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TMI BlogA view: Why ‘Intermediary Service provided to recipient located outside India’ cannot fall under ‘Inter-State Supply’ and Why IGST is not leviable there against? And alternatively, why such provision treating it as ‘Inter-State Supply’ will be unconstitutional?X X X X Extracts X X X X X X X X Extracts X X X X ..... A view: Why ‘Intermediary Service provided to recipient located outside India’ cannot fall under ‘Inter-State Supply’ and Why IGST is not leviable there against? And alternatively, why such provision treating it as ‘Inter-State Supply’ will be unconstitutional? - By: - Amit Agrawal - Goods and Services Tax - GST - Dated:- 29-1-2019 - - There is substantial controversy prevalent in trade industry on whether intermediary services provided by Supplier located in India to Recipient located outside India ( hereinafter referred as subject supply ) falls under Inter-state supply u/s 7 (5) (c) of IGST Act, 2017 or under Intra-State Supply u/s 8 (2) of IGST Act, 2017 ? And whether service provider is liable to pay IGST on said transaction or SGST CGST? Genesis of the controversy involved: 1. Section 13 of IGST Act determines Place of Supply where location of supplier of services or the location of the recipient of services is outside India, while Section 12 of IGST Act determines Place of Supply where location of supplier of services the location of the recipient of services is in India. As per Section 13 (2) prescribes that the place of supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services, except the services specified in sub-sections (3) to (13), shall be the location of the recipient of services. As per Section 13 (8) (b) , the place of supply of the intermediary services shall be the location of the supplier of services. 2. One of the conditions prescribed under Section 2 (b) of IGST Act, 2017 , to fall under the category of export of services ( thereby be eligible for making Zero rate supply u/s 16 (a) ), is that place of supply should be located outside India. Due to this, most prevalent view in the industry is that GST is indeed payable (without any chance of refund there-against) by the supplier of intermediary services though location of the recipient of such service is outside India. 3. But, substantial controversy seems to be on the issue of whether subject services falls under Inter-state supply as defined under section 7 of IGST Act, 2017 ( thereby IGST is payable there against) or under Intra-State Supply as defined under section 8 of IGST Act ( thereby SGST CGST is payable there against)? 4. One of the views prevalent is that due to the express words used at start of Section 8 (2) which defines int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra-state supplies (i.e. Subject to the provisions of section 12 , which in turn determines place of supply only when location of supplier and recipient is in India), nature of supply cannot be determined u/s 8 (2) if location of service provider or receiver is outside India. As per this view, subject services falls within inter-state supply as same got covered under residual entry of section 7 (5) (c) . Altogether opposite view is also available which feels that despite the words used at start of Section 8 (2) (i.e. Subject to the provisions of section 12 ), subject supply indeed fall under intra-state supply due to above-said Section 13 (8) (b) . 5. Controversy involved can be also understood by observing following two events : I. While answering question No. 25 of FAQ s on Banking, Insurance and Stock Brokers Sector released by the CBIC stated that subject supply is intra-state supply citing Section 13(8)(b) of IGST Act and thereby answered that SGST CGST ( not IGST) is payable there against. II. But, in recent advance ruling given in case of Mrs. Vishakhar Prashant Bhave (Micro Instrument) given by Maharashtra AAR, it is ruled that sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject supply is inter-state supply and IGST ( not SGST CGST) is payable there against. 6. As many of arguments ( w.r.t. implications of the words Subject to the provisions of section 12 at start of section 8 (2) ) to support as well as oppose above-explained contrary views are fairly well known. Hence, I refrain myself to reproduce those arguments here. 7. Furthermore for purpose of this article, it is also presumed that subject supply does not fall under intra-state supply u/s 8 (2). And hence, this article only deals with the followings questions: If subject supply is not intra-state u/s 8 (2) , question is, can it really fall under inter-state supply and can IGST be levied on such supply? Our Analysis: A. IGST Act, 2017 is extended to whole of India as per Section 2 of IGST Act, 2017 as amended. A1. Reading of only sub-section 5 (c) of section 7 of IGST Act , will be as follows: Supply of goods or services or both, 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter-State trade or commerce . A2. From reading of whole section 7, it is clear that sub-section (2) (4) deals with import of goods / services into the territory of India and same are not relevant for subject supply under consideration here. Sub-section (1) (3) as well as sub-section (5) (a) actually links determination inter-state supply with a specified place of supply vis-a-vis location of supplier. Moreover, sub-section (5) (b) deals with specific situation wherein SEZ developer / unit is involved. But, reference/s to place of supply as well as location of supplier are conspicuous by their absence in the residual entry i.e. sub-section 5 (c) of section 7 . Furthermore, this residual entry requires supply in the taxable territory to be treated to be in course of inter-State trade or commerce. A3. As reported in 2007 (7) S.T.R. 625 (S.C.), in case of ALL INDIA FEDN. OF TAX PRACTITIONERS Versus UNION OF INDIA, [ 2007 (8) TMI 1 - SUPREME COURT ] Supreme Court has in Para 7 of the order held that .., it is clear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and is not a charge on the business but on the consumer and it would, logically , be leviable only on services provided within the country. Service tax is a value added tax . A4. I think that it would be almost uncontroversial to say that there is no difference between GST and VAT / Service Tax as far as above explained economic principals by Apex Court are concerned. Accordingly, unless and until there are any deeming fictions created under law, GST remain destination based consumption tax. A5. A cogent reading from above economic principles explained by Apex Court read with very minute but very relevant difference between sub- section 7 (5) (c) of as compared to sub-section (1) (3) of Section 7 (i.e. missing specific reference to place of supply vis-a-vis location of supplier , though it indeed requires supply in the taxable territory ) can only mean that in order to fall under residual entry of sub-section 5 (c), one of the conditions to be fulfilled is that supply of services / goods must be to a recipient located in India. As subject services are provided to recipient located outside India, same cannot be called inter-state supply under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 7 (5) (c). A6. In the context of discussion above, it would not be out of order to refer to legal principals enumerated by Delhi High Court in case of Indian Association of Tour Operators V/s UOI 2017 (9) TMI 98 - DELHI HIGH COURT , wherein matter involved was applicability of service tax on services provided outside taxable territory. B1. It is also worth noting that all supplies which are defined in various sub-sections of Section 7 as inter-state supply are either treated as supply of services in the course of inter-State trade or commerce or treated to be supply of services in the course of inter-State trade or commerce. One may argue that the words treated to be are used to give effect of deeming fiction . Consequently, it is possible to argue that conclusions arrived earlier above, are not sufficient definitive enough and hence, doubt still persists about status of subject supply. This is more so as Court has generally given Parliament very wide amplitude to create deeming fiction/s under taxation matters and to levy tax thereon. B2. Even though Parliament has got wide amplitude to create deeming fiction/s under taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters, it is also well settled that restrictions imposed by Constitution of India are sacrosanct. And Parliament ( for that matter, even the GST Council ) cannot go beyond those restrictions imposed by the Constitution. Question to be considered is whether above-said difference between treated as and treated to be is sufficient material enough to treat them as deeming provisions and to make subject services as deemed taxable as inter-state supply and weather IGST is payable on the basis of such deeming fiction? And if yes, whether any such reading of sub-section 7 (5) (c) will make it unconstitutional? B3. In this regard, it is very important to note understand implications of changes bought in the Constitution by way of The Constitution (One Hundred and First Amendment) Act, 2016 . Some of these changes are as under: B3.1 246A . Special provision with respect to goods and services tax . - (1) Notwithstanding anything contained in articles 246 and 254 , Parliament, and, subject to clause (2), the Legislature of every State , have power to make laws with respect to goods and services tax imposed by the Union or by such State. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. Explanation. - ... . B3.1.1 A rticle 246A gives Parliament exclusive power to make laws with respect to goods and services tax where the supply of goods / services takes place in the course of inter-State trade or commerce. But, Parliament as well as every State has concurrent powers to make laws with respect to goods and services tax where the supply of goods / services does not takes place in the course of inter-State trade or commerce. The term inter-state trade or commerce is commonly understood as trade or commerce between two states / UT. And same in common parlance is not understood as to also include international trade or commerce . B3.1.2 For levy of GST on supplies which takes place in the course of inter-State trade or commerce, Parliament has enacted IGST Act. And all such supplies are called as inter-state supply under various sub-sections of Section 7 by treating those supplies as / to be place in the course of inter-State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade or commerce. B3.1.3 And for levy of GST on supplies which does not takes place in the course of inter-State trade or commerce, Parliament has enacted CGST Act and every state (which includes Union Territory as per clause 26B of Article 366 ) has enacted respective SGST / UGST Act. These supplies are called as intra-state supplies under Section 8 of the IGST Act . B3.2 Article 269A . Levy and collection of goods and services tax in course of inter-State trade or commerce. - (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. (2) to (4) (5) Parliament may, by law, formulate the principles for det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining 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. . B3.2.1 Due to explanation inserted in Article 269A , supply of goods / services in the course of import into the territory of India are deemed to be supply of goods / services in the course of inter-State trade or commerce. However, it is worth noting that for supply of goods / services in the course of export outside the territory of India, there is no such deeming fiction created in Article 269A or anywhere else in the Constitution to treat it as in the course of inter-State trade or commerce. In other words, Parliament (while amending the Constitution in 2016 to bring GST) was fully conscious of the fact that import of goods / services cannot be called as in the course of inter-State trade or commerce and hence, chosen to insert deeming fiction. But still, it has also consciously chosen not to create such deeming fiction for export of goods / services. As explained earlier, only Parliament has been given exclusive powers to levy GST on supplies in the course of inter-State trade or commerce. Accordingly, it can be ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry well argued that subject services (being provided outside India in course of international trade commerce) are not covered under residual entry of Section 7 (5) (c) because service recipient is located outside India. B3.2.2 But and to have a very fair analysis, it is also worth noting that clause 5 of Article 269A indeed gives power to Parliament to formulate the principles for determining the place of supply, and when a supply of goods / services takes place in the course of inter-State trade or commerce. In view of conscious decision taken w.r.t. import of goods / services while amending the Constitution and not for export of goods / services, in my view, there was no intention (express or implied) under the Constitution to treat supplier made in course of international trade or commerce (on export side) as in the course of inter-State trade or commerce. This becomes clearer once one notices amended Article 286 its effect. B3.3 Amended Article 286 reads as under: 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices 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). B3.3.1 Article 286 restricts State from imposing tax where supply of goods / services take place outside the State or where supply of goods / services takes place in course of import or export. Parliament has also empowered under clause (2) to determine when a supply of goods or of services or both in any of the ways mentioned in clause (1). What is worth noting here that supply outside state and supply in course of import / export are treated as two different scenarios even in said Article 286 . B3.3.2 Combined reading of above-explained Articles 246A , 269A 286 gives following powers allowed by the Constitution: Centre / Parliament is exclusive powers to levy IGST in following three situations: Supply of goods / services in the course of inter-State trade or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merce Import of goods / services into territory of India Export of Goods / Services out of territory of India Other than above-said 3 types of supplies, Centre has only concurrent powers to levy CGST wherein the State / UT also have simultaneous powers to levy SGST / UGST. Here, Centre does not have exclusive powers to levy IGST there against. This limitation imposed by Constitution needs to be understood while reading clause 2 of Article 246A as well as clause 5 of Article 269A . B3.3.3 Furthermore, export of services are defined under Section 2 (6) of IGST Act , wherein one of condition is that the place of supply of services is outside India. In other words, wherever the place of supply of services is within India and within same State wherein supplier is located, State has concurrent power to levy SGST (along-with Centre s CGST) and Centre does not have exclusive powers to levy IGST ( Article 246A read with Article 269A Article 286, as explained above ). B3.3.4 Subject supply under discussion here is not treated as export of services under section 2 (6) read with Section 13 (8) (b) of IGST Act. And hence, State has concurrent pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (along-with Centre s power to levy CGST) to levy SGST on the subject supply as place of supply is within same state where supplier is located. And, IGST cannot be charged there-against. B.3.4 Furthermore, various entries of List I Union List and List II - State List (i.e. entries before amendment of year 2016 as well as thereafter ) clearly shows that there always was / still is material difference between supplies which are in the course of inter-State trade or commerce and supplies which are in the course of international trade of commerce. This distinction is always maintained very clearly even for taxation entries of both of said lists (i.e. entries before amendment of year 2016 as well as thereafter). B.3.4.1Even if Union was having and continues to have legal power to levy duties / taxes on export / import under Union List after amendment of year 2016, said taxes / duties (such as export duties) are different from IGST allowed to be levied under Article 246A in the course of inter-State trade or commerce. B.4 Accordingly, to treat intermediary services provided to recipient outside India as inter-state supply (being treated as made in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of inter-State trade or commerce) when place of supply is within state wherein supplier is located will be blatantly unconstitutional in our respectful submission. This is because any such interpretation means that Parliament has denied State s constitutionally granted power to levy GST on such supplies when same are neither outside the state nor export. And, for this reason, Section 7 (5) (c) , the residual entry, cannot be read into as to make subject supply as inter-state supply. C. Let s look at entire issue a fresh from point of view of reading of Section 7 (5) (a) its implications: Let s take an example that management consultancy services are supplied by provider located in the State of Maharashtra to recipient located outside India and Place of supply is a foreign country u/s 13 (2). Only difficulty is that service provider is getting his consideration in Indian Rupees and not in convertible foreign exchange. Now, even though said supply is inter-state as per Section 7 (5) (a) , supplier is not eligible to make zero-rated supply u/s 16 but is liable to pay IGST due to non-fulfillment of export of service conditions. But, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to provisions of Section 17 (2) of the IGST Act State of Maharashtra will not get any apportionment of taxes from Centre . This is despite the fact that said management consultancy services are not exported out of India and State was within its rights to levy SGST under Article 286 read with Article 246A . And this makes Section 7 (5) (a) unconstitutional due to very same reasoning explained earlier. All of above means that sub-clause (a) or (c) of Section 7 (5) to the extent which debars state from levying SGST on supplies which are neither took place outside the State nor export nor import, is unconstitutional. And to prevent those provisions becoming unconstitutional, my view is that Court has to read down those sub-clauses to cover only those supplies which are either took place outside the State or exported out of India. C1. Above said legal position remains true in my view for all situations when location of service provider is in India, location of service receiver is outside India and Place of supply is that of same State / UT wherein service provider is located under various sub-sections of Section 13 . Summar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Our Views on Subject Supply: We are of the view that subject supply (i.e. intermediary services are provided to recipient located outside India by provider located in India) cannot be treated as inter-state supply under Section 7 (5) (c) of IGST Act. Hence, no IGST is payable there against even if same does not fulfill condition of export of services. Any attempt to read Section 7 (5) (c) otherwise, will make the provision unconstitutional. If said supply also does not fall within the definition of intra-state supply under Section 8 (2) of IGST Act (as presumed for this article), then, same is not taxable at all under GST. However, to arrive at that conclusion definitively, question which needs to be reconsidered is whether subject transaction indeed does not fall under intra-state supply u/s 8 (2) ? - Reply By Aneesh BU as = In para 4 you have emphasized on the term 'subject to' used in sec. 8(2) and stated that if location of supplier or receiver is outside India, then place of supply cannot be determined under sec.12 and consequently sec. 8(2) cannot be applied. Does it mean in order to constitute Intra-State supplies under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sec. 8(2) , place of supply must be essentially determined u/s 12 ? i.e. if place of supply is determined as per sec. 13 , then sec. 8(2) cannot be applied. If so, can the same logic be extended to sec. 7(3) of IGST Act ? Dated: 30-1-2019 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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