Tax on intermediary services has been a heavily litigated issue under the earlier service tax regime and the said trend continues under Goods and Services Tax ("GST") as well, causing a direct impact in several ways on business entities engaged in rendering services to overseas recipients. While it has been the consistent position of the Government to not allow exports to carry the burden of taxes, GST is leviable on certain export transactions by treating such transactions to be intermediary services even when exports are admittedly made to an overseas recipient on payment of consideration.

By treating export services as intermediary, the assessee not only loses out on the refund of the taxes paid on the inputs but is also liable to pay tax on the output side. The problem exacerbates when refund applications by exporters are rejected by the Tax Department and show cause notices are issued. This is because most agreements would have been structured treating such transactions as export transactions, duty free along with a refund of the input taxes paid. Commercial considerations and negotiated agreements are overlooked when the Tax Department rejects exports on the ground of them being intermediary services, apart from the added cost of litigation and cash flow issues. 

In the recent past, the Gujarat High Court had upheld the constitutionality of the provisions relating to imposition of taxation on 'intermediary'.1 However, on a similar challenge, a division bench of the Bombay High Court2 has reached a split view on the constitutionality of the said provisions, and the said issue will now be decided by a third judge to be appointed for this purpose.

In the present article, we analyze the split judgments by the Bombay High Court in Dharmendra M. Jani v. Union of India, WP No. 2013 of 2018.


The Petitioner argued that their services qualifying as an export of service had been artificially brought within the tax net on account of Section 13(8) of the Integrated Goods and Services Tax Act, 2017 (the "IGST Act"), and tax is levied thereon as an intra-state supply transaction, which is otherwise an inter-state supply transaction. Accordingly, the provisions of Section 13(8)(b) read with Section 8(2) of the IGST Act are ultra vires Article 245, Article 269A, Article 286, Article 14 and Article 19(1)(g) of the Constitution of India and also ultra vires Section 9 of the Central Goods and Services Tax Act, 2017 (the "CGST Act") for levying tax on inter-state supply transactions.

The Petitioner also argued that levy of tax on such a transaction is against the basic principle that GST is a destination-based tax on consumption and the burden of such a tax is not possible to be passed on to the foreign customer, thereby going against the basic principle of indirect tax. Further, the Petitioner claimed that the said levy is a double taxation on the same supply, as the said service also gets taxed as an import of service in the concerned foreign country.

The Tax Department argued that the concerned provisions have been legislated on the basis of powers prescribed under the Constitution and that the said powers have been validly exercised. Further, the Tax Department also justified the objective of the said levy by co‑relating it with the 'Make in India' scheme.


In the below section, we have discussed the divergent view taken by the division bench of the Bombay High Court.

a. Justice Ujjal Bhuyan's opinion: Declaring tax on intermediary services as unconstitutional

GST is a destination-based tax on consumption and being a value added tax, it is not a charge on the business but on the customer, which would logically be leviable only on services consumed within the country.3 When the report or work is submitted to the foreign recipient and payment is received from such recipient, it can be said that the benefit of such service accrues to the foreign recipient outside India.4

Article 246A and Article 269A empower the Parliament to lay down principles for determining the place of supply and when such supply takes place in the course of inter-state trade or commerce, but do not empower the Parliament to impose tax on export of services by treating the said supply as a local supply. Further, Article 286(1) puts a restriction on imposition of tax by a State on supplies in the course of import or export. Clause (2) therein empowers the Parliament to formulate principles as to when a supply takes place in the course of import or export, but the said empowerment is not for the purpose of thwarting the entire scheme of the restriction imposed under Clause (1).

In terms of Article 245 of the Constitution, while a law cannot be held as unconstitutional merely on account of extra-territorial operation, the said law should have some real connection to India, which is not fanciful or illusory.5 In this regard, the extra-territorial effect given by Section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India, and runs contrary to the principle that GST is a destination based tax on consumption. Report No. 139 issued by the Parliamentary Standing Committee6 and the Central Board of Indirect Taxes and Customs ("CBIC") Circular No. 20/16/04/2018-GST dated 18th February, 2019emphasizes that GST is a destination-based consumption tax and that the tax must accrue to the State where the consumption of supply takes place.

Export service (which should be an inter-state supply) has been artificially deemed to be an intra-state supply on account of the above stated provisions and is being taxed under the CGST Act, which is contrary to the charging provisions under the CGST Act and the IGST Act.

On the above basis, Justice Bhuyan held that the view taken by the Gujarat High Court on the issue is not acceptable and that provisions of Section 13(8)(b) of the IGST Act fall foul of the CGST Act, IGST Act and are ultra vires the Constitution.

b. Justice Abhay Ahuja's opinion: Upholding the levy of tax as being constitutional

In terms of Article 269A and Article 286 of the Constitution, the Parliament has validly formulated policies regarding place of supply and pertaining to inter-state and intra-state supply under Section 13(8)(b), Section 7 and Section 8 of the IGST Act, respectively.

Provisions pertaining to export of service as provided under Section 2(6) of the IGST Act and place of supply as provided under Section 13(8)(b) of the IGST Act operate within different spheres and Section 2(6) of the IGST Act is not applicable to the present case. Section 8(2) is also not applicable in cases where the provisions relating to intermediary get triggered, as the place of supply of such services is not within the same State.

Intermediary services provided by the petitioner are categorized as 'inter-state' supply as provided under Section 7 of the IGST Act and Section 13(8)(b) does not and cannot deem an inter-state supply as an intra-state supply, as there is no linkage between Section 13(8)(b) and Section 8(2) of the IGST Act. Applicability of charging provision under the CGST Act is not called for in respect of the said intermediary service, which is an inter-state Supply.

Section 13(8)(b) cannot be said to have extra-territorial implication as it merely provides the place of supply as the location of the supplier of service who is located in India, and does not seek to levy tax on service recipient outside India. In any case, Article 245 is a 'notwithstanding' provision and is subject to other provisions of the Constitution.

Concerned provisions do not discriminate between the importer of ultimate goods and the intermediary and the classification is reasonable. The objective is to encourage the 'Make in India' scheme (without expressing any view on the scheme itself) and to prevent revenue from escaping. Further, the tax on intermediary services is legitimately imposed in exercise of powers of the Parliament.

GST is not a value added tax ("VAT") but only calculated as VAT, and the findings of the Supreme Court in the case of All India Federation of Tax Practitioners, supra are distinguishable. The principles relating to GST being a destination-based tax on consumption has no implications.

On the above basis, Justice Ahuja followed the Gujarat High Court judgment and upheld the constitutionality of the concerned provisions (Section 13(8)(b) and Section 8(2) of the IGST Act) as being valid in law.


As the division bench has taken a split view, the issue regarding constitutionality does not stand settled and will now be decided by a third judge, to be appointed by the Chief Justice of the Bombay High Court. We will be closely following the matter before the third judge and will update our readers accordingly.

However, certain issues need to be highlighted. If the intermediary services are ultimately upheld as an inter-state supply and are made liable to GST, it may lead to several consequential issues described below:

  1. Place of supply of intermediary services is prescribed as the location of the supplier, but since it is held as an inter-state supply by the Court, an issue as to the determination of place of such inter-state supply (other than the State where the supplier is located) may arise.
  2. The Tax Department has already taken a position before Advance Ruling Authorities ("AARs") and before several High Courts that the intermediary services would qualify as intra-state supplies7 and this has been accepted on numerous occasions. Compliances made based on the said rulings would now be under the scanner, especially for parties not before the AARs or High Courts.
  3. The Tax Department has itself been collecting tax on the said services as an intra-state supply since the introduction of GST, which position would stand reversed and may lead to opening of a plethora of litigation on this account.

It is relevant to note that the intermediary issue has also created a costing issue for the business entities as the output supplies of intermediary services, even when provided to recipients situated outside India would be leviable to tax. Furthermore, competitiveness in the international market would be severely affected.

Further, the said issue also has a direct impact on the refund entitlement that is available to entities providing export of services. If an intermediary exposure is triggered, the refund claims of the business entities are likely to stand prejudiced. In this regard, it is relevant that the Tax Department has been invoking the provisions pertaining to 'intermediary' in most cases where export of service has been claimed. In fact, as seen in the pre-GST regime, a lot of the adverse orders passed by the Tax Department were overturned by the Customs Excise and Service Tax Appellate Tribunal and High Courts, on the ground that the activities otherwise do not fulfill the definition of 'intermediary'. For this purpose, it is advisable that the underlying agreements and documentation pertaining to export transactions are scrutinized in detail to ensure that the activity is not an intermediary activity. This is also important from a standpoint of negotiating transactions and factoring in the tax impact because at the stage of claiming refund, if the exporter is held to be an intermediary, then the refund will be rejected, and output liability will be fastened on the exporter.

In our view, business process outsourcing companies (BPOs) and knowledge process outsourcing companies (KPOs) set up in India are also adversely affected on account of the intermediary implications as their output supplies becomes costlier on account of such tax implications.

Given the above, it remains to be seen as to what is ultimately concluded by the Bombay High Court in the matter. Since the stakes are very high for the Government and the business entities, in either scenario, the matter is likely to travel to the Supreme Court before the issue attains finality. We will keep a close watch on the proceedings before the High Court and before the Supreme Court and provide updates on a regular basis.


1. Material Recycling Association of India v. Union of India, 2020 (40) GSTL 289 (Guj.)

2. Dharmendra M Jani v. Union of India, Writ Petition No. 2031 of 2018

3. All India Federation of Tax Practitioners v. Union of India, 2007 (7) STR 625

4. Commissioner of Service Tax v. SGS India Pvt. Ltd., 2014 (34) STR 554 (Bom.)

5. GVK Industries Limited v. ITO, (2011) 332 ITR 130 and M/s. Electronics Corporation of India Limited v. Commissioner of Income Tax, AIR 1989 SC 1707

6. Report No. 139, "Impact of Goods and Services Tax (GST) on Exports", Parliamentary Standing Committee on Commerce

7. In Re : Vevaan Ventures, 2021 (46) GSTL 187 (AAR – GST Kar.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.