HC bench to decide on taxability of intermediary services to clients abroad

Situation arises as two judges of Bombay HC are divided over the matter, which has now been referred to a third judge

The Bombay High Court on Tuesday upheld the constitutional validity of a provision under integrated GST Act, which stipulates that tax can be imposed on intermediary services provided by agents, brokers, middlemen to clients based outside India.  

However, it said the state cannot impose SGST on these services as Article 286 of the Constitution bars it from doing so on services that are consumed outside its jurisdiction.  

The court referred the matter back to the division bench.                                                                                                                            

The Bombay High Court was earlier divided on the issue, with one of the judges holding the provision of imposing GST on these services as ultra vires and the other upholding its constitutional validity. As such, the issue has been referred to a third judge.

Now, the division bench has to decide the issue based on the findings of the third judge. It has to decide what kind of tax--whether one that is integrated GST or some other tax--can be imposed on these transactions, if the provision is constitutionally valid.

Abhishek Rastogi, founder of Rastogi Chambers, who argued in the case before Bombay High Court, said even IGST cannot be imposed on these transactions.

"If the state cannot levy SGST and IGST on these transactions, then the moot point remains what tax can be paid on them," he said.

The petitioner had challenged Section 13(8)(b) of the Integrated GST Act, which stipulates that the place of supply of intermediary services will be the location of the supplier of such services, if such a supplier is based in India and the recipient is based abroad.

The said provision causes 18 per cent GST to be imposed on services meant to be consumed outside India.

The petitioner said the provision ignores the destination-based system of GST.

The crux of the issue is the differential treatment accorded to intermediary services under GST law, as compared to other export services.

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

An exception has been carved out under GST law for such intermediary services. The law does not regard them to be exports, even when provided to overseas clients. Consequently, these services do not enjoy the zero tax liability given to pure export services.

This provision means that even if an intermediary provides services outside India, they will be deemed to have been provided within India.

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.