10.Place of supply and inter-state vs intra-state supply
This article is part of the book named " Comprehensive Guide to GST" authored by CA. Brijesh Thakar. You can access the full book on following link.
Defination
Customs frontiers of India
means the limits of a customs area as defined in section 2 of the Customs Act, 1962.
Export of goods
with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India.
Export of services
means the supply of any service when––
the supplier of service is located in India
the recipient of service is located outside India
the place of supply of service is outside India
the payment for such service has been received by the supplier of service in convertible foreign exchange; and
the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8
Fixed establishment
means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services or to receive and use services for its own needs.
Import of goods
with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India.
Import of services
means the supply of any service, where––
the supplier of service is located outside India
the recipient of service is located in India; and
the place of supply of service is in India.
Intermediary
means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.
Location of the recipient of services means––
where a supply is received at a place of business for which the registration has been obtained, the location of such place of business
where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment
where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and
in absence of such places, the location of the usual place of residence of the recipient.
Location of the supplier of services means––
where a supply is made from a place of business for which the registration has been obtained, the location of such place of business
where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment
where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
in absence of such places, the location of the usual place of residence of the supplier.
Non-taxable online recipient
means any Government, local authority, governmental authority, an individual or any other person not registered
Place of Supply and Concept of Inter-State vs. Intra-State Supply
and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.
Explanation.––For the purposes of this clause, the expression “governmental authority” means an authority or a board or any other body––A. set up by an Act of Parliament or a State Legislature; orB. established by any Government, with ninety per cent. or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution.
Online information and database access or retrieval services
means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as––
advertising on the internet
providing cloud services
provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet
providing data or information, retrievable or otherwise, to any person in electronic form through a computer network
online supplies of digital content (movies, television shows, music and the like)
digital data storage; and
online gaming.
shall have the same meaning as assigned to it in clause (za) of section 2 of the Special Economic Zones Act, 2005.
Special Economic Zone
shall have the same meaning as assigned to it in clause (g) of section 2 of the Special Economic Zones Act, 2005
Special Economic Zone developer
shall have the same meaning as assigned to it in clause (g) of section 2 of the Special Economic Zones Act, 2005 and includes an Authority as defined in clause (d) and a Co-Developer as defined in clause (f ) of section 2 of the said Act.
Inter-State Supply Vs. Intra-State Supply
Readers can recall that we discussed concept of inter-state supply and intra-state supply. If a supply is classified as intra-state supply then CGST and SGCT is levied whereas in case of inter-state supplies, IGST is levied. In other words, If supply is an inter-state supply then IGST shall be charged by Central Government only. If supply is an intra-state, then Central Government & State Government both will levy tax.
It is also important to classify supply as inter-state or intra-state correctly because once a wrong tax is paid (For example IGST in place of CGST & SGST or vice-versa), then as per Section 77 of CGST Act, first correct tax is required to be paid with interest and then wrongly paid tax shall be refunded to the assessee. There is no provision of set-off.
Inter-state supplies are defined under section 7 of the IGST Act & Intra- state supplies are defined under section 8 of the IGST Act.
Inter-State Supply
Conceptually, if location of the supplier and place of supply are in different states then the supply is called inter-state supply. Whereas if location of the supplier and place of supply are in same state then the supply is called intra-state supply. However, it is important to understand this concept in detail with analysis of relevant sections of the IGST Act.
Provisions related to Inter state supply in case of goods is provided under section 7(1) and section 7(2) of the IGST Act, 2017 as under-
7(1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in––a. two different States;b. two different Union territories; orc. a State and a Union territory, shall be treated as a supply of goods in the course of inter-State trade or commerce.
7(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.Provisions related to inter-state supply in case of services is defined under section 7(3) and section 7(4)of the IGST Act, 2017 as under-
7(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in––a. two different Statesb. two different Union territories; orc. a State and a Union territory
shall be treated as a supply of services in the course of inter-State trade or commerce.
7(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
Commentary
As we can understand from above provisions, there are two important ingredients to determine nature of supply. First is location of supplier and second is place of supply. It is also interesting to note that “ Location of supplier of service” is defined under section 2(15) of the IGST Act, 2017, but “location of supplier of goods” is not defined anywhere in the IGST Act or CGST Act. The reason may be that the location of supplier of goods is easily identifiable as we can trace the movement of goods, however it is not so simple in case of services. The place of supply of goods is determined by section 10 and 11 of the IGST Act, 2017. (discussed later in this chapter) whereas place of Supply of services is determined by section 12 and 13 of the IGST Act, 2017. (Discussed later in this chapter).
Further as per section 7(2), supply of goods imported into the territory of India, till they cross the custom frontiers of India are treated as supply of goods in the course of Inter-state trade or commerce. Crossing of custom frontiers generally means filing of Bill of Entry for home consumption as per Customs Act, 1962. It is also important to note that as per proviso to charging section 5(1) of the IGST Act, 2017, the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962. Hence, even if the nature of supply of goods in such case is determined by IGST Act, the IGST shall be levied as per Customs Act, 1962. Section 3 of the Custom Tariff Act, 1975 provides for levy of additional custom duty on importation of goods. So we can understand that this additional custom duty under section 3 of the Custom Tariff Act, 1975 shall be equal to the IGST levied on the goods. Moreover, this IGST paid is available as input tax credit under GST subject to fulfilment of other conditions of section 16 and 17 of the CGST Act, 2017.
In case of import of service, the story is very much different from importation of goods. In case of importation of services, the supply is considered as inter-state supply as per section 7(4) of the IGST Act, 2017. However, the IGST on such supply shall be paid by the recipient of service under section 9(3) of the CGST Act, 2017 under Reverse Charge. Here also this IGST paid is available as input tax credit under GST subject to fulfilment of other conditions of section 16 and 17 of the CGST Act, 2017.
Let us now understand section 7(5) also which provides for determining nature of supply as inter state supply for goods as well as services in some additional cases. As per this section-
7(5) Supply of goods or services or both,––a. when the supplier is located in India and the place of supply is outside India;b. to or by a Special Economic Zone developer or a Special Economic Zone unit; orc. in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,d. shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Commentary
This sub section talks about cases where the supplier is located in India and the place of supply is outside India as well as supplies by/to SEZ developer or SEZ unit. It also talks about some other cases. In case where the supplier is located in India and place of supply is outside India, such supply is treated as inter-state supply. Normally, export of goods and services are covered in this category. Here we need to understand this provision with provisions of GST registration. As per section 24, in case of inter-state supply of goods, it is compulsory to obtain registration irrespective of limit of turnover. And in case of inter-state supply of services, it is compulsory to take registration if aggregate turnover in a financial year exceeds rupees twenty lakh. Hence, in case of export of goods it will be compulsory to obtain registration even if no tax is payable on it due to section 16 of IGST Act (export being zero rated supply). In same way, in case of export of service, if aggregate turnover exceeds rupees twenty lakh, registration needs to be taken even if no tax is payable due to section 16 of IGST Act, 2017 (export of services being considered as Zero rated supply).
Special Economic Zone are considered differently in most of the taxation laws. Hence as per this sub section if supply of goods/services are made to/by a Special Economic Zone Developer or Special Economic Zone then such supply shall be treated as inter-state supply.
Clause (c) of section 7(5) is a residual clause which says that if goods or services are supplied in a taxable territory and it is not covered under section 8 of the IGST Act and not covered in any other clause/ subsection of section 7 then such supply shall be classified as inter-state supply.
Intra-State Supply
Provisions for determining nature of supply as intra-state supply are given under section 8 of the IGST Act, 2017 as under-
8(1) Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply:Provided that the following supply of goods shall not be treated as intra-State supply, namely:––a. supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit;b. goods imported into the territory of India till they cross the customs frontiers of India; orc. supplies made to a tourist referred to in section 15.
8(2) Subject to the provisions of section 12, 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:Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.
Explanation 1. For the purposes of this Act, where a person has––
a. an establishment in India and any other establishment outside India;
b. an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
c. an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
Explanation 2. A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.
Commentary
As we have understood inter-state supply as per section 7 of the IGST Act, 2017, it is easier to understand intra-state supply under section 8 of the IGST Act, 2017. Concept is same here that when the location of supplier and place of supply are in the same state/union territory the it will be treated as intra-state supply.
As discussed in section 7 of the IGST Act, following two supplies are treated as inter-state supply irrespective of fulfilment/non-fulfilment of any other condition.
a. supply of goods/services to or by a Special Economic Zone developer or a Special Economic Zone unit;
b. goods imported into the territory of India till they cross the customs frontiers of India.
It is mentioned under section 8 of the IGST Act, 2017 that as these supplies are covered under section 7, it will not be treated as intra-state supply.
There is one additional exception given under section 8 which is not present under section 7 of the CGST Act. As per this exception, supply made to a tourist referred to in section 15 of the IGST Act, 2017 shall not be considered as intra-state supply hence as per residual clause c of section 7(5) of the IGST Act, 2017 such supply shall be treated as inter-state supply.
As per explanation to section 8, where there is an establishment of a person in another state or outside India then it will be considered as distinct person. For example, if A ltd having registered officer in Gujarat opens a branch office in Maharashtra then the Maharashtra branch shall be considered as distinct person. In same way if this company opens a branch in USA then the USA branch will also be considered as distinct person.
It is relevant to discuss section 2(6) of the IGST Act, 2017 which defines export of service where it is mentioned that the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8 as one of the conditions for classification of supply of service as export of service.
Supply in cases where location of supplier or place of supply is in the territorial waters––Section 9 of IGST Act .
Notwithstanding anything contained in this Act,––
where the location of the supplier is in the territorial waters, the location of such supplier; orwhere the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
Commentary
Section 9 of the IGST Act provides for determination of place of supply in cases where the location of supplier or place of supply is in the territorial waters. As per this section, if location of supplier or place of supply is in the territorial waters then it will be deemed that the place of supply is in the coastal state or union territory where the nearest point of appropriate baseline is located. Readers can observe that this section has overriding effect over all other sections of the IGST Act.
Place of Supply
As per Section 7 and 8 of IGST Act, 2017, if location of supplier and place of supply are in same state it is considered as intra-state supply.
And if location of supplier and place of supply are in different states it is considered as inter-state supply.
Hence, it is extremely important to understand place of supply provisions.
Place of supply of Goods - Section 10 and 11
Place of supply of goods other than imported into or exported out of India shall be determined as per Section 10(1) as below:
1
Supply involves movement of goods by any person
Location of the goods at the time at which the movement of goods terminates for delivery to the recipient
2
Supply does not involve movement of goods by any person
location of such goods at the time of the delivery to the recipient
3
Goods are delivered by the supplier on the direction of a third person, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise
Deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person
4
Goods are assembled or installed at site
Place of such installation or assembly
5
Goods are supplied on board a conveyance, including a vessel, an aircraft, a train or a motor vehicle
Location at which such goods are taken on board.
Place of supply for goods imported or exported (Section 11)
1
Goods imported into India
Location of the importer
2
Goods exported from India
Location outside India
According to Section 2(5):
“Export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India.
According to Section 2(6):
“Export of services” supply of any service when,–
a. the supplier of service is located in India
b. the recipient of service is located outside India
c. the place of supply of service is outside India
d. the payment for such service has been received by the supplier of service in convertible foreign exchange; and the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.
As per Section 9(b), where the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
Receipt of consideration in convertible foreign exchange in case of export of service.
It is important to not that in case of export of service, consideration must be received in convertible foreign exchange and only then it shall be considered as zero rated supply u/s 16 of IGST Act, and consequently shall not be charged to GST on fulfillment of certain conditions. Hence, receipt of consideration in convertible foreign exchange is essential condition for export of service. However in some cases exporter of services out sources a portion of the service contract to another person located outside India and full consideration is not received by exporter in India. In this situation whether the service can be considered as export of service or not is clarified by CBIC by circular No. 78/52/2018-GST dated 31-12-2018. As clarified by this circular, in above situation two supplies are taking place.
Supply of services from the exporter located in India to the recipient located outside India for full contract value and
In Import of service by the exporter located in India from supplier of services located outside India with respect to the outsourced portion of the contract.
Supply covered under (a) above shall be considered as export of service and in case supply covered under (b), exporter located in India is required to pay GST under RCM as this supply shall be considered as import of service.
Example: A ltd , an exporter of service located in India received a contract for us $ 500,000 from a recipient located outside India. A ltd outsourced 40% of the contract work to B Ltd, another supplier of service located outside India. US $ 200,000 is directly paid by the recipient to B ltd .
In this situation full contract value of us $ 500,000 shall be covered under exporter of service and A Ltd is required to pay GST under reverse charge on US $ 200,000 for outsourced portion.
Place of supply of Services Section 12
This Section is applicable when location of supplier and location of recipient of services, both are in India. Following table explains method to determine place of supply of various services under this Section:
Service
Location of Recipient
Location of Supplier
Location of Rendering of Services
Other
In relation to
Location of the
immovable properties or vessel [1]
–
–
–
property or vessel
Restaurant catering/perso nal grooming etc. [2]
–
–
–
Training and performance appraisal [3]
If Registered
–
If recipient is unregistered
–
Admission to an event/ place [4]
If Registered
–
–
Organisation of an event or ancillary services [5]
If Registered
–
If recipient is unregistered
–
Transportation
If recipient is
of goods incl.
unregistered,
Mail or courier
If Registered
–
–
where goods are handed
over for
transportation
Transportation of Passengers [6]
If Registered
–
–
If recipient is unregistered, where passenger
embarks for
continuous
journey
On board a conveyance
–
–
–
First scheduled point of departure
Telecommunica tion services [7]
–
–
–
–
(a) Fixed Line
–
–
–
Place of installation of reception equipment
(b) Mobile Connection (Post-Paid)
–
If address of recipient is not available
–
Billing address of recipient
(c) Mobile Connection (Pre-paid)
If recharge is done through Internet
–
–
Address of selling agent (if sold through Selling Agent), OR Location of receipt of pre- payment (if sold directly to subscriber)
(d) Any other case
Address of recipient on record of supplier
If address of recipient is not available
–
–
Banking and other financial services
If address available on record
If recipient's address is not available
–
–
Insurance Services
–
–
–
Advertisement Services to Governments [8]
[see Note 8]
All other
(Registered recipient)
–
–
–
All other (unregistered recipient)
If address on record exists with supplier
If address is not available with supplier
–
–
NOTES:
Following services are covered under this sub-section:
Services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co- ordination of construction work,
Lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name called, and including a house boat or any other vessel,
Accommodation in any immovable property for organising any marriage or reception or matters related thereto, official, social, cultural, religious or business function including services provided in relation to such function at such property,
Any services ancillary to the services referred to in clauses (a), (b) and (c).
If the location of the immovable property or boat or vessel is located or intended to be located outside India, the place of supply shall be the location of the recipient.
If the property is located in more than one state or union territory, supply of services shall be treated as made in respect of each state or union territory proportionately, in the proportion of value of services separately charged as per contract.
Following services are covered under this sub-section:
Restaurant and catering services,
personal grooming,
fitness,
beauty treatment,
health service including cosmetic and plastic surgery
Words used here are Training “and” appraisal, which literally means when both services are provided at the same time. However, any one service of either training or appraisal shall be covered under this heading only. Therefore, for the purpose of this sub-section, 'and' should be interpreted as 'or'.
Following activities are covered under this sub-section: Admission to a cultural, artistic, sporting, scientific, educational, entertainment event or amusement park or any other place and services ancillary thereto.
Organisation of following activities are covered under this sub-section:
Cultural, artistic, sporting, scientific, educational or entertainment event including supply of services in relation to a conference, fair, exhibition, celebration or similar events.
Assigning of sponsorship to above events is also covered in this sub-section.
If the event is held in more than one State or Union territory and a consolidated amount is charged for supply of services, the place of supply of such services shall be taken as being in each of the respective States or Union territories proportionately.
Where the right to passage is given for future use and the point of embarkation is not known at the time of issue of right to passage, the place of supply of such service shall be determined in accordance with the provisions of sub-section (2) (Residual condition).Further, the return journey shall be treated as a separate journey, even if the right to passage for onward and return journey is issued at the same time.
Services under this sub-section includes data transfer, broadcasting, cable and direct to home television services to any person.
Fixed lines cover leased circuits, internet leased circuit, cable or dish antenna
Selling agent covers re-seller or a distributor of subscriber identity module (SIM) card or re-charge voucher.
If the leased circuit is installed in more than one State or Union territory and a consolidated amount is charged for supply of services relating to such circuit, the place of supply of such services shall be taken as being in each of the respective States or Union territories proportionately.
For this sub-section, Government includes Central Government, a State Government, a statutory body of a local authority meant for the States or Union territories. Place of Supply shall be the state where the advertisement gets published as per the contract with Government.
As per Section 9(b) where the place of supply is in the territorial waters, the place of supply shall for the purposes of this Act be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
Place of Supply of Services Section 13
Provisions of this Section is applicable when location of the supplier of services or the location of the recipient of services is outside India.
Sub- Section
Service
Place of supply
Notes
3(a)
Service in respect of goods, required to be physically made available by recipient to supplier
Location of performance of services
1, 2
3(b)
Services of personalised nature
Location of performance of services
3
4
Services Directly in relation to immovable property
Location of immovable property
4
5
S e r v i c e s b y a d m i s s i o n t o organisation of an event
Location of event
5
6
Services in (3), (4), (5) above performed in more than one location, including a location in taxable territory
Location in Taxable Territory
6
7
Services in (3), (4), (5) above performed in more than one state or UT
Proportionately among states and / or UT
7
8(a)
Service by a banking company, Financial Institution or NBFC to its account holders
Location of supplier of service
8
8(b)
Intermediary services
Location of supplier of service
9
8(c)
Hiring means of transport excluding aircrafts and vessels for more than one month
Location of supplier of service
10
9
Transportation of goods other than by Mail or Courier
Destination of goods
11
10
Passenger Transportation Services
Place of embarkation of passenger for continuous journey
12
11
Service on board of a conveyance
First scheduled
departure point
13
12
Online information and database access or retrieval service
Location of recipient
14
13
To be notified services (to prevent double taxation or non-taxation)
Place of effective use or enjoyment of service
-
2
Services other than above
Location of recipient, if available. Otherwise location of supplier
-
NOTES:
When such services are provided from a remote location by way of electronic means, the place of supply shall be the location where goods are situated at the time of supply of services.
Nothing contained in this clause shall apply in the case of services supplied in respect of goods which are temporarily imported into India for repairs and are exported after repairs without being put to any other use in India, than that which is required for such repairs.
In this sub-section, supplier covers person acting on behalf of supplier. This implies that while a service in this category is capable of being rendered only in the presence of an individual, it will not matter if, in terms of the contractual arrangement between the provider and the receiver (formal or informal, written or oral), the service is actually rendered by the provider to a person other than the receiver, who is acting on behalf of the receiver.
Illustration
A modelling agency contracts with a beauty parlour for beauty treatment of say, 20 models. In this situation where the modelling agency is the receiver of the service, but the service is rendered to the models, who are receiving the beauty treatment service on behalf of the modelling agency. Hence, notwithstanding that the modelling agency does not qualify as the individual receiver in whose presence the service is rendered, the nature of the service is such as can be rendered only to an individual, thereby qualifying to be covered under this sub-section.
For this sub-section, service supplied by immovable property includes supply of accommodation by a hotel, inn, guest house, club or campsite, by whatever name called. The included services are grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including that of architects or interior decorators.
“Immovable Property” has not been defined in the GST Act. However, in terms of section 4 of the General Clauses Act, 1897, the definition of immovable property provided in sub-section 3(26) of the General Clauses Act will apply, which states as under:
“Immovable Property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”
It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would be covered by the definition of immovable property. The property must be attached to some part of earth even if underwater.
This sub-section applies only to services which relate directly to specific sites of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. This rule does not apply if a provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services.
For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common décor for all its stores in India, this service would not be land- related.
Examples of services which are not land related:
Repair and maintenance of machinery which is not permanently installed. This is a service related to goods.
Advice or information relating to land prices or property markets because they do not relate to specific sites.
Land or Real Estate Feasibility studies, say in respect of the investment potential of a developing suburb, since this service does not relate to a specific property or site.
Services of a Tax Return Preparer in simply calculating a tax return from figures provided by a business in respect of rental income from commercial property.
Services of an agent who arranges finance for the purchase of a property.
For this sub-section, event includes cultural, artistic, sporting, scientific, educational or entertainment event, or a celebration, conference, fair, exhibition or similar events.
Example 1
A management school located in USA intends to organize a road show in Mumbai and New Delhi for prospective students.
Example 2
An Indian fashion design firm hosts a show at Toronto, Canada. The firm receives the services of a Canadian event organizer. The place of provision of this service is the location of the event (i.e. Canada).
Example of a service ancillary organization or admission to an event
Provision of sound engineering for an artistic event is a prerequisite for staging of that event and should be regarded as a service ancillary to its organization. A service of hiring a specific equipment to enjoy the event at the venue (against a charge that is not included in the price of entry ticket) is an example of a service that is ancillary to admission. However, a service of courier agency used for distribution of entry tickets for an event is a service that is not ancillary to admission to the event.
This sub-section is applicable where the actual performance of a service is at more than one location, and occasionally one (or more) such locations may be outside the taxable territory.
Example
An Indian firm provides a technical inspection and certification service for a newly developed product of an overseas firm (say, for a newly launched motorbike which has to meet emission standards in different states or countries). Say, the testing is carried out in Maharashtra (20%), Kerala (25%), and an international location (say, Colombo 55%).
Notwithstanding the fact that the greatest proportion of service is outside the taxable territory, the place of provision will be the place in the taxable territory where the greatest proportion of service is provided, in this case Kerala.
This sub-section is, however, not intended to capture insignificant portion of a service rendered in any part of the taxable territory like mere issue of invoice, processing of purchase order or recovery, which are not by way of service actually performed on goods.
For this sub-section, the place of supply of such services shall be taken as being in each of the respective States or Union territories and the value of such supplies specific to each State or Union territory shall be in proportion to the value for services separately collected or determined in terms of the contract or agreement entered into in this regard or, in the absence of such contract or agreement, on such other basis as may be prescribed.
Example
A Ltd. provides service of organising business exhibitions to B Ltd. for Rs. 1 Crore. The exhibitions will be held in 3 different states, Gujarat, Maharashtra and Rajasthan. As per agreement, 60% of value will be collected for Gujarat exhibition. 30% for Rajasthan and balance 10% for Maharashtra exhibition.
Here, for value of Rs. 60 Lakh (60% of consideration), place of supply will be Gujarat For value of Rs. 10 Lakh (10 % of consideration), place of supply will be Maharashtra (30% of consideration), For value of Rs. 30 Lakh (30% of consideration), place of supply will be Rajasthan.
For the purpose of this sub-section;
“Account” means an account bearing interest to the depositor, and includes a non-resident external account and a non-resident ordinary account;
“Banking company” shall have the same meaning as assigned to it under clause (a) of section 45A of the Reserve Bank of India Act, 1934;
''Financial institution” shall have the same meaning as assigned to it in clause (c) of section 45-I of the Reserve Bank of India Act, 1934;
“Non-banking financial company” means,––a. a financial institution which is a company;b. a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; orc. such other non-banking institution or class of such institutions, as the Reserve Bank of India may, with the previous approval of the Central Government and by notification in the Official Gazette, specify
As per Section 2(13), “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.
Also see discussion on Analysis of “intermediary services” at the end of this chapter
Example
Service consisting of hiring of –
Place of provision of service
Location of supplier
Location of recipient
Aircraft up to a period of 20 days
Aircraft up to a period of 40 days
Vessels up to a period of 20 days
Vessels up to a period of 20 days
Yachts up to a period of 20 days
Yachts up to a period of 40 days
Trucks up to a period of 20 days
Trucks up to a period of 40 days
Example
A consignment of cut flowers is consigned from Chennai to Amsterdam. The place of provision of goods transportation service will be Amsterdam. Conversely, if a consignment of crystal ware is consigned from Paris to New Delhi, the place of provision will be New Delhi.
For the purpose of this sub-section, as per Circular 2/2017-IGST, place of supply of satellite launch services supplied by ANTRIX Corporation Limited to international customers would be outside India and such supply which also falls in section 2(6) of IGST Act, thus constitutes export of service and shall be zero rated in accordance with section 16 of the IGST Act. Where satellite launch service is provided by ANTRIX Corporation Limited to a person located in India, the place of supply of satellite launch service would be governed by section 12(8) of the IGST Act and would be taxable under CGST Act, UTGST Act or IGST Act, as the case may be.
As per Section 2(3), “Continuous journey” means a journey for which a single or more than one ticket or invoice is issued at the same time, either by a single supplier of service or through an agent acting on behalf of more than one supplier of service, and which involves no stopover between any of the legs of the journey for which one or more separate tickets or invoices are issued.
As per explanation to Section 2(3), for the purposes of this clause, the term “stopover” means a place where a passenger can disembark either to transfer to another conveyance or break his journey for a certain period in order to resume it at a later point of time.
That means a place where a passenger can disembark either to transfer to another conveyance or break his journey for a certain period in order to resume it at a later point of time. All stopovers do not cause a break in continuous journey. Only such stopovers will be relevant for which one or more separate tickets are issued. Thus a travel on Delhi-London-New York- London-Delhi on a single ticket with a halt at London on either side, or even both, will be covered by the definition of continuous journey. However if a separate ticket is issued, say New York-Boston-New York, the same will be outside the scope of a continuous journey.
Example
A video game or a movie-on-demand is provided as on-board entertainment during the Kolkata-Delhi leg of a Bangkok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok. If the above service is provided on a Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the place of provision will be Delhi.
For the purpose of this sub-section, “online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as––
advertising on the internet
providing cloud services
provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet
providing data or information, retrievable or otherwise, to any person in electronic form through a computer network
online supplies of digital content (movies, television shows, music and the like)
digital data storage; and
online gaming.
Person receiving such services shall be deemed to be located in the taxable territory, if any two of the following non-contradictory conditions are satisfied, namely –
the location of address presented by the recipient of services through internet is in the taxable territory;
the credit card or debit card or store value card or charge card or smart card or any other card by which the recipient of services settles payment has been issued in the taxable territory;
the billing address of the recipient of services is in the taxable territory;
the internet protocol address of the device used by the recipient of services is in the taxable territory;
the bank of the recipient of services in which the account used for payment is maintained is in the taxable territory;
the country code of the subscriber identity module card used by the recipient of services is of taxable territory;
the location of the fixed land line through which the service is received by the recipient is in the taxable territory.
Also refer to Section 14 of IGST Act for further discussion.
As per Section 9(b), where the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
Section 14(1) Special provision for payment of tax by a supplier of online information and database access or retrieval services
As per Section 2 (17) of IGST Act, OIDAR means-
In today's information technology driven transactions, it is extremely difficult to fix responsibility of taxation. It is not only difficult in indirect taxes but also in direct taxes. Under Income Tax Act also many specific provisions are made to address taxation of such transactions. Under GST also Section 14 of IGST Act, provides for responsibility of payment of GST and registration for OIDAR services.
As per Section 13 of IGST Act, place of supply in case of OIDAR services is location of the recipient.
Provisions of this section are applicable in following cases:
Supply is of online information and database access or retrieval services
The supplier is located in a non-taxable territory
Recipient is a non-taxable online recipient
If above conditions are satisfied, then the supplier of services located in a non-taxable territory shall be the person liable for paying integrated tax.
In the above case, intermediary will be deemed to be recipient of services from the supplier of services in non-taxable territory and supplying such services to the non- taxable online recipient. However, in following cases intermediary will not be deemed to be the recipient:
The invoice or customer's bill or receipt issued or made available by such intermediary taking part in the supply clearly identifies the service in question and its supplier in non-taxable territory
The intermediary involved in the supply does not authorise the charge to the customer or take part in its charge which is that the intermediary neither collects or processes payment in any manner nor is responsible for the payment between the non-taxable online recipient and the supplier of such services
the intermediary involved in the supply does not authorise delivery; and
the general terms and conditions of the supply are not set by the intermediary involved in the supply but by the supplier of services.
Explanation on Importation of Services
As per Notification No. 10/2017- Integrated Tax (Rate), in case of any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient, then a person located in the taxable territory (other than non-taxable online recipient) shall be the person liable to pay GST. Non-taxable online recipient is defined under section 2(16) of IGST Act, 2017, as any Government, Local Authority, Governmental Authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.
Explanation-For the purposes of this clause, the expression “Governmental Authority” means any authority or a board or any other body,-i. Set up by an Act of Parliament or a State Legislature; or ii. Established by any Government,with ninety percent or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution.
Hence, if the recipient is a registered person and receives OIDAR service, then he is required to pay GST on receipt of this service under RCM. However, if the recipient is not a registered person and is considered as non- taxable online recipient as defined under Section 2(16) above then the provisions of Notification 10/2017- Integrated Tax (Rate) shall not apply and provisions of Section 14 of IGST Act, 2017 shall be applied and provider of service is required to take registration in India and is required to discharge GST Liability.
Section 14(2) Registration by a supplier of online information and database access or retrieval services
The supplier of services mentioned in Section 14(1) above, shall take a single registration under the Simplified Registration Scheme as per Notification 2/2017 – Integrated Tax.
Any person located in the taxable territory representing the supplier in that territory shall get registered on behalf of the supplier.
However, if such supplier does not have a physical presence or a representative in the taxable territory, he may appoint a person in the taxable territory for the purpose of paying integrated tax and such person shall be liable for payment of such tax.
As per Notification No. 30/2019 - CT, Dated 28-6-2019,
The said persons shall not be required to furnish an annual return in FROM GSTR- 9 or to furnish reconciliation statement in FORM GSTR-9C
Refund of Integrated Tax to international tourists Section 15
The integrated tax paid by tourist leaving India on any supply of goods taken out of India by him shall be refunded in such manner and subject to such conditions and safeguards as may be prescribed.
As per explanation to this section, the term “tourist” means a person not normally resident in India, who enters India for a stay of not more than six months for legitimate non-immigrant purposes.
Taxability of Intermediary Service under GST
The issue of taxability of “intermediary service” has been a matter of debate and concern for a long period of time. Though the concept has been borrowed from Service tax law, it needs to be looked into afresh under GST Law. The reason for this is GST has been enacted to remove some of the defects in earlier taxation laws and achieve “One Nation One Tax” and “Consumption Based taxation”.
To explain the issue on hand, let me start with an example, suppose Mr. A (located in India) is a provider of service and recipient is located outside India and amount is received in a convertible foreign exchange then as per section 2 (6) of the IGST Act, 2017 this supply is covered under Export of service and due to operation of section 16 of the IGST Act it is considered as Zero Rated supply. However, if Mr. A is covered under the definition of “intermediary” as given under section 2(13) of the IGST Act, 2017 then in such case the supply cannot be considered as Export of service and consequently Mr. A has to pay GST on such supply even though other conditions given under section 2(6) are satisfied. Merely by reading this simple example, at the outset I wish to give my opinion (with due respect to the views of Gujarat High Court in case of Material Recycling Association of India Vs Union of India), that such a provision is ultra vires to Article 14 and Article 19 of the Constitution. It clearly discriminates one exporter from another by way of a deeming fiction created by section 13(8)(b) of the IGST Act, 2017. Having said so, now let us examine the applicable legal provisions of law and judicial scrutiny made by honourable High Courts.
Gujarat High Court judgement in case of Material Recycling Association of India Vs Union of India on 24th July 2020 and recent judgement given by honourable justice Ujjal Bhuyan in case of Dharmendra M Jani vs Union of India and Others (Bombay High court- 9th June, 2021 and opposite judgment by Justice Abhay Ahuja on 16th June, 2021) are relevant for our discussion. I have also discussed judgement delivered by justice Abhay Ahuja in the same case which gives exactly an opposite view on the matter.
Applicable provisions of IGST and CGST Act
As per section 2 (13) of the IGST Act, 2017, “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account.
Hence as per this definition anyone who arranges or facilitates the supply of goods or services or both between two or more persons are called intermediary. Generally we understand that intermediary receives commission as consideration for supply of such services. Example of intermediary can be marketing agents, brokers, agents etc.
Definition of export of services as per section 2(6) of the IGST Act-“export of services” means the supply of any service when––
the supplier of service is located in Indiathe recipient of service is located outside Indiathe place of supply of service is outside Indiathe payment for such service has been received by the supplier of service in convertible foreign exchange; andthe supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.
Here, if all of the above five conditions are fulfilled then we can say that the supply of service is an export of service and consequently a zero rated supply. Three questions are important in this definition. 1. How to decide location of supplier 2. How to decide location of recipient 3. How to decide the place of supply.
As per section 2(15) of the IGST Act, “location of the supplier of services” means,––(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment; (c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and (d) in absence of such places, the location of the usual place of residence of the supplier;
As per section 2(15) of the IGST Act,“location of the recipient of services” means,––(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business; (b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment; (c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and (d) in absence of such places, the location of the usual place of residence of the recipient;
Whether supply is an inter-state supply or intra-state supply that will be determined by section 7 and 8 of the IGST Act-
Section 7 of the IGST Act deals with inter-State supply as under:
Inter-State supply
Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in–
two different States
two different Union territories; or
a State and a Union territory.
shall be treated as a supply of goods in the course of inter-State trade or commerce.
Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in–
two different States; or
two different Union territories; or
a State and a Union territory, shall be treated as a supply of services in the course of inter-State trade or commerce.
Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
Supply of goods or services or both,--
when the supplier is located in India and the place of supply is outside India
to or by a Special Economic Zone developer or a Special Economic Zone unit; or
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 inter-State trade or commerce.
Section 8 of the IGST Act deals with inter-State supply as under:
Intra-State supply
Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply: Provided that the following supply of goods shall not be treated as intra- State supply, namely:-
supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit
goods imported into the territory of India till they cross the customs frontiers of India; or
supplies made to a tourist referred to in section 15.
Subject to the provisions of section 12, 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:
Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.
Explanation 1. For the purposes of this Act, where a person has,
an establishment in India and any other establishment outside India;
an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
an establishment in a State or Union territory and any other establishment registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
Explanation 2. A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.
As far as the place of supply of service is concerned, it is decided by section 12, 13 and 14 of the IGST Act. When location of the supplier or location of the recipient is outside India then the place of supply shall be determined as per section 13 of the IGST Act, 2017. Hence for our discussion section 13 of the IGST Act becomes very important. As per section 13(2), except for services specified in sub-sections 3 to 13, place of supply shall be the location of the recipient. Hence as a normal precedent, location of the recipient is considered as place of supply. However, in case of intermediary services, section 13(8)(b) creates a deeming fiction, and as per this clause, for intermediary services the place of supply shall be the location of supplier and not the location of recipient. Now, assume a case of a supplier of service located in India who provides intermediary service to a recipient located outside India. Here the place of supply will be the place of the supplier even though the service is provided to a person located outside India.
In such cases the location of the supplier and place of supply will be in same state making it an intra state supply as per section 8(2) of the IGST Act. And the supplier will end up paying CGST and SGST on this supply. From this apparent result, it seems that section 13(8)(b) has been drafted to kee intermediary service outside IGST and cover it under CGST/SGST. The only question that remains to be answered here is- can this be done in a way in which it has been done? To answer this question we need to discuss some of the article of the constitution.
Discussion on relevant articles of the Constitution
We understand that Indian constitution has a quasi-federal structure. Article 1 of the Indian constitution says India is a union of states. Accordingly Article 246 of the constitution provides for partition of powers between centre and states (More correctly, between parliament and legislatures of states). This article is reproduced below-
Article 246
Subject matter of laws made by Parliament and by the Legislatures of States:-
(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List)
Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List)
Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the “State List”).
Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List”.
It is important to note for readers that primary condition for successful implementation of GST was to make taxation of goods and services parallel. In the provision existing before 101st Constitutional Amendment, it was very difficult to achieve. Excise, service tax etc were covered under list 1 ( union list) of schedule VII where as right to levy tax on sale of goods was with state legislature under entry 54 of list II (state list). To achieve “ One Nation One Tax”, this existing structure of partition of powers was the biggest hurdle.
Hence, for proper implementation of GST, it was need of the hour to by-pass Article 246 and give powers to both parliament and state legislature to impose tax called a Goods and Services tax. Accordingly, new article 246A was inserted vide 101stConstitutional Amendment Act. The Article 246A is reproduced below-
Article 246A
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.
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 – The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.
Readers can note from clause 2 of the Article 246A that the parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods or services or both have taken place in the course of inter-state trade or commerce. Here question arises as to how can we determine whether the supply is in the course of inter-state trade or commerce or not. This is being decided by section 7 and section 8 of the IGST Act. Hence, a question remains whether this determination can be done through IGST Act or not ? This question can be answered by examination of Article 269A of the constitution which is reproduced below-
Article 269A
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.
The amount apportioned to a State under-clause (1) shall not form part of the Consolidated Fund of India.
Where an amount collected as tax levied under clause(1) has been used for payment of the tax levied by a State under Article 246A, such amount shall not form part of the Consolidated Fund of India.
Where an amount collected as tax levied by a State under Article 246A has been used for payment of the tax levied under Clause (1), such amount shall not form part of the Consolidated Fund of the State.
Parliament may, by law, formulate the principal for determining 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.
Readers attention is drawn to explanation 5 to Article 269A which provides that it will be the parliament which can decide by law the principles for determination of 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. Hence, it can be concluded that the parliament has power to formulate law for determining whether supply if in the course of inter state trade or commerce or not.
Two more articles i.e. Article 245 and Article 286 are relevant for our discussion.
Article 245 Extent of laws made by Parliament and by the Legislatures of States –
Subject to the provisions of this 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. (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”
Article 286 Restrictions as to imposition of tax on the sale or purchase of goods.-
No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place-
outside the State; or
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.
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).
Here, on analysis of Article 245 and 286 main question arises as to whether the treatment of intermediary services where the location of supplier is in India and recipient is outside India can be treated as intra-state supply by way of a deeming fiction created by section 13(8)(b) of the IGST Act, simply by providing that in case of intermediary services the place of supply shall be the location of the supplier. Apparently, on reading of article 245 and 286 it can be concluded that the parliament has powers to decide what will be the place of supply in particular case and consequently whether the supply will be treated as inter-state or intra-state.
Whether provisions of section 13(8)(b) results into double taxation?
There is no doubt that if we ignore the deeming fiction created by section 13(8)(b) of the IGST Act, the intermediary service shall be considered as export of service as defined under section 2(6) of the IGST Act. By this deeming fiction, there is a clear double taxation if there is a tax on import of such intermediary service in the country of recipient. Let us understand this with the help of an example. Mr. A, who has location in Gujarat provides intermediary service to B Ltd of USA. Due to the deeming fiction of section 13(8)(b) of the IGST Act, this service shall be first taxed in India. Secondly if law of USA considers it as import of service by B Ltd (which is actually the correct position) then B ltd shall pay tax on this import of service. Hence there is a clear case of double taxation. It is also important to take note of report of 139th Parliamentary standing committee.
The Parliamentary Standing Committee on Commerce submitted report No.139 on Impact of Goods and Services Tax (GST) on Exports. The said report was presented to the Rajya Sabha on 19 December, 2017 and was laid on the table of Lok Sabha on the same day. After referring to the definition of 'export of services' as defined under section 2(6) of the IGST Act, it was noted that service providers providing services to overseas suppliers of goods earn commission in convertible foreign exchange; but IGST @ 18% is leviable on such commission because the government does not recognise their services as export of services. Section 13(8) provides that place of supply of services will be the location of the service supplier and not the location of overseas customers. Even in cases where both the supplier and the buyer are located outside India, commission earned for such transaction also attract IGST @ 18%. In view of the fact that GST is a destination based consumption tax, the Parliamentary Standing Committee made the following recommendations:-
- “Provide that place of supply of Indian intermediaries of goods will be the location of service recipient i.e., customers located abroad (and not the location of such intermediaries as is currently provided), so that intermediary services will be treated as exports; or
- Providing an exemption to Indian intermediaries of goods from levy of IGST, exercising the powers vested under section 6(1) of the IGST Act; or
- Notify such services under section 13(13) of the IGST Act to prevent double taxation (tax in India as well as in the importing country) by treating place of effective use (foreign country) as place of supply.”
Does section 13(8)(b) violates fundamental right under Article 14 of the Constitution?
Article 14 of the Constitution guarantees equality before law. It reads as under
“The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”
From a layman's point of view, provisions of section 13(8)(b) is clearly in violation of Article 14 of the constitution. Reason for saying so is that it taxes a transaction which is otherwise an export of service and similar other services like management consultants, marketing agents, advisers are enjoying the benefit of provisions of export of service. This benefit is denied to intermediary services.
However, in case of taxation law, before court can conclude that the statute violates Article 14, it needs to check whether it is case of discrimination or classification of taxpayers? All classifications cannot be considered as discrimination. In case of R.K. Garg Vs. Union of India and Ors. the Supreme Court has laid down that in order to pass the test of reasonable classification, the classification must fulfil two conditions-
that the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and
that differentia must have a rational relation to the object sought to be achieved by the Act.
The differentia which is a basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them. This means that Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily selected out of a large number of other persons similarly situated in relation to the privileges sought to be conferred or the liabilities proposed to be imposed, it however does not forbid classification provided such classification is not arbitrary. In other words, what is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be arbitrary, artificial or evasive, but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the legislature.
On this premise, Justice Abhay Ahuja in case of Dharmendra M Jani vs Union of India and Others (Bombay High court) held that the provisions of section 13(8)(b) is a case of classification of taxpayers and not of discrimination. However, there still remains many questions to be answered before we can actually conclude that it is a not a case of discrimination.
Judicial review of section 13(8)(b)
Before we look into what judiciary has said about constitutional validity of section 13(8)(b) of the IGST Act, we need to know that in case of judicial review of a statute, there is always a presumption in favour of constitutionality of a statute. Burden lies on the person who challenges the validity of a statute. It is also settled now that for declaring a statute as unconstitutional, Court has to see two important things:
whether there is legislative competence to enact the statute or not and
whether the impugned provision violates any of the fundamental rights given in Part III of the Constitution or not.
There are two important judgements reviewing constitutional validity of section 13(8)(b) of the IGST Act.
Gujarat High Court judgement in case of Material Recycling Association of India Vs Union of India on 24th July 2020 and
Two different views given by Bombay High court Justice Ujjal Bhuyan and Justice Abhay Ahuja in case of Dharmendra M Jani vs Union of India and Others (Bombay High court- 9th June, 2021 and opposite judgment by Justice Abhay Ahuja on 16th June, 2021).
First in case of Material Recycling Association of India vs Union of India, Honourable Gujarat High Court did not find any problem with the provisions of section 13(8)(b). Relevant paragraphs of Gujarat high court judgement is given below-
The petitioner has tried to submit that the ser services provided by a broker outside India by way of intermediary service should be considered as “export of services” but the legislature has thought it fit to consider such intermediary services; the place of supply would be the location of the supplier of the services. In that view of the matter, it would be necessary to refer to the definition of “export of services” as contained in section 2(6) of the IGST Act, 2017 which provides that export of service means the place of service of supply outside India. Conjoint reading of section 2(6) and 2(13), which defines export of service and intermediary service respectively, then the person who is intermediary cannot be considered as exporter of services because he is only a broker who arranges and facilitate the supply of goods or services or both. In such circumstances, the respondent No.3 have issued Circular No.20/2019 where exemption is granted in IGST rates from payment of IGST in respect of services provided by intermediary in case the goods are supplied in India.
It therefore, appears that the basic logic or inception of section 13(8)(b) of the IGST Act, 2017 considering the place of supply in case of intermediary to be the location of supply of service is in order to levy CGST and SGST and such intermediary service therefore, would be out of the purview of IGST. There is no distinction between the intermediary services provided by a person in India or outside India. Only because, the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services, more particularly when the legislature has though it fit to consider the place of supply of services as place of person who provides such service in India.
Therefore, there is no deeming provision as tried to be canvassed by the petitioner, but there is stipulation by the Act legislated by the parliament to consider the location of the service provider of intermediary to be place of supply. Similar situation was also existing in service tax regime w.e.f. 1st October 2014 and as such same situation is continued in GST regime also. Therefore, this being a consistent stand of the respondents to tax the service provided by intermediary in India, the same cannot be treated as “exporter of services” under the IGST Act, 2017 and therefore, rightly included in Section 13(8)(b) of the IGST Act to consider the location of supplier of service as place of supply so as to attract CGST and SGST.”
As can be derived from the above paragraphs, Gujarat High Court did not find any defect in the provisions of section 13(8)(b). However justice Ujjal Bhuyan in case of Dharmendra M Jani vs Union of India and Others did not agree with the proposition laid down by Gujarat High Court. In para 56 of his judgement he writes as under-
“With utmost respect we are unable to accept the views of the Gujarat High Court as extracted above. Having regard to the discussions made in the preceding paragraphs it is evident 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 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; rather 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.”
In the same case, Justice Abhay Ahuja has different opinion. According to him, provisions of Section 13(8)(b) does not offend Article 245 or 286 and parliament is well within its powers in drafting such a legislation.
As there are two opposite views in the same judgement, the matter has been referred to the Chief Justice of Bombay High Court.
Conclusion and author's opinion
Though the taxation of Intermediary service is not a new concept and the same law prevailed in service tax also, according to opinion of the author, being a pre existing law, does not make is a good law. Though I agree with the dissenting view in case of Bombay high court judgement in case of Dharmendra M Jani vs Union of India and Others that the provision does not appear to be offending Article 245 and 286 of the Constitution and it is not ultra vires, I believe that there is a violation of Article 14 of the constitution. It is difficult to accept that this provision is not about discrimination but of classification of taxpayers. Further, it is against the concept of consumption based taxation for sure. It also results into double taxation and is causing injustice to a person who brings convertible foreign
exchange in the country like any other exporter. 139th Parliamentary standing committee report also suggests the same thing. However, parliamentary committee reports are not binding in nature. To conclude, if court cannot hold the provisions ultra-vires, we need to leave it to wisdom of parliament to amend the provision suitably as suggested in 139th parliamentary committee report.
Next Article