‘Constitutional’. Bombay HC settles dust on constitutional validity of provisions for IGST on intermediary services

The Bombay High Court settled the issue of Integrated Goods & Services Tax (IGST) on intermediary services. After a division bench divided over the issue, the third judge upheld the constitutional validity of provisions related to IGST making it 2:1 in favour of validity. However, experts feel the big challenge would be who will levy the tax. Also, this would require amendment in law or rules.

Considering the views taken by Justice G S Kulkarni and one of the members of the division bench (Justice Abhay Ahuja), “we hold the provisions of Section 13(8)(b) and Section 8(2) of the IGST to be legal, valid and constitutional,” a division bench of Justices Ahuja and Sunil B Shukre said.

Section 13(8)(b) of the IGST Act refers to intermediary services while determining the location of the supplier as the Place of Supply (PoS). Section 8(2) of the IGST Act defines intra-state supply, which states that if a supplier is in India and the recipient is located abroad, then these will be treated as establishments of distinct persons.

The matter was brought before the single judge after a difference in opinion arose between two judges on a division bench in 2021. While one of them struck down Section 13(8)(b) of the IGST Act as ultra vires, the companion Judge upheld the validity of the said provisions on all counts. Following this, the matter was referred by the Chief Justice to a third judge, who also held the provision. Then, the matter was referred to a division bench for pronouncement of the final judgment so that the matter can be disposed.

Some confusion

Expert feels though the provisions have been upheld as constitutionally valid, there is still confusion about whether State can levy state GST on these transactions. “While the provisions have been held to be constitutionally valid, the moot point remains whether the state will have the power to collect state GST on the supplies of the Intermediaries as the location of the service provider and the place of provision of the services are in the same state”, said Abhishek A Rastogi, founder of Rastogi Chambers, who had argued the writ petition before the High Court.

“It is hoped that the appropriate pragmatic amendments are made prospectively so that there is more clarity to the Indian businesses and that they do not become uncompetitive to the neighbouring countries rendering similar services”, added Rastogi.

‘Distinct transactions’

One of the petitioners, a proprietary firm, is engaged in providing marketing and promotion services to customers located outside India. The overseas customers to whom services are provided by the petitioner are engaged in the manufacture 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.

Under such an agreement, the petitioner provides services to enable his foreign principal to get purchasers for its goods in India or elsewhere. The petitioner thus undertakes the marketing and promotion of goods sold by its overseas customers in India. There are two transactions – one between the petitioner and the foreign customers, and the second between the foreign customer and Indian buyers. Both are distinct transactions.

The petitioner said its transaction is an export of services and outside the purview of the CGST and the MGST Acts. Accordingly, it pleaded to the court to declare that the provisions of GST laws were null and void. The second petition was also on similar lines.

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