The author is Tejaswini Kaushal, third year student at Dr. Ram Manohar Lohiya National Law University, Lucknow.
The previous part established the concept of intermediary services and conceptualized ‘intermediaries’ utilizing the M/S Ernst and Young Limited case. Determining the place of supply in intermediary services is another aspect demanding urgent emphasis in this analysis concerning intermediary services.
1. The Place of Supply in Intermediary Services
1.1. An Analysis of Section 13(8)(b) of the IGST Act
As per Section 13(8)(b) of the IGST Act 2017, the place of supply of intermediary services shall be the location of the supplier of services. Upon examination of the provisions, it is clear that the place of supply aligns with the location of the supplier, making it an intra-state supply subject to CGST and SGST. The confusion arises because Sections 12 and 13 of the IGST Act only govern the place of supply of services.
Section 8(2) of the IGST Act states that if the location of the supplier and the place of supply of services are in the same state or union territory, it is treated as an intra-state supply, ‘subject to’ Section 12, which determines the “place of supply of services where location of supplier and recipient is in India”. Here, section 13(8) confirms that the place of supply aligns with the location of the supplier, making it an intra-state supply.
When a provision is subject to another provision, the former cannot supersede the latter. This legal interpretation has been established by various judgments. South India Corporation (P) Ltd v. The Secretary, Board of Revenue, Trivandrum & Anr. held that “The expression’ subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” The case of Southern Petrochemical Industries Co. Ltd v. Electricity Inspector and E.T.I.O. & Ors. established that the expression “subject to” typically implies that a provision yields to another provision or provisions to which it is subject, and in cases of conflict, the provisions of the latter prevail. This interpretation has been supported by Surinder Singh v. Central Government and Others, South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Trivandrum and another, Ashok Leyland Ltd. v. State of Tamil Nadu & Anr., S.N. Chandrashekar and another v. State of Karnataka and Others, and Union of India versus Brigadier P.S. Gill. Therefore, Section 8 of the IGST Act applies to Sections 10 and 12 exclusively.
1.1.1. Implications of Section 13(8)(b) on the Place of Supply for intermediary services
Certain services as taxable instead of being treated as exports, making them liable for GST. This imposition of taxes falls within the purview of Article 286(2) and is constitutionally valid. The five broad criteria provided in the 2021 circular aforementioned has also caused difficulties. The Revenue Department’s inclusive approach to classifying intermediary services has resulted in financial burdens for companies due to taxes, interest, and penalties. Retroactively classifying services as intermediaries has led to legal disputes. The need for clarification to ensure a stable tax regime for intermediary services has been emphasized by various judicial decisions, including the 2020 Material Recycling Association of India ruling by the Gujarat High Court and the dissenting judgment in the 2023 Dharmendra M. Jani case by the Bombay High Court.
1.2. Analysis of the Dharmendra M. Jani case
1.2.1. Brief facts
M/s. Dynatex International provides marketing and promotion services to foreign clients and acts as an intermediary between them and Indian buyers. Despite being an exporter of services, falling within the definition stated in Section 2(6) of the IGST Act, they were paying CGST and SGST without collecting these taxes from foreign clients due to an incorrect interpretation of the IGST Act. This tax burden greatly impacted their profitability, accounting for around 40% of their total revenue.
1.2.2. Constitutional Validity Challenges in the Dharmendra M Jani Case
Section 13(8)(b) of the IGST Act, which designates the service provider’s location as the place of supply for intermediary services, has faced legal challenges, most recently in the Dharmendra M Jani case. The provision was contested in violation of Article 14 of the Constitution, as it discriminates against service providers offering intermediary services by classifying their place of supply as within India, thus denying them the benefits of exporting services. The export of services necessitates the place of supply being outside India.
1.2.3. Split Verdict and the Chief Justice’s Decision
The Division Bench delivered a split verdict on the provision, with one judge (Justice Ujjal Bhuyan) deeming it ultra vires Article 14, while the other (Justice Abhay Ahuja) disagreed. The matter was referred to the Chief Justice, who ruled that the provision’s differential treatment of intermediary services is based on a reasonable classification and is not ultra vires Article 14 of the Constitution. The Gujarat High Court, in the case of Material Recycling Association of India v. Union of India, interestingly, considered the petitioner’s argument that the provisions of Article 246A, Article 269A, and Article 286 of the Constitution empower Parliament to tax interstate transactions and that Parliament lacks legislative competence to tax the export of services under the CGST and SGST Acts, which pertain to intra-state supply of goods and services. It upheld the constitutional validity of Section 13(8)(b) of the IGST Act, clarifying that IGST applies to services provided by intermediaries to individuals outside India. However, experts differ in opinion regarding whether IGST or CGST and SGST should be charged for such transactions.
2. Implications and Key Findings
2.1. Reducing Ambiguities in Defining Intermediary Services
The Court’s ruling in the M/S Ernst and Young case clarified that Ernst and Young did not act as an intermediary, as the place of supply of services was determined based on the recipient’s location, as per Section 13(8) of the IGST Act. This decision overturned previous rulings and instructed the Adjudicating Authority to process Ernst and Young’s refund application. The judgment set a significant precedent by defining the distinctions between intermediary and other services, providing much-needed clarity, and establishing clear boundaries. It ensures a more consistent and accurate classification of services for tax treatment, benefiting both businesses and tax authorities. Overall, this ruling resolved the specific case and contributed to a better understanding and interpretation of the law, avoiding misinterpretations and disputes in the future.
2.2. Impact on Export of Services and Associated Benefits
The Dharmendra M. Jani case dealt with the taxability of intermediary services provided to foreign recipients, leaving taxpayers seeking clarity. Unfortunately, the recent verdict added to the confusion by appearing contradictory. While it recognized the transaction as an “export of service,” it upheld the constitutional validity of Section 13(8)(b) of the IGST Act, which imposes GST on such transactions. The ruling fails to align with its own conclusion as the transaction doesn’t meet the criteria to be classified as an export of service, which requires the place of supply outside India. Despite this, the ruling deems the imposition of GST on intermediary services as constitutionally valid, subjecting them to IGST under Section 7(5)(c). This may have unintended consequences and could potentially face challenges in the Supreme Court by revenue authorities seeking a stay on its implementation.
2.3. Pending Need for Clarity and Consistent Interpretation
The Dharmendra M. Jani case highlights the importance of thoroughly examining laws with implications beyond national borders. The High Courts of Gujarat and Bombay have expressed differing views on section 13(8)(b). The Bombay High Court sees it as a fictional deeming clause, treating the export of services as a local supply. The Court emphasized that constitutional authority should not be used to tax services outside India’s territorial jurisdiction. It is crucial to interpret these provisions in a way that respects constitutional principles and ensures fairness in cross-border operations.
Implementing GST in India has presented challenges in understanding intermediary services and determining their place of supply. Contemporary cases like M/S Ernst and Young Limited of Delhi High Court and Dharmendra M Jani v. Union of India of Bombay High Court highlight the evolving landscape of GST in India. These judgments have clarified the interpretation of relevant provisions and the constitutional validity of Section 13(8)(b) of the IGST Act. They shed light on the nuances of the definition of an intermediary and how the implications of Section 13(8)(b) on the place of supply for intermediary services require careful interpretation. Despite some unresolved issues, these cases are vital milestones for better understanding intermediary services under GST, facilitating compliance, and addressing challenges for taxpayers and authorities.