The taxation of intermediary services has long been a topic of contention and differing opinions. Traditionally, the point at which these services were subject to taxation rested on the recipient, aligning with the prevalent global practice of place of supply. This approach was maintained until 2014 when the CBEC unexpectedly shifted its stance due to the influence of an overly enthusiastic officer.
Unfortunately, this change lacked the tax neutrality observed in other countries. The introduction of GST further complicated matters, particularly in relation to the provisions regarding the place of supply. This article delves into the profound implications of the significant Dharmendra M. Jani case ruling in the esteemed Bombay High Court and outlines the potential paths ahead for such service providers.
Key Provisions under Examination
- Section 13(8)(b) of the IGST Act: Designates the place of supply as the location of the service provider.
- Section 7(5)(a) of the IGST Act: Pertains to Inter-State Supply transactions where the supplier is in India, but the place of supply is outside India.
- Section 8(2) of the IGST Act: Addresses Intra-State Supply transactions, where services are supplied within the same State or Union territory.
- Section 2(6) – Definition of ‘Export of Service’: Involves scenarios where the supplier is in India, the recipient is outside India, and the place of supply of service also lies outside India.
Intermediary Services in a State of Uncertainty
The issue at hand stems from the interpretation of Sections 2(6) and 7 of the IGST Act. By the plain reading of these sections, the transaction could be categorized as an inter-State supply. However, due to the influence of section 13(8)(b), it is classified as an intra-State supply, consequently attracting taxation.
In 2021, one Judge declared these provisions as ultra vires (beyond the legal power or authority) in nature. However, another Judge took a dissenting stance, leading to the pivotal larger bench decision that ensued.
Recent High Court Ruling Analysis on Taxation
The High Court has taken a thoughtful approach to interpreting and aligning the legal provisions to ensure their effective implementation. They recognize the presence of a dual perspective. The underlying purpose of these provisions is not to spark conflicts and legal battles but rather to facilitate a seamless and clear operation within a strong taxation framework. Ultimately, the court deems the transaction in question to fall under the category of inter-State supply.
The petitioner firmly contends that Section 13(8)(b) of the IGST Act should not be applied to the CGST Act or the State GST Act in a way that indirectly imposes taxation on the export of services. The High Court’s analysis concludes that both Section 13(8)(b) and Section 8(2) of the IGST Act stand in accordance with the Constitution.
The assertion that the taxation of intermediary services has an extraterritorial character and goes against Article 245(2) of the Indian Constitution is found to be unsupported. This is particularly so, given that Section 13(8)(b) pertains to an inter-State supply.
Furthermore, the High Court determines that neither Section 13(8)(b) nor 8(2) of the IGST Act infringes upon the provisions of Article 14, 19(1)(g), 245, 246, 246A, 265, 269A, and 286 of the Indian Constitution. It emphasizes that Section 13(8)(b) should be confined solely to the IGST Act and should not be extended to have any implications under the CGST and State GST laws.
The “Department-Related Parliamentary Standing Committee On Commerce” expressed a viewpoint in its 139th Report on GST that the place of supply for intermediary services should be placed under the residual clause of Section 13(2) of the IGST Act. This adjustment would enable the export of services and create consistency on a global scale. The High Court acknowledges that this perspective should have been taken into consideration by the Parliament.
Regarding the ruling in the case of Material Recycling Associations of India – Gujarat High Court, where intermediary services were deemed subject to CGST and SGST, the High Court finds that this verdict does not align with the current case and cannot substantiate the Revenue’s stance.
The Confronting Opinions
The Honorable High Court judges view the transaction as an export of service, classifying it as a supply during inter-State trade or commerce. This stance diverges from the established export of service guidelines, which stipulate that the place of supply must lie outside India. According to Section 13(8)(b), the place of supply corresponds to the service provider’s location.
Several nations, including Thailand, Sri Lanka, and the European Union, have successfully implemented destination-based taxation. This approach facilitates service exports and minimizes the risk of double taxation.
Numerous businesses have relocated their operations beyond India’s borders to evade supplementary taxes. Unfortunately, this maneuver has a ripple effect, negatively influencing both our international competitiveness and overall economic stability.
Way Forward – Intermediary Services
The matter of validity is extensively discussed and addressed.
However, individuals who had been paying taxes according to CGST & SGST are not required to make IGST payments for their previous transactions.
According to Section 77(1) of the CGST Act, coupled with Section 19(2) of the IGST Act, it is clarified that in cases where CGST & SGST were inadvertently paid for a transaction assumed to be within a single state but was actually an interstate transaction subject to IGST, the incorrect tax payment will be reimbursed once the accurate IGST taxes are settled. No interest will be charged in these situations.
It can also be inferred that only upon confirmation (via a notice or departmental audit) by the department that the case falls under such circumstances, should the payment and refund processes be initiated.
Considering that this matter might escalate to the Supreme Court and there are no additional interest expenses, taxpayers are advised to await the final decision before taking any action.
Those who haven’t yet paid for intermediary services can opt to do so under protest, following a consultation with an expert who can provide precise details.
Proposed Changes in GST Law (personal viewpoint)
We should remove section 13(8)(b) and connect it to the general provision, which is section 13(2) of the IGST Act. Furthermore, it’s advisable to issue a notification under section 13(13) of the IGST Act in order to prevent dual taxation. This would ensure that taxation doesn’t occur both in India and in the foreign country, by defining the place of supply as the recipient’s location.
Services Based on Principal-to-Principal Relationship
Services provided directly rather than through intermediaries should be considered as services on a principal-to-principal basis. Such services would be categorized as export of services, falling under section 13(2) of the IGST Act, and not under section 13(8)(b).
The Circular 159/15/2021-GST issued by CBIC on 20th September 2021 further clarifies the distinction between intermediary services and the contrasts between services provided on one’s own account versus subcontracted services.
Key Legal Precedents for Such Situations:
- McDonald’s India Pvt Ltd – Delhi High Court – W.P.(C) 11430/2022
- Ernst and Young Ltd – Delhi High Court – W.P.(C) 8600/2022
- Universal Services India Pvt Ltd 2016 (42) STR 585
- GoDaddy India Web Services Pvt Ltd 2016 (46) STR 806
Final Thoughts
The High Court’s ruling seems to have caused some confusion due to the way they reached their conclusion. However, it’s too early to decide on any business actions using this ruling. It would be wise to wait for the Supreme Court’s decision and follow the best practices outlined earlier.
Moreover, properly categorizing services and aligning contract structures with the actual services provided is crucial. This should be done while considering tax regulations in order to ensure compliance.