JUNE 11, 2024

By Somesh Jain, Advocate

RECENTLY, the Rajasthan High Court in the case of M/s Savio Jewellery v. Commissioner, CGST, 2024-TIOL-799-HC-RAJ-GST, held that GST will be payable even on events/exhibitions held outside India. The judgement is a very brief one. The sole reasoning in the judgement is that Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 issued under Section 5(3) of the IGST Act has not been challenged and that it expressly provides that a person located in taxable territory is liable to pay tax as a recipient of service on any service provided by a person located in the non-taxable territory. Based on this notification, the Court concluded that even in case where the place of supply is outside India, the same will be taxable and tax will be paid by the recipient of service in India.

The sole argument of the Petitioner was that Section 1 of the IGST Act provides that the Act extends to India and as the place of supply of the service is outside India in terms of Section 13(5), GST cannot be levied. This reasoning, on the face of it, is incorrect as under Section 7(5)(a), even a supply whose place of supply is outside India is liable to GST if the supplier is located in India.

The question now arises whether, seen objectively, GST can be levied on a supply of service by way of admission to an event held outside India as per the provisions of the IGST Act.

The Supreme Court in the case of A. V. Fernandez v. State of Kerala, - 2002-TIOL-436-SC-CT-CB held that a subject can be taxed only if the Court is satisfied that the case falls strictly within the provisions of the law. Thus, before fastening any tax liability, the transaction must be brought within the ambit of charging section.

The charging section under the GST law are Section 5 of the IGST Act and Section 9 of the CGST Act/ SGST Act. Under the said section, tax is levied on an "inter-state supply" or an "intra-state supply", the ambit of which is defined under Section 7 and Section 8 of the IGST Act.

Here, it is also pertinent to mention that if a transaction is not covered within the ambit of inter-state supply or intra-state supply, it cannot be taxed merely by relying on Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 issued under Section 5(3) of the IGST Act, as this section merely casts liability for payment of tax provided it is otherwise leviable under the charging Section 5(1) of the IGST Act.

Whether supply by way of admission to an event held outside India is an "inter-state supply" or an "intra-state supply"?

It is general understanding that the transaction in dispute does not amount to an import of service as per Section 2(11) of the IGST Act. This is because the place of supply of the service is outside India as per Section 13(5) of the IGST Act, i.e., a place where the event is actually held.

Further, since the place of supply is outside India, the transaction will also not be covered by any other clauses of Section 7 and Section 8 of the IGST Act. The only exception is clause (c) of sub-section (5) of Section 7 which covers "supply of goods or services or both in the taxable territory" not being an intra-state supply and not covered elsewhere in Section 7. This is catch-all phrase which will cover a transaction when it is not covered by any of the other specific clauses.

Even in the case of Savio Jewellery (supra), though it has not been invoked or analysed, this is the only clause which can possibly make the transaction taxable under the GST law. Understanding the meaning of this clause is very important as this will often be invoked by the tax department to tax a transaction where the place of supply is outside India.

What is the meaning of the phrase "supply … in the taxable territory" - Whether it is same as "place of supply"?

The meaning of the phrase "supply in the taxable territory" is nowhere defined in the IGST Act or the IGST Act. The meaning thus has to be ascertained by reading the provisions of the IGST as a whole and in a coherent manner.

A possible interpretation can be that a supply will take place in the taxable territory only if the place of supply is in the taxable territory. This is based on the general meaning of the phrase "supply in the taxable territory" and "place of supply". The prepositions used in the phrases assume relevance. As per Collins dictionary, if something happens "in" a place, it happens there. Further, the preposition "of" is used to combine two nouns when the first noun identifies the feature of the second noun that you want to talk about.

Thus, it is possible to conclude that the place of supply provisions identifies the location or the territory in which the supply takes place.

If this view is taken, the transaction of supply by way of admission to an event or exhibition held outside India will not be taxable under the GST law.

What if the phrase "supply in taxable territory" is held to be not same as "place of supply"?

It is equally possible to say that the phrase "supply in the taxable territory" has to be interpreted independent of the provisions determining "place of supply". The reason for such interpretation can be threefold:

(i) The phrase "place of supply" is used at various places in Section 7 and Section 8 to determine whether a supply is an inter-state supply or an intra-state supply. The legislature has consciously not used the same term in Section 7(5)(c) of the IGST Act.

(ii) The term "place of supply" is not defined in the Act anywhere. This is opposed to provisions relating to time of supply which says that liability to pay arise at the time of supply (Section 12(1) and Section 13(1) of the CGST Act).

(iii) There is no express provision which creates a deeming fiction that a supply is deemed to take place in the territory in which the place of supply is determined. This can be contrasted with the erstwhile service tax provisions. Section 66B of the Finance Act, 1994 created a charge on service provided or agreed to be provided in the taxable territory. Section 66C provided that the Central Government may, by rules, determine the place where the services are provided or deemed to be provided. The relevant rules were the Place of Provision of Services Rules, 2012.

In view of the above, the meaning of the phrase "supply in the taxable territory" assumes importance. Now, the question arises as to how the phrase "supply in the taxable territory" should be interpreted in absence of any guidance in the statute.

Guidance under the Income Tax Law

A parallel of the above phrase can be found in Section 5 of the Income Tax Act which defines the scope of total income and includes income which "accrues or arises or is deemed to accrue or arise … in India".

In the leading commentary of Kanga & Palkhiwala on Income Tax, the author observes that it is impossible to lay down any general test to determine the place at which the income accrues or arise. It depends on the facts of each case. In some cases, the place where the contract is formed may be relevant whereas in some other case the place where it is actually performed may be relevant. The relevant extract of the commentary is as under:

"It would be nearly impossible and wholly unwise to lay down any general test to determine the place where profits or gains of business or employment accrue. In some cases it may be the place of the formation of the contract, but other matters, e.g. the place where the contract is carried out or; acts are done under the contract, may be decisive in certain circumstances. The question should be decided on the facts of each case in the light of common sense and plain thinking, and too much importance should not be attached to, or emphasis laid upon, the niceties of verbal definitions."

The Privy Council in the case of Commissioner of Income Tax v. Chunnilal B. Mehta, 6 ITR 521 (PC), while analysing the provisions of Income Tax Act, 1922 held that one must look at the transaction to see what happened in British India and what happened elsewhere. Tax is levied on profits, which is result of difference between sale and purchase. Where such transactions are taking place has to be seen to determine where the income accrues or arises.

In the case of CIT v. Mysore Chromite Ltd., - 2002-TIOL-2644-SC-IT-CB, the Supreme Court held that sale took place where the property in goods passes to the buyer. Since, the sale took place outside British India, the Court concluded that the profits derived from such sale also accrued outside India.

Guidance under the Sales Tax Law

Similar issue has also arisen under the pre-constitution Sales Tax Law. One such case is Constitution Bench judgement in Tata Iron & Steel Co. v. State of Bihar, (1958) 9 STC 267. The issue in this case was whether a State can tax a sale merely because the goods were in the state at the time of contract of sale of the production or manufacture of goods happened in the state. The majority decision concluded that the tax continues to be levied only on the aspect of "sale", i.e., transfer of property in goods. The provisions only provide that once sale takes place anywhere, it can be taxed in the state if the contract was formed or the goods were manufactured in the State.

In the above case, Justice Vivian Bose, sole dissenting judge, provided valuable guidance to determine where a transaction of sale can be said to have taken place. Justice Vivian Bose held that sale is not a mystical entity, present here, there and everywhere all at once. It is a very mundane and earthly transaction which can have one existence and one situs. Continuing further, he vividly observes that:

"The States may tax the sale but may not disintegrate it and, under the guise of taxing the sale in truth and in fact, tax its various elements, one its head and one its tail, one its entrails and one its limbs by a legislative fiction that deems that the whole is within its claws simply because, after tearing it apart, it finds a hand or a foot or a heart or a liver still quivering in its grasp."

He concluded that there can be only one situs for a transaction of sale which applies throughout the territory of India. In this background, he said that if he was to decide the issue of situs of sale, he would have preferred the place where the elements of the contract of sale are most densely grouped. The relevant extract is as under:

"Left to myself, I would have preferred Cheshire's view about the proper law of the contract set out by him in Chapter VIII of his book on Private International Law, 4th edition. I referred to this in The Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh. I quote him again:

"The proper law is the law of the country in which the contract is localised. Its localisation will be indicated by what may be called the grouping of its elements as reflected in its formation and in its terms. The country in which its elements are most densely grouped will represent its natural seat."

Through the above observations, being part of a dissenting judgement may not be binding in a case where the statute itself provides the criteria, however, they may serve as a valuable guide in case where no guidance is provided by the statute.

Having said the above, the answer to the vexing question depends on the facts of each case. It is not possible to lay down a general and universal formula which can apply in all cases.

Whether GST can be levied in case of events held outside India?

In the case of Savio Jewellery, though detailed facts have not been narrated, it appears that the majority of the elements (such as the location of service provider, the place of exhibition, the act of admission, etc.) are located outside India and further the actual performance of contract is also outside India. Thus, to use the words of Lord Coleridge in Mayor of Southport v. Morris, [1893] 1 Q.B. 359, it is not necessary to draw the line at any precise point as to when a supply is not in the taxable territory, it is enough to say that the present case is on the right side of any line that could possibly be drawn.

Thus, it is hoped that the decision in Savio Jewellery will be revisited and the legal position will be set right. Further, it will be seen how the courts will interpret the phrase "supply … in the taxable territory", whether same as 'place of supply' or independently of the 'place of supply' provisions.

[The views expressed are strictly personal.]