GST On Intermediary Services In Limbo As Bombay High Court Gives A Divided Opinion

Bombay High Court divided on GST levy on intermediary services provided overseas.

The Bombay High Court. (Source: BloombergQuint)
The Bombay High Court. (Source: BloombergQuint)

The Bombay High Court is divided on its opinion on whether services provided by intermediaries to overseas clients are Constitutionally permitted to be taxed under the goods and services tax law.

The division bench of Justices Ujjal Bhuyan and Abhay Ahuja could not come to a unanimous decision on the issue. While Justice Bhuyan held the GST provision relating to intermediaries as unconstitutional, Justice Ahuja has reserved his judgment for next week. In July 2020, the Gujarat High Court had upheld the Constitutionality of these provisions. A review petition has been filed against this order and is pending before the Gujarat High Court.

GST On Intermediaries

At the heart of the issue is the differential treatment accorded to intermediary services under GST law as compared to other export services, explained Abhishek Jain, partner at EY India.

An intermediary is like an agent, broker, middlemen etc. who arranges or facilitates the supply of any goods or services. Commission agents, stock brokers, travel agents etc. fall under this category.

An exception is carved out under the GST law for such intermediary services. The law precludes them from being considered as export of services, even when they are provided to overseas clients. Consequently, these services are not able to enjoy the zero tax liability given to pure export services.

A deeming fiction is created in GST law such that even if an intermediary provides services outside India, it will be deemed that services are provided within India, said Jain.

So if a travel agent or a stock broker provides his services to foreign customers and earns in foreign exchange, he will still have to pay 18% GST. But overseas services provided by market research agencies, advertising consultants, professional services are all treated as export of service, inviting nil tax liability.
Abhishek Jain, Partner, EY

These intermediary services, attracting an additional tax burden of 18%, is making such entities highly uncompetitive in the international markets, Jain pointed out.

Bombay High Court: A Divided View

In the writ petition before the Bombay High Court, it was challenged that this differential treatment towards intermediary services is arbitrary and irrational. And that it effectively leads to imposition of GST outside India.

While holding the provision as unconstitutional, Justice Bhuyan observed that the Constitution of India does not empower imposition of tax on export of services by treating the same as a local supply. The GST provisions in question have created a fiction and transformed an export of service to be a local supply, he noted.

He also held that levy of indirect tax on intermediary services is contrary to the fundamental concept of GST as a destination-based tax.

Destination-based taxation is a system where tax accrues where the services are finally received or enjoyed.

But by taxing such services received by overseas customers within India, destination tax theory is defeated as the services are not getting taxed at their destination but rather at their origin, Justice Bhuyan pointed out.

This (the provisions) is definitely an artificial device created to overcome a Constitutional embargo.
Justice Bhuyan, Bombay High Court

By artificially creating a deeming provision where the location of the recipient of service provided by an intermediary is outside India, the place of supply has been treated as the location of the supplier i.e., in India, Justice Bhuyan observed. “This runs contrary to the scheme of the Central GST Act as well as the Integrated GST Act besides being beyond the charging sections of both the Acts.”

The dissenting opinion of Justice Ahuja is reserved for June 16.

The manner in which the judgment has been pronounced is a rarity, with both judges of the division bench not pronouncing their judgments simultaneously .

It is not in a regular course that judgments and orders are passed in a piece-meal and disjointed manner, said Angad Sandhu, partner at PSL Advocates & Solicitors. Since the matter was before a division bench which could not come to a unanimous conclusion, reference to a larger bench will be imperative in this case so as to finally decide upon the issue, he added.