2021 (6) TMI 383 - HC - GST

Bombay HC strikes down IGST Act sections 13(8)(b) and 8(2) as unconstitutional for taxing export marketing services

The Bombay HC held that section 13(8)(b) and section 8(2) of the IGST Act, 2017 are ultra vires the Constitution and the Act itself. The court found that ... Constitutional Validity of levy of IGST on supply of services outside India - providing marketing and promotion services - Export of services - Constitutional Validity of section 13(8)(b) and section 8(2) of the Integrated Goods and Services Tax Act, 2017 are ultra vires articles 14, 19, 245, 246, 246A, 269A and 286 of the Constitution of India - HELD THAT:- Part XI of the Constitution of India deals with relations between the Union and the States. Article 245 which is included in Chapter I of the said part lays down the extent of laws made by Parliament and by the legislatures of the states. Clause (1) says that subject to provisions of the Constitution, Parliament may make laws for the whole or any part of the territory of India and the legislature of a state may make laws for the whole or any part of the state. As per clause (2), no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation - what Article 245 contemplates is that while Parliament may make laws for the whole or any part of India, the legislature of a state may make laws for the whole or any part of the state. Further, no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. It is apparent that section 9 of the CGST Act cannot be invoked to levy tax on cross-border transactions i.e., export of services. Likewise from the scheme of the IGST Act it is evident that the same provides for levy of IGST on inter-state supplies. 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. On the other hand sub-section (2) of section 8 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. However, 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. Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 is ultra vires the said Act besides being unconstitutional - Petition allowed. Second Judge has passed DISSENTING order in [2021 (6) TMI 563 - BOMBAY HIGH COURT] Issues Involved:1. Levy of tax on export of service is ultra vires Article 269A of the Constitution of India.2. Section 8(2) and section 13(8)(b) of the IGST Act are ultra vires section 9 of the CGST Act.3. GST is a destination-based tax on consumption.4. Levy of GST on an intermediary violates Article 14 of the Constitution of India.5. Levy of CGST and SGST on export of service constitutes an unreasonable restriction under Article 19(1)(g) of the Constitution of India.6. GST as an indirect tax must be capable of being passed on to the end receiver of the service.7. Levy of GST on an intermediary leads to double taxation.Detailed Analysis:1. Levy of tax on export of service is ultra vires Article 269A of the Constitution of India:The petitioner argued that the levy of GST on export of services by an intermediary is ultra vires Article 269A of the Constitution, which deals with the levy and collection of GST in the course of inter-state trade or commerce. The respondents countered that intermediary services do not qualify as 'export of service' even when consideration is received in foreign exchange. The court found that section 13(8)(b) of the IGST Act, which deems the place of supply of intermediary services to be the location of the supplier, contravenes the constitutional provision by treating export of service as a local supply.2. Section 8(2) and section 13(8)(b) of the IGST Act are ultra vires section 9 of the CGST Act:The petitioner contended that section 13(8)(b) read with section 8(2) of the IGST Act is ultra vires section 9 of the CGST Act, which is the charging section. The court agreed, stating that section 9 of the CGST Act cannot be invoked to levy tax on cross-border transactions, and section 13(8)(b) artificially creates a deeming provision contrary to the scheme of the CGST Act and the IGST Act.3. GST is a destination-based tax on consumption:The petitioner argued that GST is a destination-based consumption tax, and services provided to a recipient outside India should not be taxed in India. The court supported this view, emphasizing that GST is a value-added tax levied on services provided and consumed within the territory of India, and section 13(8)(b) of the IGST Act runs counter to this principle.4. Levy of GST on an intermediary violates Article 14 of the Constitution of India:The petitioner claimed that the levy of GST on intermediaries is arbitrary and discriminatory, violating Article 14 of the Constitution. The court agreed, noting that intermediaries are treated differently from other service providers who export services, thus violating the principle of equality before the law.5. Levy of CGST and SGST on export of service constitutes an unreasonable restriction under Article 19(1)(g) of the Constitution of India:The petitioner argued that the levy of CGST and SGST on export of services imposes an unreasonable restriction on their right to carry on trade under Article 19(1)(g). The court found merit in this argument, stating that such a levy could lead to the closure of businesses and incentivize foreign service recipients to set up liaison offices in India to escape taxation.6. GST as an indirect tax must be capable of being passed on to the end receiver of the service:The petitioner contended that GST, being an indirect tax, should be capable of being passed on to the end receiver. The court noted that an intermediary cannot pass on the GST burden to the foreign recipient, thus violating the fundamental principle of indirect taxation.7. Levy of GST on an intermediary leads to double taxation:The petitioner argued that the levy of GST on intermediaries results in double taxation, as the same service would be taxed in India and in the importing country. The court agreed, stating that section 13(8)(b) of the IGST Act leads to double taxation and more, contravening the basic principles of taxation.Conclusion:The court concluded that section 13(8)(b) of the IGST Act is ultra vires the said Act and unconstitutional. The provision 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 writ petition was allowed to the extent of declaring section 13(8)(b) of the IGST Act as ultra vires and unconstitutional.