The novelty of the law governing the application and operation of the Goods and Services Tax (GST) in India, coupled with the underlying indispensable requirement of hand-in-hand functioning of the Central Government and the State Governments, has paved way for innumerable controversial issues. These issues call for immediate scrutiny by all the three limbs of the government, namely the legislature, the executive and the judiciary, to promptly settle the legal position and avoid protracted litigation. The taxability of exporting the intermediary services has emerged as a persistent issue under the GST regime and has recently caught the requisite attention of the government.
“Intermediary services” is not a new concept. It finds its traces in the Finance Act, 1994 as a part of the Service Tax regime,1 and has later been adopted in the GST law. The concept was incorporated in the statute in order to levy indirect tax on the “cross-border transactions” concerning the supply of services.2
It is pertinent to note that the term “intermediary” has been defined under Section 2(13) of the Integrated Good and Services Act, 2017 (hereinafter referred as the “IGST Act”). As per the definition, the term includes any broker or any agent or any other person, irrespective of the name by which he is called, who arranges or facilitates the supply of goods or services, between two or more persons.3 However, the definition categorically excludes any person who makes supply of goods or services on his own behalf. Therefore, an independent supplier is not an intermediary according to the definition.4
The definition of “intermediary” has invited numerous legal controversies and the authorities throughout the country have failed to make a consistent interpretation of the definition. Consequently, the definition of intermediary, in conjunction with the provisions relating to the “place of supply” under the IGST Act, has triggered well-founded interpretive tussles that are prevailing to the present day.
Section 2(86) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) refers the meaning of “place of supply” to be as mentioned under Chapter V of the IGST Act. Under the said Chapter of the IGST Act, Section 13(8)(b) provides that in case of supply of intermediary services, the said place of supply shall be deemed to be the “location of the supplier”.5 Here, the “location of the supplier” of services, as enumerated under Section 2(15) of the IGST Act, refers to the location of the place of business or the place of residence of the supplier.6 A conjoint reading of the aforesaid provisions evokes a legal position to the effect that even the services tendered by persons located in India to the persons located outside India will be considered to be supply of services made in India, and therefore, will be taxable under the GST regime, unlike the case of exports of services.
Notably, Section 2(6) of the IGST Act defines “export of services”. It provides that the cases of supply of services, where a supplier is located in India but the recipient of service is outside India and the place of supply of service is outside India, will be considered as export of services if the payment for such supply is made in convertible foreign exchange.7 Moreover, Section 16 of the IGST Act renders exports to be a “zero-rated supply”, and hence, non-taxable with GST.8 The perusal of these provisions reveals that the supply of intermediary services to foreign territories becomes taxable merely because the place of supply for intermediary services is considered to be India in lieu of the said Section 13(8)(b), absent which all the ingredients of export of services are being fulfilled by such supply.
The interplay of the aforementioned provisions coupled with the objective of GST gives rise to a legislative anomaly related to the taxability of intermediary. The same was further aggravated by Circular No. 107/26/2019-GST,9 issued by CBIC clarifying the “doubts related to supply of Information Technology enabled Services (ITeS services)” which was said to have inadequately explained the meaning of the terms “on his own account” in the definition of intermediary, leading to the ambiguity as to whether ITeS services shall be regarded as intermediary services falling outside the scope of export of services.10 In pursuance of the said ambiguity, discussions were made in the 37th Meeting of the GST Council which envisaged the application of the principles of Service Tax regime for interpreting the phrase “on his own account”, rendering the ITeS intermediary services taxable under the GST regime.11 However, the aforesaid clarificatory circular was subsequently withdrawn by virtue of Circular No. 127/46/2019-GST, giving rise to even more uncertainty as to the correct position.
Furthermore, the judicial interpretations on this issue have miserably failed to lay down an unambiguous position of law. The constitutional validity of these were challenged before the High Court of Gujarat in the year 2020 for which the Court was pleased to uphold such validity, emphasising that the intermediary services provided to foreign clients, being merely facilitative, do not fall under the ambit of exports.
Subsequently, in the year 2021, similar challenge was raised before the division bench of the Bombay High Court which gave a divided opinion on the matter, with one Hon’ble Justice having upheld the constitutionality of the provisions and the other having declared them unconstitutional. Accordingly, the matter has been referred to a lager bench to resolve the conflict and the decision on it is still awaited.
In the wake of the prevailing controversy, the Central Board of Indirect Taxes and Customs (hereinafter referred to as “CBIC”) has recently released a notification in September 2021, attempting to bring some clarity to the present issue. In light of the same, the present research lays down an in-depth analysis of the matter.
The first in line of the judgments depicting the said interpretive tussle is the case of Material Recycling Association of India v. Union of India & Others decided by the Gujarat High Court.12 The petition was filed under Article 226 of the Indian Constitution by Material Recycling Association of India, challenging the taxability of the intermediary services provided by its members to foreign clients under the GST Regime.
The Association contended that its members are in no way related to the main supply of goods by foreign clients to the foreign and Indian customers of these clients, for the goods are shipped and the invoices are addressed directly to these customers.Further, the consideration too is transferred by these customers directly to the foreign clients. The members of the Association receive a commission amount from the clients in the form of foreign currency. Thereby, the Association claimed to have made “export of services”, attracting zero rate of tax as per its Section 16(1) of the IGST Act.
Further, theAssociation argued that Article 286 of the Indian Constitution empowered the Parliament to merely lay down the tax policy on exports but not to determine the “place of supply”.However, the Parliament under Section 13(8)(b) has in fact defined the place of supply, thereby violating Article 286(1). Furthermore, the Association claimed Section 13(8)(b) to be ultra vires Article 14 for treating the intermediary services provided for facilitating supply by foreign clients to foreign customers differently from those provided for facilitating supply by such foreign clients to Indian customers, without any intelligible differentia and reasonable nexus with the objective of the Act.
This apart, the Association maintained that Section 13(8)(b) violates the very idea and object ofGST being a destination-based levy that envisages the avoidance of double taxation.This is because as a result of the operation of this provision, the intermediary services will be subject to CGST and SGST in India while also being taxable in the territory where the customers of the foreign clients are located.
On the other hand, the Respondents resorted to literal interpretation of the law to contend that intermediary services provided to foreign clients do not qualify under export of services. The government has advertently framed the policy on intermediary services which is in conformity with the foregoing Service Tax regime in India and is not subject to judicial review. Further, they affirmed that the Parliament is well-empowered to make deeming provisions with respect to tax-related matters and that it has the exclusive power under Article 246A to lay down the law on GST.They also repelled the Association’s arguments on violation of Article 14 and on double taxation.
The Hon’ble Gujarat High Court held that the intermediary services provided to foreign clients being merely facilitative services do not fall under the ambit of export of services as per the legislative framework. Such intermediary services cannot be called as export on the ground that invoices have been raised in respect of foreign clients and the commission is received in foreign currency. The Court observed that the law has not envisaged any deeming provision but has made a legal stipulation under Section 13(8)(b) which has to be duly followed.The Court also rejected the argument of the possibility of double taxation.Accordingly, the Court upheld the constitutionality of the challenged provisions.
The judgment of the Gujarat High Court settled the long-standing controversy entailing Section 13 of IGST Act. However, the said controversy was reignited pursuant to the recent divided opinion rendered by the Division Bench of the Hon’ble Bombay High Court in the case of Dharmendra M. Jani v. Union of India13, leading to the looming legislative uncertainty on the matter.
The case concerned a petition filed under Article 226 of the Indian Constitution by Dharmendra M. Jani, engaged in the business of providing marketing and production services for the goods manufactured by their foreign clients, challenging the constitutionality of Section 13(8)(b) and section 8(2) of the IGST Act before the Bombay High Court.
Mr. Jani contended that the fiction created by Section 13(8)(b) renders the intermediary services provided to foreign clients as intra-state supply of services subject to GST, and hence, is illegal,arbitrary,and in violation of Articles 14, 19(1)(g) and 21 of the Indian Constitution. Further, he contended thatSection 13(8)(b) is ultra vires Article 269A. Furthermore, he argued that Article 286(1) does not empower the States to impose taxes where the supply of goods or services takes place outside India. However, given that Section 13(8)(b) treats the export of intermediary services equivalent to a local supply, the same will empower the States to levy SGST in sheer violation of Article 286. Moreover, similar to the contention raised in the afore-discussed case, Mr. Jani alleged the incidence of double taxation resulting from the effect of Section 13(8)(b).
Repelling the contentions raised by Mr. Jani, the Respondents argued that they are empowered to make provisions related to GST under Article 269A, and hence, the exercise of the said power cannot be termed as arbitrary and unconstitutional. They affirmed that the responsibility of the economic development of India resting on the shoulders of the government necessitates such levy of taxes.
The division bench of the Bombay High Court rendered adivided opinion on the matter. While Justice Abhay Ahuja upheld the constitutionality of the impugned provisions, Justice Ujjal Bhuyan declared the same to be unconstitutional.
Accordingly, pursuant to the divided opinion of the Bombay High Court, the aforesaid interpretative tussle has re-emerged. Consequently, the issue regarding the constitutional validity of section 13(8)(b) will now be determined by the third judge appointed by the Chief Justice of the Bombay High Court.
In light of the prevailing uncertainty regarding the taxability of intermediary services provided to foreign clients, it is pertinent to revisit the constitutional provisions, the jurisprudential aspects of the GST regime,the circumstances surrounding the transitional phase of the indirect tax structure in India, the recommendations of the various learned Committees on the matter, the ramifications of taxing the export of intermediary services,and the law of the land.
GST has been introduced in India through the 101st Constitutional Amendment with the objective of effecting “one tax for one nation”, beating the multiplicity of indirect taxes and the ensuing cascading effect of taxation.14 Article 246A empowers the Parliament and the State Legislatures to make laws for the levy of GST within the bounds of the Article,15 while Article 286 prohibits the States from imposing taxes on the export or import of goods or services or both.16 Considering the clear meaning of these constitutional provisions, the State Legislatures shall be prohibited from imposing taxes on the supply of intermediary services to their foreign clients, for such supply would constitute export of services.
Notably, due to the taxable event being the provision of service under the origin-based Service Tax regime, the government earned a significant part of its tax revenues from the provision of intermediary services by taxable entities.17 With the advent of the destination and consumption based GST regime resulting in the shift of the taxable event to supply of services,18 the government was set to lose its revenue that it previously earned on such intermediary services. Therefore, in order to avoid the ensuing loss, Section 13(8)(b) was incorporated under the IGST Act, deeming the place of supply of intermediary services to be the location of the supplier and bringing such services out of the ambit of exports.
Such an act of the government is not justified in light of Article 286. The government has attempted to circumvent the provisions of Article 286 by creating a deeming fiction, showcasing its attitude of avoiding losing on tax revenue by hook or by crook. The same is also violative of the well-established principle of Interpretation of Statutes namely “Quandoaliquidprohibetur ex directo, prohibeturet per obliquum”, also known as the doctrine of colourable legislation, depicting that an act which the government is disentitled to do directly cannot be done by it indirectly.19
It is pertinent to note that by virtue of the Notification No. 20/2019 – IGST, the intermediary services tendered by an Indian intermediary for facilitating the main supply of goods made by its foreign clients to their foreign customers shall be subject to “Nil” rate of tax under the IGST Act.20 However, as a result of the provisions of Section 13(8)(b), such services tendered by an Indian intermediary for facilitating the main supply made by foreign clients to their Indian customers shall be liable to tax.
This culminates in a discriminatory treatment being extended to the provision of intermediary services based on mere movement of “goods”, for the said notification does not take into consideration the supply of “services” by such foreign clients. Furthermore, the discrimination is also evident in the fact that intermediary services provided for facilitating main supply to Indian customers is taxable, unlike the case of foreign customers.
Both these differential treatments are devoid of any intelligible differentia or any reasonable nexus to the object of GST.A supplier of intermediary services to foreign clients is essentially paid in lieu of such supply of services, and has no privity with the contract between the said foreign clients and their ultimate customers. Therefore, the location of the seultimate customers shall have no bearing on the tax liability of an intermediary who is particularly supplying its services to foreign clients and is acting on behalf of such clients.
Another limb of discrimination lies in the benefits available to other service exporters under the GST regime in the form of non-taxability of their exports and their simultaneous eligibility for claiming Input Tax Credit refunds.21 Clearly, the operation of Section 13(8)(b) denies these benefits to the exporters of intermediary services.
As per the settled principles under the constitutional law, vague legislations are liable to be declared as void to the extent of such vagueness.22 Hence, the deeming fiction created by Section 13(8)(b) is liable to be struck down on the ground of the anomaly and the non-mendable vagueness it has created.
The arguments raised by the Association before the Gujarat High Court regarding the impact of taxing the export of intermediary services on the Indian economy were highly apt and not insignificant enough to be ignored.Observations have been made about the opening up of dummy offices by intermediaries in countries like Dubai and Sri Lanka which exempt the imposition of taxes on the provision of intermediary services to foreign clients.23 Therefore, there exists a great risk of migration of Indian intermediary service providers to such foreign countries that provide their desired tax benefits, hampering the foreign exchange earned by India.
Further, the present matter has great bearing on the ease of doing business ranking of India.24 Indian is a leading provider of intermediary services to foreign countries and forms a significant outsourcing hub in the eyes of these countries. Thus, the taxability of such services directly affects the competitive stand of the Indian market in the global arena.25 Classifying such intermediary services as export of services will extinguish the tax liabilities, thereby attracting more and more intermediaries to set up their businesses in the Indian territory, giving a boost to the “Make in India” campaign and the “Aatmanirbhar Bharat” scheme of the government.26
The present question has been raised on numerous occasions before various Committees which have given their respective recommendations. The 139th Parliamentary Standing Committee Report on the "Impact of Goods and Services Tax (GST) on Exports" envisaged an amendment to Section 13(8)(b), making the place of supply of intermediary services to be the location of the recipient of such service, and consequently, treating them as export of services.27 The Report also observed that the proposed amendments will give way to the prevention of double taxation of intermediary services, i.e. in India in the hands of the intermediaries as well as in the country of the ultimate customers of the main supply.28 Thereafter, similar amendment to the provision was recommended by the Tax Research Unit of CBIC.29
However, the said recommendations remain merely on paper and have not been heeded by the government for unexplained reasons.In the wake of the parliamentary committee recommendations and the harsh ramifications of taxing the export of intermediary services, the government should sideline its personal monetary interests and focus on the overall interests of the Indian legal framework and the Indian economy.
The foregoing analysis clearly traces an inclination in favour of non-taxability of the intermediary services tendered by Indian intermediaries to foreign clients and the classification of such services as export of services.
Pursuant to the recent split opinion of the Bombay High Court and the consequent stalemate of the legislative position, the present matter was listed in the agenda to be discussed in the 45th GST Council meeting conducted on September 17, 2021.30 The same was followed by the issuance of the clarificatory Circular No. 159/17/2021-GST, explaining the scope and other aspects related to the provision of intermediary services through illustrations,31 with the aim of minimizing litigation on the matter.32
The Circular states that there has to be two supplies in a transaction involving intermediary services namely the main supply and the ancillary supply. The former takes place between the supplier and the recipient of the goods or services or both, whereas the latter is the facility given for,and shall be clearly distinguishable from, the former.The Circular further mentions that the person who is principally or even partly involved in the main supply will not be considered to be an intermediary under Section 2(13) of the IGST Act, for an intermediary is the entity that plays only a supportive role in such supply.
Next, the Circular clarifies that the persons supplying services on his own account and the sub-contracting of services are not included in the definition of intermediary. Lastly, the Circular states that Section 13(8)(b) shall have its applicability only in the situations “when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India”.
Notably, the Circular does not address the present interpretative tussle in its particularities and essence. Rather, it attempts to bring relief in the form of the explanation of the phrase “on his own account” under Section 2(13) through illustrations, and by placing due emphasis on being “facilitative services” for qualifying as intermediary services.33 In lieu of this, the predominant Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO) and Business Process Management (BPM) industry of India rejoiced,34 for the fourth illustration of the Circular renders it out of the scope of the definition of intermediary, and hence, exempted from the levy GST, unless it provides purely facilitative services to the principal suppliers.The National Association of Software and Service Companies (Nasscom) hailed the said clarifications to be in the benefit of the IT and R&D export services.35
However, the Circular still fails to lay down the proper interpretation of the terms “arranging” and “facilitating”, leaving a scope for ambiguity as well as future litigation,36 striking at its very objective. Further, the Circular does not speak of the above-discussed conflicting legal position concerning the interplay of Section 13(8)(b), Section 8, Section 2(13) and Section 16 of the IGST Act. Therefore, even though the GST Council has apparently provided the long-due relief to some parts of the service export industry in India, it has very conveniently refrained from bringing the supply of intermediary services to foreign clients within the scope of export of services. The legislative position still remains at a stalemate, leaving the rest of the service export industry under pressure and in distress. The silence and inaction of the government on the matter is unexplainable and frustrating, taking a toll on the effective development of the Indian economy.
The most effective way of resolving a legislative stalemate is the hand-in-hand functioning of all three limbs of the government, where each of these limbs puts aside its own interests and works towards the overall betterment of the country. The Infusion of this ideology in the present matter, where in the two discussed judgments of the Gujarat High Court and the Bombay High Court have evoked a stalemate, calls for the Judiciary to promptly settle the legal position regarding the taxability of intermediary services provided to foreign clients, the Parliament to lay down unambiguous, rational and comprehensive legal provisions on the matter, and the Executive to make quick policy decisions to resolve any ambiguities that might creep up in the future.
The present discussion evinces the position that taxing the export of intermediary services is in sheer violation of Article 286 of the Indian Constitution which prohibits the States to impose taxes on exports and imports of goods or services, and is thushit by the doctrine of colourable legislation. Further, the same is also violative of Article 14 of the Constitution for discriminating between the taxability of the provision of intermediary services on various standpoints in the absence of any intelligible differential and reasonable nexus with the object of GST. Furthermore,such taxation greatly impacts the effective development of the Indian economy by posing the risks of migration of intermediaries and losing of foreign exchange. Moreover, the dire need for bringing the intermediary services provided to clients beyond the Indian territory under the ambit of export of services has previously been highlighted by 139th Parliamentary Standing Committee Report.
Notably, the clarificatory Circular of September 2021 passed in pursuance of the discussions made in the 45th meeting of the GST Council has brought significant reliefs to the Indian entities exporting BPO, BPM, R&D and IT services. However, the same does not address the present legislative tussle, furnishing merely an indirect solution.Uncertainty stills looms over the legal position for the intermediary services other than these services. Accordingly, it is high time for the GST Council to conclusively decide in favour of qualifying these services as export of services and to comprehensively recommend the consequent amendments to the GST laws in force in India.