Whether the provisions of Section 13(8)(b) r.w.s. 2(13) and 8(1) of the IGST Act,2017 are ultra vires and unconstitutional or not.

[Rachit Agarwal]

MATERIAL RECYCLING ASSOCIATION OF INDIA VERSUS UNION OF INDIA & 2 OTHER (S) [2020 (8) TMI 11 - GUJARAT HIGH COURT]

Facts of the Case

1. The members of the petitioner also facilitate sale of recycled scrap goods for their foreign principals in India and other countries.
2. Members of the petitioner association have no role to play in the actual sale and purchase of recycled scrap as the goods supplied by foreign clients to its purchasers are directly shipped by the foreign client to the Indian or overseas purchaser
3. The members of the petitioner association raise invoices upon its foreign client for such commission received by them

Petitioner’s Plea

1. Parliament is not authorized to legislate and artificially assign the place of supply to be within India when clearly the services are being exported out of India.
2. Though the services are rendered outside India, the member of the petitioner association is subjected to make the payment of CGST and SGST in view of the provision of Section 13(8)(b) of the IGST Act,2017 as the services would not be considered as export of services, but same would be considered as intermediary services
3. If the supplier and recipient of intermediary services are located in the territory of India, then as per Section 12 of the IGST Act,2017 there is no separate provision carved out which prescribes a special treatment for intermediary services.
4. Different yardsticks prescribed for the same set of services when both parties are situated within and outside India.
5. When the nature of intermediary services compared with the other advisory services that are provided by management consultants, lawyers or portfolio managers, they substantially remain the same except that these service providers are required to perform different functions.
6. Treating the intermediary services provided by the members of the petitioner association to be the place of supply at India according to Section 13(8)(b) of the IGST Act,2017 would result into violation of Article-14 of the Constitution.
7. Section (13)(8)(b) of the IGST Act,2017 suffers from incurable defect of vagueness and is therefore, liable to be struck down.
8. Recipient is located as it would be an import of service for such recipient.
9. Section 13(8)(b) of the IGST Act,2017 suffers from the defect of unreasonableness as it creates a deeming fiction.
10. In case of services provided by an intermediary when location of both supplier and the recipient outside the taxable territory and such services should be taxed at Nil rate.
11. Levy of IGST on intermediary services when the recipient is located outside the India which results in double taxation and is not in line with the destination based principle as was intended by the GST legislation.
12. Entry no.12AA introduced by the Notification No.20/2019-Integrated Tax (Rate) provides exemption to ‘intermediary services’ provided by a resident service to a non-resident recipient when the person who receives goods from such person is located outside India. In such circumstances, the members of the petitioner association are subject to discrimination and suffers from effect from being violative of Article 14 of the Constitution of India.
13. There is a possibility that intermediaries could shift base of their providing services to a location outside India for the purpose of billing the service recipient and/or close their Indian office so as to escape tax implication.

Department Plea

1. IGST cannot be levied thereon is not tenable in law as the petitioner is providing intermediary services to the recipient located outside the Indian Territory
2. This transaction will not be covered within the definition of export of services, as provided in Section 2(6) of GST Act, 2017
3. The existing provisions are in consonance with pre- GST era i.e. Service Tax
4. Parliament has got wide amplitude to create deeming fiction/s under taxation matters
5. Article 246A gives Parliament exclusive power to make laws with respect to goods and services tax.
6. Policy decision of the Government the levy cannot be said to be unlawful or violating the tenets of the Constitution of India.
7. Benefits accruing to exporters of services are meant for those who actually export services and not to every other entity which is directly or indirectly associated with the exporter
8. One service cannot be compared with other service so as to justify the violation of Article 14 of the Constitution
9. There is no conflict between section 13(2) and 13(8)(B) IGST Act, 2017
10. Hon'ble Supreme Court in case of EAST INDIA TOBACCO COMPANY VERSUS THE STATE OF ANDHRA PRADESH AND ANOTHER [1962 (4) TMI 57 - SUPREME COURT] wherein the Apex Court has held that in tax matters, "the State is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably.
11. GST Council is a constitutional body with the representation of Union and State Governments and the GST Council alone has the power to consider such views of the trade/commerce/parliamentary committees and recommend changes.
12. Levy of tax on such intermediary service does not infringe the right of the members of the petitioner from practicing any profession or carrying out any occupation or trade or business and as such does not violate Article 19(1)(g) of the Constitution
13. The supply of services by the Intermediaries to the recipients outside India are not export of services irrespective of the mode of payment since the service provided by the members of the petitioner is not export of service, the question of Violation of Article 265 and 286 of the Constitution of India does not arise.
14. On catena of judgments of the Apex Court are within the legislative competence as the legislature is free to pick and choose the supply that it intends to tax and the manner in which it intends to tax.
15. If an Indian exporter hires a service of an agent located overseas for export of service, such service should not be subject to tax in India as effective use and enjoyment of service would be outside India
16. Internationally also the intermediary services are treated distinctly from other services in approach as suggested by OECD for taxation of services, it recommends a distinct approach for taxation of intermediary services.
17. Commission income earned by the intermediary is taxable in the hands of intermediary and ITC of same is also eligible to the intermediary and thus no double taxation
18. The services of such intermediary to business recipient is taxable on reverse charge basis and ITC of taxes paid is available to the business to off-set their tax liability on further supplies.
19. Hon'ble Supreme Court held that a policy decision is subject to judicial review on the the grounds that:(a) If it is unconstitutional, or (b)If it is dehors the provisions of the Act and the regulations; or (c) If the delegate has  acted beyond its powers of delegations; or (d) If the executive policy is contrary to the statutory or a larger policy. None of the aforesaid conditions is applicable in the present case.

Court Order

1. The basic underlying change brought in by the GST regime is to shift the base of levy of tax from point of sale to the point of supply of goods or service.
2. Conjoint reading of Section 2(6) and 2(13), which defines export of service and intermediary service respectively, then the person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitate the supply of goods or services or both.
3. Only because, the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services
4. There is no deeming provision as tried to be canvassed by the petitioner, but there is stipulation by the Act legislated by the parliament to consider the location of the service provider of intermediary to be place of supply. Similar situation was also existing in service tax regime w.e.f. 1^st October 2014
5. The contention of the petitioner that it would amount to double taxation is also not tenable  as commission paid by the recipient of service outside India would be entitled to get deduction of such payment of commission by way of expenses and therefore, it would not be a case of double taxation.

It cannot be said that the provision of Section 13(8)(b) r.w. Section 2(13) of the IGST Act,2017 are ultra vires or unconstitutional in any manner.