M/s Dharmendra M. Jani vs. Union of India (Bombay High Court, 2021) – Constitutional Validity of Section 13(8)(b) & Section 8(2) of the IGST Act

⚖️ M/s Dharmendra M. Jani vs. Union of India (Bombay High Court, 2021) – Constitutional Validity of Section 13(8)(b) & Section 8(2) of the IGST Act

📌 Background

M/s Dharmendra M. Jani vs. Union of India (Bombay High Court, 2021): M/s Dharmendra M. Jani, a service provider based in India, rendered marketing and sales promotion services to overseas customers. These overseas clients exported goods to importers in India.

• The assessee acted as an intermediary, soliciting purchase orders from Indian importers on behalf of foreign principals.
• The goods were shipped by the overseas customers to Indian buyers, who cleared them through customs after paying duties.
• Payment for goods was made directly by Indian importers to foreign suppliers.
• In return, the assessee raised invoices on overseas clients and received commission in convertible foreign exchange.

The tax authorities treated the assessee as an “intermediary” under Section 13(8)(b) of the IGST Act, 2017, which deems the place of supply to be India (location of the supplier). This effectively made the services taxable in India, even though the service recipient was located outside India.

❓ Point of Dispute

The central legal question was:

👉 Are Section 13(8)(b) and Section 8(2) of the IGST Act, which tax intermediary services provided to foreign clients by deeming the place of supply in India, constitutionally valid?

📑 Submissions by the Assessee

• Export of Service: GST is a destination-based consumption tax. Services consumed outside India should qualify as exports and remain zero-rated. Levying GST on such transactions amounts to taxing exports.
• Violation of Fundamental Rights: Levying GST on services provided to foreign clients constitutes an unreasonable restriction on trade under Article 19(1)(g) of the Constitution.
• Ultra Vires the Constitution:
  • Taxing exports of service is beyond the scope of Article 269A, which governs GST on inter-state trade.
  • Sections 13(8)(b) and 8(2) are ultra vires Section 9 of the CGST Act, the charging section.
• Double Taxation: Intermediary services taxed in India would also be taxed abroad, leading to double taxation, violating Article 14 (equality).

📑 Submissions by the Revenue

• Legislative Competence: Parliament has full authority under Articles 246A, 269A and 286 to define place of supply and tax intermediary services within India.
• Precedent under Service Tax: Even under the Place of Provision of Services Rules, 2012, intermediaries were taxed in India from 2014 onwards.
• Policy Justification: Taxing intermediaries encourages overseas clients to establish entities in India, promoting “Make in India” and creating a level playing field.
• Judicial Precedent: The Gujarat High Court in Material Recycling Association of India vs. Union of India (2020) upheld the validity of Section 13(8)(b), rejecting similar challenges.

⚖️ Legal Principles and Scope of Decision

The Division Bench of the Bombay High Court delivered a split verdict:

🧑‍⚖️ Justice Abhay Ahuja (Upheld the validity of levy)

• Parliament has authority under Articles 269A and 286 to frame place of supply rules.
• Section 13(8)(b) does not have extra-territorial operation; it merely determines the location of supply as the supplier’s place (India).
• Article 245 allows laws with extra-territorial effects as long as there is some nexus with India. Here, the supplier being in India establishes that nexus.
• Hence, the provisions were constitutionally valid.

🧑‍⚖️ Justice Ujjal Bhuyan (Declared levy unconstitutional)

• Exports cannot be taxed: Parliament has no authority to treat export of services as intra-state/local supply. This contravenes Articles 246A, 269A, and 286.
• Section 13(8)(b) distorts the destination-based nature of GST by taxing services consumed abroad.
• Article 286(1) restricts States from taxing imports/exports, and Parliament cannot use Article 286(2) to override this constitutional protection.
• Extra-territorial nexus must be real and substantial. Taxing services consumed outside India merely because the supplier is in India creates an illusory nexus.
• Thus, Sections 13(8)(b) and 8(2) were unconstitutional.

🏛️ Court’s Conclusion

• The Division Bench delivered a split verdict:
  • Justice Ahuja upheld the provisions.
  • Justice Bhuyan struck them down as unconstitutional.
• Owing to this difference of opinion, the matter was referred to a third judge for final resolution.

Thus, the constitutional validity of Section 13(8)(b) and Section 8(2) remains sub-judice.

✅ Practical Impact on Businesses

• Uncertainty for Intermediaries: Export-oriented service providers such as commission agents, marketing consultants, and sourcing agents continue to face litigation risk.
• Double Taxation Concerns: Intermediary services may get taxed both in India and abroad, reducing competitiveness.
• Pending Final Word: Until resolved by a larger bench or the Supreme Court, businesses must comply with existing provisions while keeping refund/restitution claims alive.
• Policy Implications: This case underscores the tension between India’s goal of boosting exports and its revenue considerations.

🔑 Key Takeaways

1. Split Verdict: One judge upheld the provisions; the other declared them unconstitutional.
2. Export Services in Question: Whether intermediary services provided to overseas clients can be taxed in India is still unresolved.
3. Destination Principle at Stake: The case tests whether GST in India truly functions as a destination-based tax.
4. Future Impact: The final ruling will directly impact export of services, BPOs, and Indian intermediaries working for foreign clients.

📢 Why This Case Matters

The Dharmendra Jani case is one of the most significant GST constitutional disputes, as it challenges the very validity of taxing intermediary services to foreign clients. Its outcome will have wide-reaching consequences on India’s export service sector, global competitiveness, and interpretation of GST as a destination-based tax.

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