Bombay High Court referral judge upholds validity of Section 13(8)(b) of IGST Act after split verdict of division bench

The Bombay High Court recently upheld the constitutional validity of Section 13(8)(b) of the Integrated Goods and Services Tax (IGST) Act under which intermediary service providers based outside India could be taxed for providing services in India. [Dharmendra M Jain v. Union of India]

Section 13 of the IGST Act provides for imposition of tax for a specific situation when the location of a supplier or location of a recipient is outside India.

Sub-section (8)(b) clarified that for intermediary services (as agents, or brokers) the location for taxation purposes was the location from where the supplier has supplied the said services.

Now sub-section (2) of Section 8 of the IGST Act stated that where the location of the supplier and the place of supply of services are in the same state or same union territory, it would be treated as intra-state supply.

Therefore, the export of service by the petitioner as intermediary would be treated as intra-state supply of services under Section 13(8)(b) read with Section 8(2) of the IGST Act, rendering such transaction liable to payment of Gentral Goods and Services Tax (CGST) and State Goods and Services Tax (SGST).

This was the main point of grievance which an array of petitioners raised in the High Court. They claimed that they had paid CGST and SGST from under protest without collecting the same from their foreign customers, bearing the net tax burden of about 40 percent of the total revenue.

The matter was referred to Justice GS Kulkarni, who held that the provision was constitutionally valid as it was applicable only for the framework within the IGST Act.

“None of the provisions under the IGST Act can be considered to be meaningless insofar as they are applicable within the framework of the IGST Act. These provisions under the IGST Act, in my opinion, need to be applied and understood in their applicability only under the IGST Act, even applying the principles of strict construction of the taxing statutes," the judgment stated. 

The Court, however, clarified that Section 13(8)(b) was not applicable to services taxable under the CGST Act and the Maharashtra Goods and Services Tax (MGST) Act. This, because of restrictions imposed under Article 286 of the Constitution on sale or purchase outside India.

Justice Kulkarni's opinion came after a Division Bench of the High Court gave a split verdict in June 2021 on the constitutional validity of the provision. While Justice Ujjal Bhuyan struck down the provision as unconstitutional, Justice Abhay Ahuja differed. 

As is the procedure, the matter was referred to Justice Kulkarni by the then Chief Justice Dipankar Datta for his opinion.

The limited question before the referral judge was to determine the constitutional validity of Section 13(8)(b) of the IGST Act. 

The matter will now be placed before a Division Bench, which will proceed to decide on the merits of the petition.

[Read Justice Kulkarni’s opinion]

[Read Justice Bhuyan’s and Justice Abhuja’s opinions]