2023 (4) TMI 821 - HC - GST

Section 13(8)(b) and 8(2) of IGST Act constitutional but limited to IGST framework, cannot apply to CGST/MGST for export services

Dharmendra M. Jani and A.T.E. Enterprises Private Limited (formerly known as A.T.E. Marketing Pvt. Ltd.) Versus The Union of India, Central Board of Indirect Taxes and Customs, Goods and Services Tax Council Principal Commissioner of Goods and Service Tax, Mumbai State of Maharashtra, through Secretary Finance Department, Mumbai

Bombay HC held that Section 13(8)(b) and Section 8(2) of IGST Act 2017 are constitutional and valid, but their operation is confined only to IGST Act ... Intra-state day - Export of services - Intermediary Services - Constitutional validity of provisions for determination of place of supply - Zero rated supply - difference of opinion - Third Member decision - Constitutional validity of the provisions of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 - whether Section 13(8)(b) of the IGST Act 2017 is ultra vires the Constitution and the provisions of the IGST Act or otherwise? - HELD THAT:- It is seen that insofar as the IGST Act is concerned, “export of services” as defined under Section 2(6) fall within the purview of the provisions of Section 16, namely, the provision made for “zero rated supply”. The contention of the petitioners is also to the effect that once a transaction is of export of services and as defined under Section 2(6) of the IGST Act, in regard to which there is no definition under Section 2 of CGST Act or under section 2 of MGST Act, Section 13(8)(b) cannot by a legal fiction and/or an implication form any transaction to be taxed under the CGST Act and MGST Act, by categorizing it to be an intra-State sale. A bare reading of Section 9 of the CGST Act would indicate that subject to the provisions of sub-section (2) thereof, there shall be levy of a tax called the Central Goods and Services Tax on all “intra-State supplies of goods or services or both”. By virtue of Section 2(65) of the CGST Act ‘intra-State supply of services’ is required to have the same meaning as assigned to it in Section 8 of the IGST Act - Section 8 of the IGST Act provides for 'intra-State supply'. Section 8(2) of the IGST Act provides that subject to the provisions of Section 12, the supply of services where the location of the supplier and the place of supply of services are in the same State or same Union Territory shall be treated as intra-State supply. Sub-section (2) of Section 8 recognizes the effect of Section 12(2) namely that the place of supply of services made to any person other than a registered person shall be the location of the supplier of services and hence, for transaction of such nature, the supply of services becomes an intra-State supply. The consequence brought about by such provision is that by mere inclusion of Section 8 of the IGST Act within the provisions of Section 2(65) of the CGST Act, which defines 'intra-State supply of services', a legal effect which emerges is that not only Section 8 of IGST Act, but also the accompanying provisions, namely, Section 12 relating to the place of supply of services, stands embedded, implanted and/or incorporated, and are deemed to form an integral part of the CGST Act. Similarly, Section 2(86) of the CGST Act defines 'place of supply' to mean the place of supply as referred to in Chapter V of the IGST Act. Thus, Chapter V of the IGST Act stands incorporated under the provisions of the CGST Act. Chapter V of the IGST Act, which deals with the place of supply of goods or services or both, contain the provisions from Section 10 to Section 14 incorporating within such Chapter the impugned provision, namely Section 13(8)(b). The conflict is that, the export of services for a commission to be received by the petitioners, fructify only after the goods are supplied by the foreign principals who are beneficiaries of the export of services provided by the intermediaries and the same are received as imports by the Indian purchasers. Thus, applying the destination principle, the amount by way of commission, to be paid to the petitioners are already subsumed in the transaction which the foreign principal may have with its customer (the Indian importer) on which the Indian importer is already being taxed - there is another apparent incongruity which can be noted from the conjoint reading of sub-Section (5) of Section 7 and the provisions of Section 13(8)(b) of the IGST Act. This is to the effect that sub-section (5) of Section 7, which categorically provides that in regard to supply of goods or services or both, when a supplier is located in India and the place of supply is outside India, such supply of goods or services shall be treated to be a supply of goods or services or both, “in the course of Inter-State trade or commerce”, whereas in respect of a clear transaction of export of service as defined under sub-section (6) of Section 2 by virtue of Section 13(1), which provides that such provision shall apply to determine the place of supply of services where the location of the supplier of services or recipient of services is outside India, shall be the location of the supplier of services, when it concerns intermediary services, that is to classify the export of service as an ‘intra-State’ trade or commerce. What can be discerned and derived, is that it is necessary to confine transactions which are clearly transactions in the course of Inter-State trade or commerce and more particularly transactions of export of services as defined under Section 2(6) of the IGST Act and the intermediary services, to be subjected, relevant and confined only to the provisions of the IGST Act, and transactions which are in the course of Intra-State trade or commerce, shall remain confined to the provisions of the CGST Act and the MGST Act - the approach of the Court would be by interpretative process to make the provisions of the respective enactments meaningful for their smooth and effective implementation. The duty of the Court would also to accept the constitutionality of the provision rather than being tilted to read the provision to be ultra-virus or unconstitutional. It may be observed that it is well-settled that every provision in an enactment is required to be understood and interpreted within the framework of the object and intention the legislation intends to achieve. The provisions of Section 13(8)(b) and the provisions of Section 8(2) of IGST Act be struck down as unconstitutional being violative of the provisions of Articles 14, 19(1)(g), 245, 246, 246A, 265, 269A and 286 of the Constitution. This more particularly considering the fact that the impugned provisions insofar as they stand and are applicable only under IGST Act. It may be observed that the legislative wisdom to have the provisions of Section 2(6), Section 7, Section 8(2), Section 12 and Section 13 under the IGST Act and the consequence of any such transaction of export of service being scrutinized for the benefit under Section 16 of a Zero Rated Tax, need not be gone into, suffice it to observe that the mechanism for Section 13(8)(b) to operate is confined only to the provisions of the IGST Act - insofar as the provisions of Section 13(8)(b) is concerned, the same are required to be read to confined only to the provisions of the IGST Act. Constitutionally and for the reasons as discussed in the forgoing paragraphs, it is not permissible for such provision to operate under the CGST Act and the MGST Act. It is not possible to foresee and visualize such provision becoming relevant in case of a particular transaction which may purely fall under the IGST Act. The provisions of Section 13(8)(b) and Section 8(2) are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST Act and MGST Act, on such interpretation, the provisions are intra vires the Constitution, the IGST, the CGST and the MGST Acts - it is not necessary to consider the validity of the impugned provisions on the touchstone of Articles 14 and 19(1)(g) of the Constitution as canvassed by the petitioners. The provisions of Section 13(8)(b) and Section 8(2) of the IGST Act are legal, valid and constitutional, provided that the provisions of Section 13(8)(b) and Section 8(2) are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax on services under the CGST and MGST Acts - The office to place the matter before the Division Bench. Issues Involved:1. Constitutional validity of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act).2. Constitutional validity of Section 8(2) of the IGST Act.3. Applicability of Section 13(8)(b) and Section 8(2) of the IGST Act under the Central Goods and Services Tax Act (CGST Act) and Maharashtra Goods and Services Tax Act (MGST Act).Summary:Issue 1: Constitutional validity of Section 13(8)(b) of the IGST ActThe petitioners challenged Section 13(8)(b) of the IGST Act, contending it is unconstitutional and violates Articles 14, 19, 245, 246, 246A, 248, 265, 269A, and 286 of the Constitution. The petitioners argued that the section creates a fiction that treats export of services as intra-State supply, which contradicts the destination-based principle of GST. The court observed that Section 13(8)(b) should be confined to the IGST Act and cannot be applied under the CGST and MGST Acts. The court upheld the validity of Section 13(8)(b) within the context of the IGST Act, but it cannot be used to levy tax under the CGST and MGST Acts.Issue 2: Constitutional validity of Section 8(2) of the IGST ActThe petitioners also challenged Section 8(2) of the IGST Act, arguing it is unconstitutional for similar reasons as Section 13(8)(b). The court held that Section 8(2) is valid within the context of the IGST Act but cannot be applied under the CGST and MGST Acts for taxing export of services.Issue 3: Applicability of Section 13(8)(b) and Section 8(2) of the IGST Act under the CGST and MGST ActsThe court examined whether the provisions of Section 13(8)(b) and Section 8(2) of the IGST Act could be incorporated into the CGST and MGST Acts. It concluded that these provisions are confined to the IGST Act and cannot be applied under the CGST and MGST Acts. The court emphasized that the IGST Act deals with inter-State trade and commerce, while the CGST and MGST Acts pertain to intra-State supply. Therefore, the fiction created by Section 13(8)(b) should not extend to the CGST and MGST Acts.Conclusion:The court upheld the constitutional validity of Section 13(8)(b) and Section 8(2) of the IGST Act, provided they are confined to the IGST Act. These provisions cannot be applied for levy of tax on services under the CGST and MGST Acts. The reference was answered accordingly, and the matter was directed to be placed before the Division Bench.