also to be formulated by the Parliament.
• Observed that, as per generalia specibus non derogant when there is a specific provision defining intermediary in Section 2(13) of the IGST Act and intermediary services are specifically dealt with in Section 13(8)(b) of the IGST Act, the question of application of general provision of Section 2(6) of the IGST Act of export of services would not arise. So there is no question of deeming the Petitioner’s supply of intermediary services to be intra-state supply.
• Analysed that, just because explanation to Article 269A of the Constitution deems import to be supply in the course of inter-State trade or commerce, in no way it would take away the power of the Parliament to stipulate any other type of supply to be a supply in the course of inter-State trade or commerce as:
  • A conjoint reading of Article 269A(1) with Article 269A(5) and Article 246A of the Constitution exclusively empowers the Parliament to make law on what is inter-state supply and what is not which obviously includes what is intra-state in contradistinction to what is inter-state and that power is exclusively with the Parliament.
  • The power to stipulate the nature of supply and place of supply, is pursuant to the provisions of Article 269A(5) read with Article 246A and Article 286 of the Constitution and not ultra vires to the Constitution.

On Petitioner’s case of Section 13(8)(b) of the IGST Act invoking Section 8(2) of the IGST Act to deem inter-state supply as intra-state supply

• Section 13(8)(b) of the IGST Act comes into the picture in the case of Petitioner. Once the Parliament has in its wisdom stipulated the place of supply in case of Intermediary Services be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction. In any event Section 8(2) of the IGST Act is not applicable to the case of Petitioner as location of supplier and place of supply is not within same State (in India) but in taxable territory viz. India.
• Further, when there is a specific provisions defining Intermediary under Section 2(13) of the IGST Act and place of supply for intermediary Services under Section 13(8)(b) of the IGST Act, the question of application of a general provision would not arise, particularly when the constitutionally of both the above provisions has been upheld.
• Therefore, Section 13(8)(b) or Section 8(2) of the IGST Act are not unconstitutional.

On Petitioner’s submission that no State has the authority to levy local tax on export of services as that would be in violation of Article 286(1) of the Constitution. Further, Section 13(8)(b) read with Section 7(5) has deemed an export of service to be a local supply which is in violation of Article 286(1) ibid

• Stated that as per newly amended Article 286(2) of the Constitution pursuant to the Constitution (101st) Amendment Act, 2016, the Parliament can formulate principles for determining when a supply of goods or services or both have taken place either outside the State or in the course of import into or export out of the territory of India. The whole purpose of Article 286(2) of the Constitution is to empower the Parliament to formulate principles to determine the situs of supply.
• Further, the omission of Article 286(3) ibid pursuant to the Constitution (101st) Amendment Act, 2016 signifies that the power to legislate on any matter relating to inter-state supply is with the Parliament and not with the State.
• It is in furtherance of the powers under Article 246A, 269A, and 286 of the Constitution, the Parliament by legislation, in Sections 7 and 8 of the IGST Act has provided for determination of the nature of supply and in Sections 10 to 14 of the IGST Act for a place of supply.
• Thus, there is no violation of Article 286(1) of the Constitution.

On Petitioner’s submission that Section 13(8)(b) of the IGST Act are ultra vires Article 245 of the Constitution and whether the Parliament is empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India on hypothetical situation

• A hypothetical situation in respect of above challenge is not the case of the Petitioner. Relied on Supreme Court’s case in Union of India v. Exide Industries Ltd. [(2020) 5 SCC 274], wherein it was held that the Court, cannot venture into hypothetical spheres which are not contemplated in the enactment while adjudging the constitutionality of a duly enacted provision and unfounded limitations cannot be read into the process of judicial review.
• It would, therefore, not be necessary to deal with this hypothetical situation to consider the challenge under Article 245 of the Constitution.
• Further, noted that Petitioner is seeking to include these facts during the course of hearing thus, it would not be necessary to deal with the challenge on the basis of these facts
• However, stated that a plain reading of Article 245 of the Constitution, makes it clear that the Section 13(8)(b) of the IGST Act in no way violates this provision as from the plain language of the said section it is clear that the same do not seek extra territorial operation nor seek to levy tax on service recipient outside India. All that Section 13(8)(b) ibid does is to provide for place of supply in respect of intermediary services where the service recipient is outside India (as in the case of the Petitioner), to be the location of the supplier of services. Therefore, there is no question of extra territorial legislation here.
• Further, Article 245(1) of the Constitution begins with the language, subject to the provisions of this Constitution means that Article 245 is subject to the other provisions of the Constitution such as Article 246A, Article 269A, the bringing in of the new GST law as well or legislations on interstate supply of goods and services as well as on principles regarding place of supply.
• Therefore, Section 13(8)(b) of the IGST Act is not ultra vires to Article 245 of the Constitution.

On Petitioner’s challenge under Articles 14 of the Constitution

There is no discrimination between Petitioner’s case and other exporter of services. The intermediary services rendered by Petitioner are specifically provided as one of the services in addition to banking services and transport hiring services where the place of supply has been provided as the location of the supplier of services as per Section 13(8)(b) of the IGST Act.

• The Petitioner is providing intermediary services and accordingly goods are imported from overseas customer to Indian importer, which is the transaction of import of goods for which the intermediary services have been provided by Petitioner. Therefore there is no discrimination between the Petitioner and others importer of services.
  • Therefore, there is a reasonable classification founded on intelligible differntia which has a rational relation/nexus to the object sought to be achieved. The objectives could be to encourage the Make in India program and create the level playing field or to prevent revenue from escaping.
  • Therefore, there is reasonable classification and the same is neither arbitrary nor unreasonable and cannot be said to be discriminatory in any manner.

On Petitioner’s challenge under Articles 19(1)(g) of the Constitution

• Stated that it is not understandable as to how by virtue of Section 13(8)(b) of the IGST Act, the Petitioner would be restricted to carry on its business or for that matter result in closure of business of Petitioner. Further, It is a legitimate power of the parliament, to enact IGST Act including Section 13(8)(b) ibid.
• Observed that if this submission was to be considered, then any tax levied by the Central or State Government would be a restriction to carry on trade under Article 19(1)(g) of the Constitution.

On Petitioner’s challenge that Section 13(8)(b) of the IGST Act runs contrary to the scheme of the GST Law and deems an inter-state supply as intra-state supply

• When the Constitution has empowered the Parliament to formulate principles determining the place of supply, Section 13(8)(b) of the IGST Act cannot be said to be ultra vires the charging section as Section 13(8)(b) of the IGST Act does not violate the levy on the supply made by the intermediary, particularly in view of Section 7 of the IGST Act, which designates such supplies to be inter-State supplies.
• There cannot be any dispute as to the doctrine of pith and substance as canvassed by the Petitioner while deciding on legislative competence, no tax can be levied without authority of law. Having already held that Section 13(8)(b) of the IGST Act has been enacted pursuant to the authority of law and that the said Section 13(8)(b) of the IGST Act cannot be linked with Section 8(2) of the IGST Act to deem an inter-state supply as an intra-state supply, the said concerns are unfounded.

On Petitioner’s submission that Section 13(8)(b) of the IGST Act is ultra vires the charging Section 9 of the CGST Act/ MGST Act

• It could not be said that Section 13(8)(b) of the IGST Act is in breach of Section 9 of the CGST Act/MGST Act as both these provisions operate in different fields. When there is a specific provision dealing with the case of the Petitioner Section 13(8)(b) of the IGST Act, which has been enacted pursuant to the powers under Article 269A(5) of the Constitution, challenge appears to be without substance.

Double taxation

• There are two distinctly identifiable supplies involved:
• Supply of service by the Intermediary to the overseas supplier of goods which attracts Section 13(8)(b) of the IGST Act.
• Supply of goods by overseas supplier to the Indian importer which is liable to tax under the Customs Act, 1962 and the incidence of customs duty would be on the importer of goods not on the intermediary service provider.
• The assertion that the same supply would be taxed by foreign service recipient in his hands in the importing country, not tenable in the eyes of law as IGST is not extra-territorial and generally speaking a commission paid by the recipient of service outside India would be entitled to get deduction of such payment of commission by of expenses and therefore, it would not be a case of double taxation. Moreover, that would depend on the laws of that country.

• Petition dismissed on above discussed grounds.

Relevant Provisions

Article 269A(1) & (5) of the Constitution

'(1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation. - For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

(5) Parliament may, by law, formulate the principal for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce'

Article 286 of the Constitution

'Article 286. Restrictions as to imposition of tax on the sale or purchase of goods.-

(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place-

(a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).'

Section 2(6) of the IGST Act

'2. Export of Services

(6) 'export of services' means the supply of any service when,- -

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8'

Section 2(13) of the IGST Act

'(13) 'intermediary' means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account'

Section 7(1) and (5) of the IGST Act

'7. Inter-State supply

(1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in- -

(a) two different States;

(b) two different Union territories; or

(c) a State and a Union territory,…

(5) Supply of goods or services or both,- -

(a) when the supplier is located in India and the place of supply is outside India;

(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or

(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,

shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.'

Section 8(2) of the IGST Act

'8. Intra-State supply

(2) Subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:..'

Section 13(8)(b) of the IGST Act

'13. Place of supply of services where location of supplier or location of recipient is outside India.

(8) The place of supply of the following services shall be the location of the supplier of services, namely:- -

 (b) intermediary services;'