A SYNOPSIS OF CASE LAW OF DHARMENDRA M JANI Vs UNION OF INDIA AND OTHERS

BRIEF FACTS OF THE CASE

The Petitioner of the case is the proprietor of M/s. Dynatex International which is registered under the CGST Act which has its registered office at Andheri (West), Mumbai. They are a service provider supplying marketing and promotion services, to solicit Purchase orders in India, to the principal recipients located outside India, who are engaged in manufacture and / or sale of goods and receives consideration (Commission) in convertible foreign.

The services provided are export of services as defined under section 2(6) of the IGST Act and in the capacity of Intermediary as defined in section 2(13) of the IGST Act.

The petitioner has paid CGST and SGST without collecting the same from its foreign customers as the conjoint reading of section 13(8)(b) read with section 8(2) of the IGST Act the export of service by the petitioner as intermediary would be treated as intra-state supply of services liable GST. This has increased the tax cost burden on the petitioner which amounts to up to 40% of the total revenue.

CONTENTION OF THE APPELLANT

The petitioner has filed the petition under Article 226 of the Constitution of India and questioned the constitutionality of section 13(8)(b) and section 8(2) of the Integrated Goods and Services Tax Act, 2017 on the following grounds urged: –

• Levy of tax on export of service is ultra vires Article 269A of the Constitution of India.
• Section 8(2) and section 13(8)(b) of the IGST Act are ultra vires section 9 of the CGST Act which is the charging section.
• GST is a destination-based tax on consumption. Therefore, services provided by a service provider in India to a service receiver located outside India which is treated as export of service cannot be taxed; for taxing a service it is not the place of performance but the place of consumption which is relevant. Once the services are consumed outside India, Parliament has no jurisdiction to levy tax on such services consumed outside India.
• Levy of GST on an intermediary like the petitioner is violative of Article 14 of the Constitution of India.
• Levy of CGST and SGST on the export of service by the petitioner to its overseas customers constitute an unreasonable restriction upon the right of the petitioner to carry on trade and business under Article 19(1)(g) of the Constitution of India.
• GST is an indirect tax. The cardinal rule of indirect taxation is that it must be capable of being passed on to the end receiver of the service. Therefore, it is trite that an agent cannot be burdened with GST.
• Levy of GST on an intermediary like the petitioner providing services to an overseas customer would lead to double taxation on the same service.

FINDINGS OF THE CASE

Analysing the provisions of the Constitution the court found the following:

• Article 245: Clause (1) – Parliament may make laws for the whole or any part of the territory of India subject to the provisions of the Constitution; Clause (2) – no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Although this does not mean that law having extra-territorial operation can be enacted which has no nexus at all with India
• Article 246: Power to legislate, be it by the Parliament or by the legislature of a state. The various entries comprising the three lists of the seventh schedule to the Constitution of India are the fields of legislation.
• Article 246A: special provision with respect to GST and Article 269A: levy and collection of GST in the course of inter-state trade or commerce. Careful and conjoint reading of the two Articles it was found that Constitution has only empowered Parliament to frame law for levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services or both takes place in the course of inter-state trade or commerce. And the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply.
• Article 286: Clause (1) – No law of a state shall impose or authorize imposition of a tax on the supply of goods or services or both where such supply takes place in the course of import into or export out of the territory of India. Clause (2) – Parliament to make laws formulating principles for determining supply of goods or of services or both. Both have to be read together to understand that they cannot be used to foil or thwart each other

Analysing the provisions of the GST law the court found the following:

Section 9 of the CGST Act which is the charging section provides for levy and collection of CGST on all intra-state supplies of goods or services except on the supply of alcoholic liquor for human consumption at such rate as may be notified by the central government on the recommendation of the GST Council and collected in such manner as may be prescribed and shall be paid by the taxable person. Therefore section 9 of the CGST Act cannot be invoked to levy tax on cross-border transactions i.e., export of services.

• Section 5 of the IGST Act which is the charging section provides for levy of IGST on all inter-state supplies of goods or services or both except on the supply of alcoholic liquor for human consumption on the value determined under section 15 of the CGST Act and at such rates as may be notified by the central government on the recommendation of the GST Council and collected in such manner as may be prescribed and shall be paid by the taxable person. Therefore, IGST Act only provides for levy of IGST on inter-state supplies.
• Petitioner fulfils the requirement of an intermediary as defined in section 2(13) of the IGST Act.
• All the conditions required for a supply of service to be construed as Export of service has been complied with as stipulated in section 2(6) of the IGST Act read with section 13(2) thereof.
• The overseas foreign customer of the petitioner falls within the definition of ‘recipient of supply’ in terms of section 2(93) of the CGST Act read with section 2(14) of the IGST Act.
• Therefore, transaction is a supply of service from India to outside India by an intermediary and is an export of service, there is no dispute that the supply takes place outside the State of Maharashtra and outside India in the course of export.
• Import and export of services have been treated as inter-state supplies in terms of section 7(1) and section 7(5) of the IGST Act.
• Section 8(2) of the IGST Act provides that where location of the supplier and place of supply of service is in the same state or union territory, the said supply shall be treated as intra-state supply.
• Section 13(8)(b) of the IGST Act read with section 8(2) of the said Act creates a fiction deeming export of service by an intermediary to be a local supplye., an intra-state supply.
• By artificially creating a deeming provision in the form of section 13(8)(b) of the IGST Act, where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e., in India. This runs contrary to the scheme of the CGST Act as well as the IGST Act besides being beyond the charging sections of both the Acts.

Analysing the various discussions and also the judgment of the Gujarat High Court in Material Recycling Association of India the court found the following:

• The court found that Gujarat High Court while holding that section 13(8)(b) of the IGST Act cannot be said to be ultra vires or unconstitutional in any manner, however kept it open for the respondents to consider the representation made by the petitioner so as to redress its grievance in a suitable manner and in consonance with the CGST Act and the IGST Act.
• The court was unable to accept the views of the Gujarat High Court. And found that section 13(8)(b) of the IGST Act not only falls foul of the overall scheme of the CGST Act and the IGST Act but also offends Articles 245, 246A, 269A and 286(1) (b) of the Constitution.
• The court found that the extra-territorial effect given by way of section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system and that it runs completely counter to the very fundamental principle on which GST is based i.e., it is a destination-based consumption tax as against the principle of origin-based taxation.
• The court also found that decision of one High Court will have the force of binding precedent only in the states or territories over which the Court has jurisdiction and is not binding on another High Court though it deserves due consideration and certainly has a high persuasive value.
• In relation to the submissions made by the respondent the court relied on the judgements held by the Supreme Court, that each case would have to be decided on the facts of that case and that there can be no straitjacket formula in applying the above principles. The court also addressed the respondent, where it was highlighted that similar provisions which existed in the Place of Provision of Service Rules, 2012 and the same was unchallenged, the same was not a valid ground for non-suiting the petitioner from instituting the present challenge and that the challenge has to be met on the touchstone of the above provisions and not by falling back upon a non-existent Place of Provision of Service Rules, 2012.

ORDER BY THE COURT:

Based on the discussions the court held that it may not be necessary to deal with the other grounds raised by the petitioner and that section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 is ultra vires the said Act besides being unconstitutional.

NOVELLO COMMENTS:

The constitution empowers the parliament and the legislature to enact various laws but the enactments having extra-territorial operation needs to be carefully analysed.

A similar matter was taken up by the Gujarat High Court, but the High court of Bombay has differed in its opinion and has held that the provisions of section 13(8)(b) create a fictional deeming clause on the export of services by an intermediary to be construed as a local supply and the empowerment of the constitution to enact a law should not be used to impose tax on such export of services out of the territory of India.

While we wait for the dissenting Judge’s order and expect a turn of events in the matter, feel free to reach out to me for coffee and conversations at [email protected]