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M/s XYZ Pvt. Ltd
AY 2013-14

Therefore, this has resulted in a under assessment of income of Rs.
130,00,00,000/-.

Since 4 years from the end of the relevant year has expired in this case, the
requirement to initiate proceedings under section 147 of the Act are reason to
believe that income for the year under consideration has escaped assessment
because of failure on the part of the assessee to disclose fully and truly all
material facts necessary for his assessment for the assessment year under
consideration.

Hence, it is a fit case for issue of notice under section 148 of the Act, 1961.

The Notice is valid in light of Taxation and other laws (Relaxation of certain
provisions) Ordinance 2020 and subsequent Notifications thereof.

In this case, more than four years have lapsed from the end of the assessment
year under consideration. Hence, in accordance with the provisions of section
151(1) of the Income-tax Act, 1961, the Pr. Commissioner of Income Tax, may
kindly accord approval for reopening the case in the case of assessee for A.Y.
2013-14.

Sd/-
Assessing Officer

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April 25, 2021

To,
Income tax Department,
Mumbai.

Hon’ble Sir/Madam,

In the matter of : XYZ Pvt. Ltd. (Assessee)
2013-14
Assessment Year (AY) : AAXXXXX97M

PAN : Objections to the issuance of Notice under
Section 148 and section 147 of the Income-tax
Subject : Act, 1961 (Act) dated April 02, 2021

With reference to the subject matter captioned matter, the assessee, do hereby
its objections as under:

We are in receipt of the Notice issued under section 148 of the Act dated April
02, 2021 and a copy of the reasons recorded provided vide Letter dated April
15, 2021.

We hereby object on the following grounds, which are without prejudice to
one another:

I. No reassessment Notice under section 148 of the Act can be issued
after March 31, 2021, without following the procedure laid down
under section 148A of the Act.

II. Section 3 of the The Taxation and other Laws (Relaxation of Certain
Provisions) Ordinance, 2020 read with the Explanation in
Notification No.20 of 2021 and Explanation in Notification No. 30
of 2021 dated April 27, 2021 are ultra-vires the Income Tax Act,
1961 and the Finance Act, 2021.

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III. No reassessment can be made on an issue which is a subject matter
of appeal and is sub judice before the Hon’ble Income tax Appellate
Tribunal

IV. No reassessment can be made on an issue when a specific question
on that issue has been raised during original assessment proceeding.

V. There is no failure on the part of the assessee to full and true
disclosure of all material facts necessary for assessment and since
the impugned notice was issued after four years from the relevant
assessment year.

VI. No new material brought on record by the Department.

VII. Non-recording of reasons before issuance of Notice under section
148 of the Act.

VIII. Not providing a copy of the sanction accorded under section 151 of
the Act.

IX. The sanction is accorded on the same day as issuance of the Notice
under section 148 of the Act, the same would amount to non-
application of the mind of the Ld. AO

Therefore, it is most humbly prayed that on the circumstances of the facts of
the case and in law, the Notice issued under section 148 of the Act is not
being in accordance with law, therefore, the proceeding initiated may be
dropped

Hope our request is acceded to.

Thank you,
Sd/-
Assessee

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Government of India 17
Ministry of Finance
Assessee : Income-tax Department
PAN :
AY : M/s XYZ Ltd
XXXXXXXXXX
2013-14

Order disposing objections

1. I have gone through the objections raised by the assessee.

2. The Assessee has raised the following Objections vide letter dated April
25, 2021:

I. No reassessment Notice under section 148 of the Act can be
issued after March 31, 2021, without following the procedure
laid down under section 148A of the Act.

II. Section 3 of the The Taxation and other Laws (Relaxation of
Certain Provisions) Ordinance, 2020 read with the Explanation
in Notification No.20 of 2021 and Explanation in Notification
No. 30 of 2021 dated April 27, 2021 are ultra-vires the Income
Tax Act, 1961 and the Finance Act, 2021.

III. No reassessment can be made on an issue which is a subject
matter of appeal and is sub judice before the Hon’ble Income
tax Appellate Tribunal

IV. No reassessment can be made on an issue when a specific
question on that issue has been raised during original
assessment proceeding.
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Government of India
Ministry of Finance
Income-tax Department

V. There is no failure on the part of the assessee to full and true
disclosure of all material facts necessary for assessment and
since the impugned notice was issued after four years from the
relevant assessment year.

VI. No new material brought on record by the Department.

VII. Non-recording of reasons before issuance of Notice under
section 148 of the Act.

VIII. Not providing a copy of the sanction accorded under section
151 of the Act.

IX. The sanction is accorded on the same day as issuance of the
Notice under section 148 of the Act, the same would amount to
non-application of the mind of the Ld. AO

3. It is pertinent to note that, it has been clarified vide Explanation in
Notification No.20 of 2021 and Explanation in Notification No. 30 of 2021
dated April 27, 2021 that the erstwhile law shall apply to the Notices
covered under Section 3 of the The Taxation and other Laws (Relaxation
of Certain Provisions) Ordinance, 2020. Therefore Objection No. I & II are
invalid.

4. The matter pending before the Hon’ble ITAT pertains to addition under
section 56(2) of the Act to the tune of Rs. 70,00,00,000. Whereas the
reopening pertains to proposed addition under section 68 of the Act to
the tune of Rs. 130,00,00,000/-. Therefore Objection No. III is invalid.

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Government of India

Ministry of Finance

Income-tax Department

5. The Assessee has failed to truly and fully disclose all relevant material
during the original assessment. Therefore Objection No. IV & V are
invalid.

6. The Department is in possession of a statement diary seized from the ZT
group and a statement recorded from one of the employees of the ZT
group that they were involved in providing accommodation entry.
Further, one of the accountants of M/s XYZ Ltd and a Director in
CD(Mauritius) Ltd. Therefore, Objection No. VI is invalid.

7. The Department has complied with all necessary sanctions required for
issuance of Notice under section 148 of the Income-tax Act, 1961 (Act).
Further appropriate sanction under section 151 of the Act has been
obtained. Therefore, Objection No. VII, VIII and IX are invalid.

8. Accordingly, the objections for reopening are disposed.

9. During the course of reassessment proceedings, the assessee will be
afforded adequate opportunity to explain the case and the resultant order
will be passed on an objective appraisal of the evidence available.

Therefore, I do not find any merit in the objections raised by the assessee and
deem the case fit for reassessment.

Yours faithfully, | 55 |
Sd/- Page 3 of 3

Assessing Officer,
May 02, 2021

| Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition 2021 |

NANI PALKHIVALA MEMORIAL
RESEARCH PAPER COMPETITION 2021

The All-India Federation of Tax Practitioners – West Zone (AIFTP-WZ), and The Goods and Service
Tax Practitioners Association of Maharashtra (GSTPAM) in association with Maharashtra National
Law University Mumbai is pleased to announce the Nani Palkhivala Memorial Research Paper
Competition, 2021.
The topics for this year’s Research Paper are:
Topic 1: Section 255(7) of the Income-tax Act, 1961: Faceless Income-tax Appellate Tribunal - Does
it pass the test of Constitutional validity?
• Legislative competence: Ministry of Finance vis-à-vis Ministry of Law & Justice
• Due process of law & future functioning of the Tribunal
• Digitalisation of the Judiciary
• Position in other Jurisdictions
• Any other area(s) the author deems fit.
Topic 2: Supply of services by an “intermediary” to a foreign recipient - Constitutional validity of
Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (“IGST”) read with Section 8(2)
thereof - Whether the tax levied by the Maharashtra Goods and Services Tax Act, 2017 pursuant to
these two provisions is ultra vires the Constitution?
• Can laws made by Parliament under Article 286(2), that is the IGST Act, be challenged on

touchstone of Article 286(1)?
• Can Central Goods and Services Tax Act, 2017 be challenged as ultra vires Article 286(1)?
• Extra-territorial operation and territorial nexus – Parliament vs. State Legislatures – whether

Section 13(8)(b) read with Section 8(2) enables State legislation to have extra-territorial effect
and if so, whether this per se can be a ground to strike down legislation?
• Tax policy and judicial review.
• Interplay of IGST Act and the legislative competence of State Legislatures.
• Role of economic theories in Constitutional adjudication.
• Is the transaction classifiable under Section 7(5)(c) of the IGST Act instead of Section 8(2)?
• Impact of Sections 13(8)(b) and Section 8(2) of IGST Act being ultra vires or the transaction
being classified as under Section 7(5)(c) instead of under Section 8(2) of the IGST Act?
Topic 3: Access to Justice in Tax matters (Direct taxes, Indirect taxes (With special reference to
GST) and Prosecution)
• Efficacy in delivery of Justice
• Foreign investors perspective
• Expansion constrains of the Judiciary
• Appointment of Ad hoc Judges
• Financial independence of the Judiciary
• Digitalization of the judiciary

• Any other area(s) the author deems fit.

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| Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition 2021 |

ARYAN LUKKA
NMIMS’s Kirit P. Mehta School of Law
Email: [email protected]

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SECTION 255(7) OF THE INCOME-TAX ACT, 1961: FACELESS INCOME-TAX
APPELLATE TRIBUNAL - DOES IT PASS THE TEST OF CONSTITUTIONAL

VALIDITY?

SECTION 255(7) OF THE INCOME-TAX ACT, 1961: FACELESS INCOME-TAX
APPELLATE TRIBUNAL - DOES IT PASS THE TEST OF CONSTITUTIONAL

VALIDITY?

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INDEX

SR. NO. CONTENTS PAGE
NO.
1. INTRODUCTION
2. DUE PEOCESS OF LAW AND FUNCTIONING OF THE 3
4-9
2.1 TRIBUNAL
2.2 Quasi-judicial Body 4
2.3 Audi Alteram Partem 6
2.4 Oral Hearing – A Statutory Right 7
2.5 Precedent and Jurisdiction 8
3. Fundamental Rights 9
LEGISLATIVE COMPETENCE: MINISTRY OF LAW VIS-À-VIS 11-14
3.1 MINISTRY OF FINANCE
3.2 Timeline of Events and the Intent of the Government 11
4. Illegal Delegation 14
4.1 POSITION IN OTHER JURISDICTION 15-17
4.2 15
5. Colombia 16
5.1 Peru 18-21
5.2 18
6. DIGITISATION OF JUDICIARY 19
7. Need for Digitisation 22
25
Current status of Digitisation
CONCLUSION
BIBLIOGRAPHY

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INTRODUCTION

The Income Tax Appellate Tribunal (Hon’ble ITAT) country’s first tribunal instituted for
administering the appeals under Direct Taxes Act. It is known as the “Mother Tribunal” of
India. With its institution in 1941, the tribunal has been discharging it functions in a fair and
efficient manner. It was the success of Hon’ble ITAT that inspired the Government to establish
similar tribunals. The rulings of the tribunal are final and the next appellate forum from it is its
jurisdictional High Court. The appeal in High Court is only admitted if there is a substantial
question of law, that makes Hon’ble ITAT the last fact-finding authority.

By virtue of section 86 of the Finance Act, 2021, an amendment was carried on to section 255
of Income-tax Act (“the Act”) to bring in new sub-section (7), (8) and (9) with effect from
April 01, 2021. The amendment proposed to replace the existing tribunal with “'National
Faceless Income Tax Appellate Tribunal Centre”. The amendment proposes to change the
current mode of physical hearing to a virtual faceless hearing thereby eliminating interface
between the appellants.

The manoeuvre of faceless process started with scrutiny assessment. Eventually, the
functioning before Commissioner of Income-tax (Appeal) [CIT (A)] was redeveloped in
faceless format. Now subsequent to the amendment, the intent of the Government is to change
the functioning of the Tribunal into a faceless format thereby eliminating an opportunity of an
oral hearing in all the fact-finding stages.

The objective of this research paper is to analyse the constitutional validity of the amended
section 255 of the Act. It is divided into four chapters that analyses the due process of law with
respect to the functioning of the tribunal, legislative competence, state of law in other countries
for faceless courts, digital revolution in judiciary and concludes based on analysis of each
chapter. The author for the purpose of analysing legislative competence has assumed that the
course of action for notifying faceless ITAT would be analogous to the one of CIT (A).

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DUE PROCESS OF LAW AND FUNCTIONING OF THE TRIBUNAL

• Quasi-Judicial Body

The Hon’ble ITAT is a quasi-judicial body instituted under the Income-Tax Act. In Ajay
Gandhi v. B. Singh1, it was held that “The Income-Tax Tribunal exercises judicial functions
and has the trappings of a court.” In Rajesh Kumar v. DCIT2, it was observed that proceedings
before Tax Authorities is a part of judicial process. It specifically states that the proceedings
before the Hon’ble ITAT shall be considered as judicial proceedings within the meaning of
Section 193 and 228 of the Indian Penal Code, 1860 and for the purpose of Chapter XXXV of
the Code of Criminal Procedure, 1898 the proceedings of Hon’ble ITAT shall be considered of
a civil court.

Rule 33 of the Income-tax (Appellate Tribunal) Rules, 1963 states that:

“ Proceedings before the Tribunal.
33. Except in cases to which the provisions of section 54 of the Indian Income-tax Act, 1922,
and/or section 137 of the Act are applicable and cases in respect of which the Central
Government has issued a notification under sub-section (2) of section 138 of the Act, the
proceedings before the Tribunal shall be open to the public. However, the Tribunal may, in
its discretion, direct that proceedings before it in a particular case will not be open to the
public.”

The importance was oral hearing in open court was highlighted in Naresh Shridhar Mirajkar &
Ors. v. State of Maharashtra.3 It was observed that as a general principle all the cases in court
shall be in open court. In order to administer justice in a healthy, impartial, and fair manner,
public trials in open court are indubitably necessary. The public scrutiny and gaze of a trial
operates as a inherent check against judicial notion and it is a potent tool for instilling public
faith in the integrity, objectivity, and rationality for the administration of justice.

1 [2004] 2 SCC (120)
2 [2006] 287 ITR (91)
3 [1966] 3 SCR (744)

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In Brajnandan Sinha v. Jyoti Narain4,it was held that “a body or forum must have power to
give a decision or a definitive judgment which has finality and authoritativeness which are
essential tests of a judicial pronouncement, if it has to be treated as a ‘Court’.”

In Suraj Mall Mohta and Co. v. A. V. Viswanatha Sastry5 it was held by the Supreme Court
that the hearings before Income tax officer are judicial proceedings. That it is the right of the
assessee to inspect the relevant records and documents before he is called to lead the evidence.

One of the most important advantages is that it ensures that courts follow the rules.
Nonetheless, practical factors frequently necessitate balancing the goal of open justice against
other objectives like as confidentiality, costs, and national security. There are three reasons
why open justice is important: First, it contributed in the pursuit for truth and performed a
critical role in educating and instructing the people. Second, it increased accountability and
discouraged misconduct. Third, it had a psychological purpose by assuring that justice had been
served.

The proceedings before the Assessing Officer and the Commissioner of Income-Tax (Appeal)
are internal proceedings. The proceedings before Hon’ble ITAT are open to public thereby not
subjected to any influence by the parent bodies of income-tax authorities. The rule inherently
promotes transparency, efficiency and impartiality. The amendment to Section 255 of the Act
directly threatens the quasi-judicial nature of this quasi-judicial body and therefore, is
unconstitutional. The most critical aspect of any quasi-judicial institution is the independence
of such institution. Independence of the institution remains intact, when there is no interference,
internal or external, in the work of the quasi-judicial authority by any person. Further, it is
because of this independent nature of the institution that the faith of the taxpayers has remained
intact. The moment, there is any transgress in this feature of the institution, the entire institution
would crumble down.

The Hon’ble ITAT being a quasi-judicial body must have its independence. The legislature
being a different organ mustn’t interfere with the functions of the Judiciary. The underlying
principle of Doctrine of Separation of Powers is that one organ of the Government cannot

4 [1966] 3 SCR (744)
5 [1954] 26 ITR 1 (SC)

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exercise or interfere with the functions of any other organ of the Government. It is settled that
the Hon’ble ITAT has trappings of a court and is recognisable as a judicial body. In
Keshavanand Bharti v. State of Kerala6 it was held that separation of powers and independence
of judiciary is an important part of the basic structure doctrine. The amendment of section 255
of the Income tax Act dictates upon the most essential functions of the judiciary, which
amounts to violation of Doctrine of Separation of Powers.

• Audi Alteram Partem

The concept of natural justice takes effect when no individual is treated unfairly in any
regulatory or judicial action. The concept of natural justice is founded on the principle of Audi
Alteram Partem. Principles of Natural Justice are not just mere formality. There principles
reflect significant rights of a citizen. Audi Alteram Partem forms a part of it. It states that no
person shall be judged without being heard. The maxim ensures that the parties to the case will
have a fair hearing and that the court will not make its verdict until both sides have been heard.
Both parties have the ability to defend themselves.

The Principle of Audi Alteram Partem comprises of two elements:
1. An opportunity of hearing must be provided.
2. Such opportunity must be adequate, credible and reasonable.

In Mineral Development Ltd. v. The State of Bihar7, it was held that “The concept of reasonable
opportunity is an elastic one and is not susceptible of easy and precise definition. What is
reasonable opportunity under one set of circumstances need not be reasonable under different
circumstances.”

The opportunity provided should not be a paper opportunity and the same should not be for
name sake. It is crucial for effective operation of the case that the parties to the case are given
an opportunity of heard whereby they can present their own contentions and respond to the
contentions put forward by their opponents.

6 (1973) 4 SCC 225
7 AIR 1960 SC 468

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The rule of hearing is an essential part of natural justice and applies in the matters before
Hon’ble ITAT. In Uma Nath Pandey & Ors v. State Of UP8 it was held that when a quasi-
judicial institution is deciding on a dispute between the parties, compliance to the principles of
natural justice is crucial. That the first and most important element is of audi alteram partem.

In P. N. Eswara Iyer v. Registrar, Supreme Court of India9, it was held that audi alteram partem
is the most fundamental part of judicial framework. It further stated that providing an
opportunity of fair hearing to the affected party is profoundly ingrained in the principles of the
Constitution.

• Oral Hearing – A Statutory Right

Section 254 of the Act specifically states that an opportunity of being heard is to be given to
both the parties to the appeal in Hon’ble ITAT. Thus, it is obligatory on the part of Hon’ble
ITAT that such opportunity is provided. It is the duty of the Tribunal to provide an opportunity
and effectively conduct the hearing considering the facts, contentions and legal position.
In Automotive Tyres Manufacturers’ Association v. Designated Authority10, it was held that
written arguments is not an alternative to oral hearing. An oral hearing allows the authority to
observe the persona of the witness and clarify its uncertainties.
Oral hearing is an important ingredient of judicial system. It is a framework where judge is
personally involved in the assessment of facts and evidences. In P.N Eswara Iyer v. The
Registrar, Supreme Court of India11, it was held:
“23. The magic of spoken word, the power of the Socratic process and the instant clarity of
the bar-Bench dialogue are too precious to be parted with…”
In Chief Election Commissioner of India v. M. R. Vijayabhaskar and Ors.12, it was stated
that:
“20. Courts must be open both in the physical and metaphorical sense. Save and except for in-
camera proceedings in an exceptional category of cases, such as cases involving child sexual
abuse or matrimonial proceedings bearing on matters of marital privacy, our legal system is
founded on the principle that open access to courts is essential to safeguard valuable

8 AIR 2009 SC 2375
9 [1980] 4 SCC (680)

10 [2011] 2 SCC (258)

11 [1980] 4 SCC (680)

12 [2021] SCC OnLine SC (364)

7

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constitutional freedoms. The concept of an open court requires that information relating to a
court proceeding must be available in the public domain. Citizens have a right to know about
what transpires in the course of judicial proceedings. The dialogue in a court indicates the
manner in which a judicial proceeding is structured. Oral arguments are postulated on an open
exchange of ideas. It is through such an exchange that legal arguments are tested and analysed.
Arguments addressed before the court, the response of opposing counsel and issues raised by
the court are matters on which citizens have a legitimate right to be informed. An open court
proceeding ensures that the judicial process is subject to public scrutiny. Public scrutiny is
crucial to maintaining transparency and accountability. Transparency in the functioning of
democratic institutions is crucial to establish the public‘s faith in them......................”

The Income-Tax Act is innately very intricate in nature. There are
comprehensive elucidations that require complex cross-referencing with relevant evidences
and establishing how the circumstances in the case are comparable to the factual information
of the rulings and judgments so relied on. There is no replacement for expressing the subtleties
of difficult subjects face to face, whether in person or via digital mode, no matter how
effectively one communicates oneself. Even during Covid-19 the Hon’ble ITAT was
functioning virtually whereby parties were allowed to appear through video-conferencing and
the process of oral hearing was followed.

In Charan lal Sahu v. Union of India13, it was observed that “Justice is a psychological yearning,
in which men seek acceptance of their view point by having an opportunity of vindication
before the forum or the authority enjoined or obliged to take a decision affecting their right.”

• Precedent and Jurisdiction

Precedents play an important role in administration of justice. If the Bombay High Court has
provided its verdict on particular issue, it would be a binding precedent on all the ITATs in the
state. However, if the National faceless ITAT is instituted then there would arise a jurisdictional
issue as to which High Court will have a binding effect on the Tribunal.

13 [1990] 1 SCC (613)

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In The Commissioner of Income-Tax v. Thana Electricity Supply Ltd.14, it was held that the
decision of one High Court cannot have a binding effect on other High Courts or other quasi-
judicial bodies outside its territorial jurisdiction. It was further held that even the doctrine of
stare decesis doesn’t empower the decisions of one High Court to have a binding effect on
other High Courts. It is only the decision of Supreme Court that shall have a binding effect on
all the courts in the country under Article 141 of the Constitution.

It is settled that decision of High Court shall have a binding effect in its own State. However,
the assessment is now carried on by the NEAC which is situated in national capital, through its
Regional Assessment Centres. Therefore the situs of the Assessing officer becomes obsolete.

In Suresh Desai Associates v. CIT15, it was held:
“On account of the abovesaid doctrine of precedents and the rule of binding efficacy of the law
laid down by the High Court within its territorial jurisdiction, the questions of law arising for
decision in a reference should be determined by the High Court which exercises territorial
jurisdiction over the situs of the assessing officer. Else it would result in serious anomalies.
An assessee affected by an assessment order at Bombay may invoke the jurisdiction of the
Delhi High Court to take advantage of the law laid down by it and suited to him and thus get
rid of the law laid down to the contrary by the High Court of Bombay not suited to the assessee.
This cannot be allowed."

The above ratio settles the fact that the jurisdiction of the High Court will be dependent on situs
of the Assessing Officer. However, determination of such situs under Faceless Assessment
Scheme still becomes a nodus.

• Fundamental Rights

The Principle of Equality is enshrined in Article 14 of the Indian Constitution. It states "the
State shall not deny to any person equality before the law or the equal protection of the laws
within the territory of India". It is responsibility of the State to ensure that all Indian citizens
are treated equally under the law. It is the responsibility of the state to give equal legal

14 [1994] 206 ITR 727 (Bom)
15 [1998] 230 ITR (912)

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protection to all citizens of India. However, with the manoeuvre to eliminate interface between
department and assessee, the State itself has curtailed the opportunity of hearing to the Assessee
thereby violating the right of natural justice.
The principle of reasonableness and rationality in the provisions is the desideratum in Article
14. It must also be observed that oral hearing is offered before other tribunals like, Customs,
Excise and Service Tax Appellate Tribunal (CESTAT), Competition Appellate Tribunal
(COMPAT) and Securities Appellate Tribunal (SAT) etc.
In Naresh Shridhar Mirajkar v. State of Maharastra16, Bachawat, J. elaborated on open justice
as follows “Long ago Plato observed in his laws that the citizen should attend and listen
attentively to the trials. Hegel in his Philosophy of Right maintained that judicial proceedings
must be public since the aim of the Court is justice, which is a universal belonging to all save
in exceptional cases, the proceedings of a Court of justice should be opened to the public.” The
object behind the hearing in open court has been to provide legal assistance readily available
to a person facing trial and it is in consonance with Article 21 of the Constitution.

16 1966 SCR (3) 744

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LEGISLATIVE COMPETENCE: MINISTRY OF LAW VIS-À-VIS MINISTRY OF

FINANCE

• Timeline of Events and the Intent of the Government

Timeline of events

Sr. No. Date Event
1. 1961 The Income-tax Act was enacted that contained the provisions for
Appeals to Commissioner of Income-tax (Appeals) and Income-tax
2. 01.02.2020 Appellate Tribunal.
3. 27.03.2020 Finance Bill, 202017 was introduced in the Parliament with an
explanatory memorandum.
4. 25.09.2020 Finance Act, 202018 was enacted which inserted sub-sections (6B),
5. 01.02.2021 (6C) and (6D) in section 250 of the Income-tax Act, 1961
6. 28.03.2021 empowering the Central Government to notify scheme for faceless
appeals to CIT (Appeals).
Notification No. 76 of 2020 notified by under section 250(6B) of the
Act rolling out the Faceless Appeal Scheme, 2020.
Finance Bill, 202119 was introduced in the Parliament with an
explanatory memorandum.
The Finance Act, 202120 was enacted which inserted sub-sections
(7), (8) and (9) in section 255 of the Income-tax Act, 1961
empowering the Central Government to notify scheme for faceless
appeals to Hon’ble ITAT.

It is imperative to analyse the intent of legislature to understand the future implication of the
amendment on the tribunal.

17 Bill No. 26 of 2020
18 Act No. 12 of 2020
19 Bill No. 15 of 2021
20 Act No. 13 of 2021

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The Finance Act, 2020 empowers the Central Government to notify the Scheme for faceless
appeals to CIT (Appeals) by amendment to section 250 of the Act.

The relevant extract of section 250:

“(6B) The Central Government may make a scheme, by notification in the Official Gazette, for
the purposes of disposal of appeal by Commissioner (Appeals), so as to impart greater
efficiency, transparency and accountability by—
(a) eliminating the interface between the Commissioner (Appeals) and the appellant in the
course of appellate proceedings to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
(c) introducing an appellate system with dynamic jurisdiction in which appeal shall be disposed
of by one or more Commissioner (Appeals).”21

Subsequently, within six months of such enactment the Faceless Appeal Scheme was brought
into existence under sub-section (6B) of section 250 of the Act by Notification No. 76 of 2020
dated 25.09.2020.

The Finance Act, 2021 empowers the Central Government to notify the Scheme for faceless
appeals to Hon’ble ITAT by amendment to section 255 of the Act.

The relevant extract of section 255:

“Procedure of Appellate Tribunal
255. (1) ……
……
(7) The Central Government may make a scheme, by notification in the Official Gazette, for
the purposes of disposal of appeals by the Appellate Tribunal so as to impart greater efficiency,
transparency and accountability by—
(a) eliminating the interface between the Appellate Tribunal and parties to the appeal in the
course of appellate proceedings to the extent technologically feasible;

21 Sub-section (6B) of section 250 of the Income-tax Act, 1961. 12

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(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
(c) introducing an appellate system with dynamic jurisdiction.

….
”22
The Memorandum of the Finance Bill, 2021 elucidates the reasoning behind the amendment,
so made, to section 255 of the Act.

The relevant extract from the Memorandum:

“Provision for Faceless Proceedings before the Income-tax Appellate Tribunal (Hon’ble ITAT)
in a jurisdiction less manner
……
In order to ensure that the reforms initiated by the Department to reduce human interface from
the system reaches the next level, it is imperative that a faceless scheme be launched for
Hon’ble ITAT proceedings on the same line as faceless appeal scheme. This will not only
reduce cost of compliance for taxpayers, increase transparency in disposal of appeals but will
also help in achieving even work distribution in different benches resulting in best utilisation
of resources.”

It is pertinent to acknowledge that the elaborate scheme for Faceless Appeals has not been
discussed in Parliament due to the rising crisis of the pandemic. However, on perusal of the
above mentioned provisions it can be observed that the terminology of the section 250(6B) and
section 255(7) of the Act is exactly the same except for the appellate authority. It was
subsequent to the amendment to section 250 that the Faceless Appeal Scheme for CIT
(Appeals) was introduced by the Central Board of Direct Taxes (CBDT). The relevant extract
of the Memorandum to the Finance Act, 2021, establishes that the Government is firm on its
view to have a Faceless Hon’ble ITAT thereby reducing human interface and disposing off the
appeals. Considering the series of events by the Finance Acts and the subsequent notifications
it can be evidently deduced that the course of action of issuing notification for faceless appeals
before Hon’ble ITAT would be analogues to that of the notification issued for appeals before
CIT (Appeals), whereby rules will be framed under the Ministry of Finance.

22 Sub-section (7) of the Income-tax Act, 1961. 13

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▪ Illegal Delegation

The Faceless Scheme for CIT (Appeals) was issued by Central Board of Direct Taxes. The
powers to notify the scheme are derived from section 255 (8) of the Act. The Parliament under
Article 246(1) of the Constitution of India has an exclusive power to make laws on subjects
mentioned in List I in the Seventh Schedule. Parliament also, under Article 246(2) of the
Constitution, has power to make laws on subjects mentioned in List III in the Seventh Schedule.
Entry 82 of the List I specifies ‘Taxes on income other than agricultural income’ and Entry
11A of List III specifies Administration of justice; constitution and organisation of all courts,
except for Supreme Court and the High Courts. Thus, power to enact laws in respect of
administration of justice and tax rests with the Parliament. Such power cannot be exercised by
the CBDT by way of an executive notification.
Furthermore, it must be noted that Hon’ble ITAT functions under the directions issued by
Ministry of Law and Justice. The CBDT is under the aegis of Department of Revenue in the
Ministry of Finance. The President of the Hon’ble ITAT has the authority to constitute
Benches, regulate procedure of the benches, transfer members, transfer applications or
appeals, etc.23 The procedure with respect to the functioning of the Hon’ble ITAT should
principally be determined by the President of the Hon’ble ITAT.
It is pertinent to notice that the CIT (A) is a party before Hon’ble ITAT. CIT (A) functions
under the directions of Department of Revenue under Ministry of Finance. It would be out of
bounds if CBDT issues notification with respect to the procedure of Hon’ble ITAT as it would
be a framework where Department of Revenue is making law for the Department of Revenue.
In A.K. Kraipak v. Union of India24, the selection of the post of Chief Conservator of forests
was made by a committee in which the one of the member was the acting Chief Conservator
of forests. It was held that there was presence of bias and the decision made by the committee
was against the principles of natural justice.
The law on this issue is settled that a particular department of the government cannot create
law for itself thereby preserving the sanctity and fairness in its functioning. Therefore,
notification with respect to the procedural aspects of the tribunal issued by CBDT would
certainly be an illegal delegation.

23 https://www.Hon’ble ITAT.gov.in/files/uploads/categoryImage/RTI/OfficersPowers&Functions.pdf 14
24 Writ Petitions Nos. 173 to 175 of 1967

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POSITION IN OTHER JURISDICTION

The faceless justice system has been adopted by some countries to combat terrorism whereby
the trial of the accused are conducted by faceless judges. The tribunals were instituted for such
purpose. Such system was primarily adopted as a consequence of extra-ordinary situation
where there is threat to national security.

• Colombia

In 1980’s Colombia was going through a difficult time. The violence was at its peak as a cause
of Guerilla warfare. The M-19 was accused of being funded by narcotic supplier Pablo Escobar
in 1985 to assault the Apex Court of Colombia and destroy information that may have led to
his extradition. That attack claimed the lives of up to 95 persons, including 11 judges.25 The
state of warfare was such that the violence against administrators, judges, activists etc. was a
daily practice for criminals. The judicial systems were tarnished and the judiciary lost the
capacity to hold the criminals guilty as it would lead to the death of judges. In 1991, the
Colombian government adopted a new constitution and code of criminal procedure to solidify
the judicial system and react aptly to the warfare. The new constitution and code of criminal
procedure institutionalised the faceless justice reform approach by creating special courts that
ensured the secrecy of judges, prosecution officials, and eyewitness testimony.26 Special courts
were instituted to deal with the cases of drugs trafficking, terrorism, extortion and arms
trafficking. In the courts, no one but the prosecutor was in knowledge of the identity of the
judge. There was no public hearings granted to the accused. The hearings were held in
defensive military fortification that had one way mirrors and sound transmitters were installed
for the privacy and safety of judges.
The fundamental goal of the faceless justice system was to improve the operation of
judiciary during the peak of the security crisis by eliminating injustice and reducing the risk of
judicial authorities and witnesses being killed.27 However, this strategy eventually failed to
achieve its goal. Initially the system acted as a bribe-taking platform: justices, law enforcement

25 Murphy, H., 2021. Colombia elects ex-guerrilla in sign peace possible. [online] U.S. Available at:

<https://www.reuters.com/article/colombia election-idUKN1E79U12R20111031> [Accessed 8 November

2021]
26 Cidh.org. n.d. THE POLITICAL AND LEGAL SYSTEM IN COLOMBIA. [online] Available at:

<http://www.cidh.org/countryrep/colombia93eng/chap.3a.htm> [Accessed 8 November 2021].
27 Luz Estella Nagle, Colombia’s Faceless Justice: A Necessary Evil, Blind Impartiality or Modern Inquisition?,

P. 912-913

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officials, and bureaucratic personnel working in the framework routinely accepted douceur in
return for tampering the evidence. The endeavour to protect criminal justice system and
increase judicial capability through this method eventually eroded the court's credibility.
The efforts of the administration to develop a reputation of judicial credibility and
independence were further undermined by corruption scandals and claims of impunity. Human
rights and civil liberties were also sacrificed as a result of faceless reforms.
The Organization of American States condemned the faceless justice method, citing violations
of the principles of natural justice and American Convention on Human Rights.28
In spite infructuous system, in late 1990's the Colombian Congress enacted a legislation that
would prolong the faceless method of conducting proceedings.29 As a result of such enactment,
protests emerged in the country. The human rights organisations and global institutions started
putting pressure on the incumbent Government.30 On 6th April, 2000, the Constitutional Court
of Colombia held that the anonymity and in the framework and functioning of special courts
violated due process and principles of natural justice. Eventually the laws on faceless judicial
systems were struck down.31

• Peru

Around 1980, Peru witnessed an internal armed conflict between the then Peruvian
Government and the Maoist guerrilla group Shining Path. In 1992, the then incumbent
Government enacted laws to deal with terrorism and treason. The laws enunciate rules
pertaining to the trail of persons accused of political violence by undisclosed or faceless
prosecutors and judges in faceless civilian courts and tribunals. The laws were implemented at
a time when the country was suffering from the effects of increasing terrorist activity. The
framework was efficient in convicting guerrilla’s however it also lead to unlawful detention of
hundreds of innocent people. Since 1992, there have been extensive human rights violations
by the faceless justice system.32

28 http://www.cidh.oas.org. 2021. ADMINISTRATION OF JUSTICE AND RULE OF LAW.

<http://www.cidh.oas.org/countryrep/Colom99en/chapter-5.htm.> [Accessed 8 November 2021].
29 U.K. HOME OFFICE, IMMIGRATION AND NATIONALITY DIRECTORATE COUNTRY

ASSESSMENT – COLOMBIA (2002), <http://www.unhcr.org/refworld/docid/3c2b4e097.html> [Accessed 8

November 2021]
30 Larry Rohter, Secretive Colombian Courts Survive Protests over Rights, N.Y. TIMES, June 20, 1999,

http://www.nytimes.com/1999/06/20/world/secretive-colombian-courts-survive-protests-over-rights.html
31 U.K. HOME OFFICE, supra note 30.
32 Human Rights Watch/Americas, "The Two Faces of Justice," Hrw.org. 2021. Peru.

<https://www.hrw.org/reports/1996/Peru.htm> [Accessed 8 November 2021].

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In Berenson Mejía v. Peru33, the author in this case was confined and subjected to inhumane
conditions. The Inter-American Court of Human Rights held that the right of fair trial was
violated under Article 1– obligation to respect rights Article 8 – Right to fair trial, of American
Convention on Human Rights.

A book titled “The Innocents Have Names” was jointly seven human rights organizations, as
well as church groups and independent lawyers in November 1995. The book gave details of
300 cases they were defending.34 The arbitrariness of the courts and their systematic violations
of elementary rights of defence and due process have been criticized by several United Nations
human rights bodies, as well as the Inter-American Commission on Human Rights. The
absence of credibility in justice delivery system led to corruption and ineffectiveness.
Eventually in 1997 the Peruvian government announced it would end the highly criticized
practice of trying accused terrorists before "faceless" judges.

The Inter-American Commission on human rights also distinguished “faceless justice system
as violation of fundamental rights to the defendant. Its Report of Terrorism and Human Rights35
denounced the use of "faceless" justice systems practised by the Inter-American Commission
on Human Rights as violating the right to be tried by a proficient, distinct, and unbiased
tribunal, primarily because the secrecy of the prosecution, justices, and witnesses precludes the
defendant of fundamental rights. In such situations, a defendant has no way of knowing who is
judging or accusing him, and thus has no way of knowing whether that individual is competent
to do so, or whether there is any basis to request that these officials extricate themselves due to
incompetence or lack of impartiality. With respect to the security of judges it stated that “The
states are obliged to take all necessary measures to prevent violence against judges, lawyers
and others involved in the administration of justice. This may in turn require that certain
exceptional measures be taken to protect the life, physical integrity and independence of judges
on a case by case basis, always providing, however, that the nature or implementation of such
measures does not compromise a defendant’s non-derogable fair trial guarantees, including
the right to a defense and the right to be tried by a competent, independent and impartial
tribunal.”

33 IACHR Series C no 119 (Official Case No) 17
34 APRODEH et al, Los Inocentes Tienen Nombre: 300 Historias de Prisión Injusta en el Perú, (Lima:
Grafimace S.A., 1995).
35 Cidh.org. 2021. Report on Terrorism and Human Rights
<http://www.cidh.org/terrorism/eng/toc.htm> [Accessed 8 November 2021].

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DIGITISATION OF JUDICIARY

• Need for digitisation

The outbreak of novel corona virus has advanced the use of virtual mediums for conducting
the court proceedings. The use of technology has been of prime importance to deal with such
situation. Technological developments in legal practice have been given a lot of importance in
recent times and acknowledgement of it has led to a thought as to what will be the future of
law. It makes one wonder why there has been sudden hype in recent years in analysing
technological development as browsing, email, search engines, error free software etc. has
already been in the market and impacting the legal business.

Digitisation of judiciary acknowledges the most crucial problem of Indian judicial system i.e.
affordable legal service and speedy disposal of trial. The efficiency of lawyers will rise when
court visits and lengthy waiting hours become the exception. If this method is applied to similar
civil cases, court efficiency will dramatically improve.

The use of technology found judicial recognition in precedent of this Court in State of
Maharashtra v. Praful Desai36. This Court held that the term ‘evidence’ includes electronic
evidence and that video conferencing may be used to record evidence. It observed that
developments in technology have opened up the possibility of virtual courts which are similar
to physical courts. The Court held:- “Advances in science and technology have now, so to say,
shrunk the world. They now enable one to see and hear events, taking place far away, as they
are actually taking place…Video conferencing is an advancement in science and technology
which permits one to see, hear and talk with someone far away, with the same facility and ease
as if he is present before you i.e. in your presence. In fact he/she is present before you on a
screen. Except for touching one can see, hear and observe as if the party is in the same room.
In video conferencing both parties are in presence of each other. Recording of such evidence
would be as per “procedure established by law”

In Meters and Instruments v. Kanchan Mehta, it was pointed by the Supreme Court that the
“Use of modern technology needs to be considered not only for paperless courts but also to

36 (2003) 4 SCC 601

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reduce overcrowding of courts. There is need to categorise cases which can be concluded online
without physical presence of the parties where seriously disputed questions are not required to
be adjudicated like traffic challans and cases of Section 138 of the NI Act.”

• Current status of Digitisation

The initiation in using digital platforms for judiciary began in the year 2004 by an order of Law
ministry to institute an e-committee of the Supreme court. The then Chief Justice of India, Mr
Justice R.C. Lahoti, suggested the formation of the e-Committee after recognising the essential
requirement to transform India's judicial system by the use of modern technologies and to
develop a “National Policy and Action Plan” to incorporate Information and Communication
Technology (“ICT”) in courts. The e-Committee was set up to facilitate the formulation of a
National Policy that would allow the Indian judiciary to prepare for the digital age by adapting
and implementing technologies and communication tools that would make the judicial system
more coherent, benefiting all stakeholders. The present Chairman of the e-Committee is Justice
D Y Chandrachud, Judge, Supreme Court of India.

In India the courts are burdened with vast pendency and long delays causing adversity to the
litigants. As per the statistics released by the e-courts committee of the Supreme Court, the
total pendency of cases before courts is 3.27 crores.

The “National Policy and Action Plan for Implementation of Information and Communication
Technology (ICT) in the Indian Judiciary – 2005” gestated the eCourts project. The objective
of the project was to:

i. To provide citizen centric service in an time bound and effective manner.
ii. To create, install and utilize the decision support systems.
iii. To develop judicial efficiency to in order to make judicial system more economical,

accessible and transparent.37

The e-Committee has released three phases in the eCourts project. Phase I and II have
introduced e-filing, judicial services like uploading judgments and order, case status, cause list,

37 ecommitteesci.gov.in. E-Courts Mission Mode Project.
<https://ecommitteesci.gov.in/project/brief-overview-of-e-courts-project/> [Accessed 8 November 2021].

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display board, e-service of summons etc.38 The draft vision of phase III has been introduced by
the e-committee on April 20, 2021.39

Phase III plans to upgrade the electronic infrastructure of the judiciary. The objective of the
phase is to provide digital case registry, a comprehensive repository of case laws, machine
readable documents, Interoperable Criminal Justice System (“ICJS”), digital case management
systems, e-filing, open digital hearings, service of notice, remote digital assistance,
administration of legal aid etc.40

However, there are certain limitations to Phase III. The theme of Phase III revolutionises the
functioning of courts at scratch of judicial system where there are issues of bandwidth,
specifically in remote areas.

There also has to be acceptance as well as literacy with respect to digital courts. Justice DY
Chandrachud at the inauguration of Model Virtual Courtroom observed that "There is a major
digital divide in India. We cannot really ignore the fact that persons who access our services
do not necessarily have an awareness of access to technology. The common litigants do not
necessarily have access to technology which we have as judges. Lawyers again, who are
critical to the success of the mission, do not, in many instances, have access to technology
which we have. For the simple reason that lawyers perform services in id of society across the
spectrum, earning a small pittance of a fee for a junior member of the bar, we have to ensure
that we bridge the digital divide for the members of bar.”41

Another hurdle to the digital courts is paperwork and e-filing. There is no standard paper filing
that is used across the nation. Different High Courts have different method of filing. This can
be a greatest hurdle to the digitisation of all records as well as e-filing. With respect to e-filing

38 Doj.gov.in. Brief on eCourts Project. <https://doj.gov.in/sites/default/files/Brief-on-eCourts-Project-(Phase-I-

%26-Phase-II)-30.09.2015.pdf> [Accessed 8 November 2021]; Doj.gov.in. Digital Courts Vision & Roadmap

Phase III of the eCourts Project.

<https://doj.gov.in/sites/default/files/Draft%20Vision%20Document_eCommittee_0.pdf> [Accessed 8

November 2021].
39 ecommitteesci.gov.in/. Draft Vision document for Phase III of eCourts Project.

<https://ecommitteesci.gov.in/inviting-suggestions-on-the-draft-vision-document-for-phase-iii-of-ecourts-

project/> [Accessed 8 November 2021].
40 Ibid
41 National Informatics Centre (NIC, O). Event Calendar | Orissa High Court, Cuttack. Orissahighcourt.nic.in.

<https://orissahighcourt.nic.in/about-orissa-high-court/event-details/135/11/> [Accessed 8 November 2021].

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and digitisation of records Justice Chandrachud stated that “We are in the process of now
commencing a very ambitious scheme of digitising court records across the country. We had
set up a broad-based committee of High Court judges as well as experts from the private sector
and governmental institutions. A detailed SOP has now been prepared which has now been
prepared which has now been unveiled for all the chief justices. We have chosen certain High
Courts as pilot high courts for the implementation of the pilot project. Another initiative is to
have a nationwide consultant for taking the message forward of digitisation of court records
across the country. But the e-filing of cases filed by the state government should be looked at
from the perspective of digitisation. Now that we are commencing digitisation, we are digitising
legacy records, previous records. Five years down the lane, we should not be required to
digitise records all over again. That we can avoid by ensuring that we start e filing of cases in
tandem with digitisation of old records. Because it is only when we e-file cases today that we
will obviate the need for digitisation in the future.”

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CONCLUSION

The Hon’ble ITAT is the last fact-finding authority. The Hon’ble ITAT being the last fact-
finding authority has greater obligation and duty to provide a hearing to the party affected under
the aegis of the act. To deny such opportunity would lead to unfair conclusions and cause
injustice to the party. In the matters involving complex laws like the Income-tax Act, proper
hearing needs to be provided.

It cannot be denied that presentation of law and facts verbally is significantly simpler than
replicating and communicating them in writing. Granting a reasonable appearance, even via
video conferencing can be far more effective than bundles of electronically uploaded
submissions, which the judge may or may not read.

It is settled that the Hon’ble ITAT has the trappings of a court. The essential element in the
proceedings before the court room is public hearing. Public hearing is the mechanism to keep
a check on judicial functioning as well as to ensure transparency. When it comes to
transparency, an open court hearing is the best method where all arguments occur in the plain
sight of the public. In open court hearings the Revenue and the assessee present their cases
before the Hon'ble ITAT in a collegial manner. Written submissions in faceless mode is not a
substitute to open court hearings for the purpose of ensuring fairness. In reality, it would
completely obfuscate the mechanism. Faceless proceedings at CIT (A) were may be justified
in part as it was held behind closed doors with only the Assessee, lawyers and the CIT (A)
being present. The best performance of courts all across the globe is due to public hearings. A
public hearing is transparent, and the extent of leeway is likewise limited.

Institution of Faceless courts in other parts of world have been for a specific purpose to deal
with terrorism emerging within the state. The situation in Peru and Colombia created a
compulsion on the respective Governments to secure the sovereignty of the nation. The
breakdown of judicial machinery by attacks on judges and judicial officers created a situation
of judicial emergency in the state. Such internal war must be observed as an exceptional
situation. It must also be noted that the system of faceless courts was eventually withdrawn and
was highly criticized because of the human rights violations caused to the innocent people. The
fundamental principle and the reasoning for such withdrawal was violation of “audi alteram
partem.”

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The judiciary must be at the disposal of the public's rights in order to ensure an actual
reformation of the dispensation of justice. In other words, the judiciary's presence is justified
by the preservation of human rights against state and private power abuses. This implies that
courts must change their stance on the law since basic rights were originally only legitimate
within the confines of the law, they are now only valid within the confines of the fundamental
rights.

According to the author, digitisation will revolutionise the future functioning of the judicial
system. With Artificial Intelligence changing the perspective of each sector of the society,
advancement of judiciary through technology is imminent. Technology has prepped into almost
every sector of the society including medical, finance, defence, media, accounting etc. The use
of technology in delivery of justice has become essential and will evolve in coming times. As
observed by Justice D Y Chandrachud at the inauguration of Model Virtual Courtroom -
“Virtual Courts Are The New Symbol And New Image Of the Indian Judiciary.” With changing
times the judiciary also has to evolve to be in lines with the society. However, Faceless Scheme
of Appeals cannot be in lines with the concept of using technology for judicial purposes.
Technological advancements must not be installed at the cost of suspension of fundamental
rights.

The digital courts or a judicial setup can be instituted for the best use to deal with petty offences.
The offences where the footfall is huge and needs a robust system to dispose off the matter
quickly. In such cases where the punishment is just of an ordinary fine, the cost and burden on
both the government and the accused can be reduced. An example like violation of traffic rules
can efficiently be tried online where if the person so accused pleads guilty, he/she can pay the
fine and the matter is put to rest; and if the pleads not guilty they can be offered proper hearing
before the courts. However, in matters pertaining to complex laws like Income Tax, oral
hearing must be provided as the facts and law and the connection between them have to be
clearly explained.

The amendment to Section 255 must be dropped. However, if the Government is keen to
implement the “Faceless Scheme for ITAT” it must ensure that the scheme is in compliance
with principle of natural justice and the legislative competence with respect to formulation of
rules must also be taken into consideration. The ITAT has been instituted under the Income tax

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Act. The Act empowers the government to frame rules. However, the rules must be formulated
with great care and requisite due diligence.
The Scheme for Faceless Proceedings before ITAT" must be formulated with great care and
should not be plainly analogous to the existing Faceless Appeal Scheme, 2020, in in
compliance with principles of natural justice and the principle of "audi alteram partem" i.e.
providing a reasonable opportunity to be heard.

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BIBLIOGRAPHY

BOOKS

• V.N. Shukla's Constitution of India by Prof (Dr.) Mahendra Pal Singh (Revised),
Edition: 13th 2017

• Commentary On The Constitution Of India; Vol 1, by D.D. Basu
• Kanga & Palkhivala's - The Law and Practice of Income Tax, (January 2020)
• Taxmann’s Faceless Assessment & Appeals Ready Reckoner with Real Time Case

Studies – Updated till 10th December 2020 | 3rd Edition 2020 by Mayank Mohanka
• Taxmann’s Master Guide To Income Tax Rule – Rule Wise Commentary on the

Income-tax Rules,1962 with Analysis of all Statutory Provisions & Judicial Changes
in the Income-tax Rules | 28th Edition | 2021
• Bharat's FACELESS Assessment, Appeals & Penalties by R. P. Garg

JOURNALS
• The Chamber’s Journal Vol. IX, No. 5, February 2021
• All India Federation of tax Practitioners Journal Vol. 23, No. 11, February 2021

REPORTS
• Law Commission Of India Report No.272 Assessment of Statutory Frameworks of
Tribunals in India.

ARTICLES
• Faceless Income Tax Appellate Tribunal not in keeping with Indian legal system? By
Pawan Jhabakh And Salai Varun in the New Indian Express.
• Faceless ITAT - Whether Denial of Oral Hearing is in Violation of Principles of
Natural Justice – Dr. Ashok Saraf.
• Final Fact-Finding Appellate Authority Also Going Faceless w.e.f. 1.4.2021 by
Mayank Mohanka published in Taxmann.
• Ecourts In India From Policy Formulation To Implementation by Shalini Seetharam
Sumathi Chandrashekaran published in Vidhi Centre for Legal Policy.
• New Standards of Justice: Uncovering Motivations for Mexico’s Recent Judicial
Reforms amid a Security Crisis by Kindra Mohr

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• Colombia's judicial reform: what now? by Maya Smith

WEBSITES

• http://www.cidh.oas.org. 2021. ADMINISTRATION OF JUSTICE AND RULE OF
LAW. [online] Available at:
<http://www.cidh.oas.org/countryrep/Colom99en/chapter-5.htm.>

• <https://publications.iadb.org/publications/english/document/The-International-
Dimension-of-Human-Rights-A-Guide-for-Application-in-Domestic-Law.pdf>

• Ir.library.louisville.edu. 2021. [online] Available at:
<https://ir.library.louisville.edu/cgi/viewcontent.cgi?article=1368&context=honors>

• Lawdigitalcommons.bc.edu. 2021. [online] Available at:
<https://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&articl
e=1006&context=ljawps>

• ecommitteesci.gov.in. 2021. E-Courts Mission Mode Project. [online] Available at:
<https://ecommitteesci.gov.in/project/brief-overview-of-e-courts-project/>

• Doj.gov.in. 2021. Brief on eCourts Project. [online] Available at:
<https://doj.gov.in/sites/default/files/Brief-on-eCourts-Project-(Phase-I-%26-Phase-
II)-30.09.2015.pdf>

• Doj.gov.in. 2021. Digital Courts Vision & Roadmap Phase III of the eCourts Project.
[online] Available at:
<https://doj.gov.in/sites/default/files/Draft%20Vision%20Document_eCommittee_0.p
df>

• Hrw.org. 2021. Peru. [online] Available at:
<https://www.hrw.org/reports/1996/Peru.htm>

• Murphy, H., 2021. Colombia elects ex-guerrilla in sign peace possible. [online] U.S.
Available at: <https://www.reuters.com/article/colombia-election-
idUKN1E79U12R20111031> [Accessed 8 November 2021].

• Cidh.org. n.d. THE POLITICAL AND LEGAL SYSTEM IN COLOMBIA. [online]
Available at: <http://www.cidh.org/countryrep/colombia93eng/chap.3a.htm>

• system?, F., 2021. Faceless Income Tax Appellate Tribunal not in keeping with Indian
legal system?. [online] The New Indian Express. Available at:
<https://www.newindianexpress.com/business/2021/feb/13/faceless-income-tax-
appellate-tribunal-not-in-keeping-with-indian-legal-system-2263590.html>

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DEVANSH JAIN
Institute of Law, Nirma Law University
Email: [email protected]

SHINJANI AGNIHOTRI
Institute of Law, Nirma Law University
Email: [email protected]

TC04
ANALYSIS OF GST SCHEME FOR EXPORT OF INTERMEDIARY SERVICES
ABSTRACT
India has undergone a series of developmental changes in taxation that has contributed to the
evolution of the Goods and Services Tax framework as we know it today. The most consistent thing
during this growth has been legislature’s endeavour to create a comprehensive indirect taxation
scheme to lessen the burden on both the supplier of services as well as the consumers. India has
been persistent in its approach to not tax exports to create a level-playing field for domestic
suppliers in international market. However, export of intermediary services has been excluded
from this benefit and suppliers of intermediary services are still getting taxed. Recently, this
controversy was brought to light again by the Bombay High Court where the strong stance was
observed against this anomaly. By way of this paper, it is proposed that taxation of export of
intermediary services defies constitutional, legal and commercial logic. This paper develops
around the idea that the operation of provisions in the IGST Act is doing more harm than good
and this situation warrants government intervention to put this controversy to rest in favour of
supplier of intermediary services.

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TABLE OF CONTENTS

INTRODUCTION 3

PART I: LEGISLATIVE COMPETENCE AS PER CONSTITUTION 4

Judicial review of Tax policies 4

IGST vis-à-vis Article 286 6

PART II: FUNDAMENTAL RIGHTS OF INTERMEDIARY SERVICE PROVIDERS

UNDER THE IGST ACT 7

History of taxation of export of intermediary services 9

IGST Act vis-à-vis Article 14 15

Class Discrimination within Intermediary Services 18

PART III: EXTRA-TERRITORIAL OPERATION 19

PART IV: CONSTRUING THE BEST PRACTICES 22

Treatment of Export of Services Globally 23

Scope of Intermediary Services 24

PART V: CONCLUDING REMARKS 27

Classification of Supply – Section 8(2) or Section 7(5)? 27

Constitutional, Legal and Commercial Viability of the Present Framework 28

Bibliography 30

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INTRODUCTION

The courts have examined the issue of supply of services abroad on various occasions, and so far,
they have upheld the constitutionality of the legislative provisions in relation to it. A two-judge
bench of Bombay High Court analyzed this issue in a recent judgment,1 wherein the transaction
involved was a situation where a supplier provided intermediary services with respect to certain
goods to a recipient located outside India and subsequently, this overseas recipient sold the goods
to the Indian customer directly. Here, out of the amount paid to the overseas recipient, a
commission was paid in convertible foreign currency to the supplier of services. Justice Ujjal
Bhuyan tipped the scale against the constitutionality of taxing provisions, whereas Justice Abhay
Ahuja presented a dissenting opinion.

Generally, exports are exempted from tax. However, by virtue of section 13(8) read with section
8(2) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), export of intermediary
services incurs GST liability. The current scheme of the IGST provides for taxation of supply of
services which should have been otherwise exempt. It begins with the general rule that the location
of supply is the location of the recipient of goods or services, but subsections (3) to (14) of Section
13 carve out exceptions to this rule. The effect created thereafter is that although the recipient of
some services is located outside India, the place of supply will be the location of the supplier (i.e.,
within India). This is done to specifically bring certain supplies within the tax net.

Section 13(8) states that “place of supply” of intermediary services is the location of supplier, and
section 8(2) states that in cases where “place of supply” and “location of supplier” are in the same
State or Union Territory, the supply is treated as intrastate supply. And thus begins the curious
conundrum of deeming fiction, because when for any prudent person, the transaction is in the
nature of export of services, the IGST Act considers it as a local supply. This is because the two
factors that determine the nature of supply (place of supply and location of supplier) will always
be the same. So, when a supplier renders intermediary services to a foreign recipient, and that
foreign recipient sells that good to a customer in India, the cross-border transaction is treated as
intra-state supply. It is widely understood and accepted that the Parliament can legislate on laws

1 Dharmendra M. Jani v Union of India (2021) SCC OnLine Bom 839

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regarding Goods and Services Tax (“GST”) on recommendations of the GST council, but it is the
constitutional provisions that determine the scope as well as limits of levying of GST on such
transactions.

This paper construes that scope and examines whether the deeming fiction created is within the
constitutional framework and if it derives its legislative competence from the Constitution of India
(“Constitution”). Part I of this paper analyzes the IGST provisions on the cornerstone of the
Constitution. It starts by examining the pattern of judicial review in India with respect to tax
legislations to understand the factors considered while examining constitutional validity of a tax
statute. Then it examines whether the deeming fiction in the IGST Act is in consonance with
Article 286 of the Constitution. Part II of this paper traces legislative competency of IGST Act
through the lenses of Article 14 of the Constitution. It sets forth the history of taxing the export of
intermediary services and then examines current provisions of IGST Act on the dual test of
arbitrariness of Article 14. Part III of this paper contemplates the extra-territorial operation of the
deeming fiction to scrutinize whether such extra-territoriality is permissible. Part IV highlights
best practices for taxing export of services across the globe. This is done by examining global
trends in levying tax on intermediary services and identifying the intention of legislature behind
the existing framework. Part V of the paper deals with the question of whether such supply can be
classified as inter-state under section 7(5) instead of intra-state under 8(2) of the IGST Act. The
paper then concludes with discussion on the consequences of continuing with the present
framework.

PART I: LEGISLATIVE COMPETENCE AS PER CONSTITUTION

JUDICIAL REVIEW OF TAX POLICIES

Judicial review by Indian courts has evolved in three dimensions: first, to demonstrate fairness in
administrative action; second, to preserve constitutionally guaranteed fundamental rights; and
third, to decide on matters of legislative competence between the center and states. When the
constitutionality of a legislation is questioned, the court has to presume that the legislature knows
and rightly understands its own people's interests and its laws are tailored to resolve problems

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faced by people, and therefore, its discriminations are based on sufficient justifications.2 In the
matter of State of Madhya Pradesh v. Rakesh Kohli and Anr.3, the Apex Court coined certain
guiding principles to be kept in mind while dealing with the legitimacy of taxation statutes, which
are as follows:

i. The constitutionality of a legislation by the Parliament or a State Legislature is always to
be presumed.

ii. A Legislation cannot be struck down on the mere ground of it being arbitrary or irrational;
its invalidity has to be backed by some constitutional infirmity.

iii. Since the Parliament and State Legislatures are bound to take care of the needs of people,
they represent and devise policies as per people’s requirements, the courts are not
concerned to examine the wisdom or unwisdom of the law.

iv. In the domain of taxation, legislators have more leeway with regards to classification of
policies.

The Supreme Court has reiterated on multiple occasions that economic policies contain an element
of trial and error, and that as long as the trial and error is genuine and with the greatest intentions,
such policies cannot be challenged as arbitrary, capricious, or unlawful.4 The court cannot overturn
a policy decision made by the government just because it believes that another policy option would
have been fairer, better, more scientifically or logically sound. However, the court could intervene
only if the policy legislated is patently arbitrary, discriminatory, or malicious.5
The legislature has greater freedom on issues of taxes and economic policies than on aspects of
civil rights such as freedom of speech, religion, and so on. The legislature is granted considerable

2 M H Quareshi v State of Bihar (1959) 1 SCR 629
3 State of Madhya Pradesh v Rakesh Kohli & Anr (2012) 6 SCC 312
4 Arun Kumar Agrawal v Union of India (2013) 7 SCC 1
5 Dhampur Sugar (Kashipur) Ltd v State of Uttaranchal (2007) 8 SCC 418

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leeway in economic matters since they are complex, and no straitjacket formula is appropriate.6
From the precedents it can be well understood that the judicial authority to review the taxation
policies is limited and remedy can be granted in either of two circumstances: if a legislation is
enacted in contravention to legislative competence or if the rights of person enshrined under Part
III of the Constitution are affected.7

IGST VIS-À-VIS ARTICLE 286

By joint reading of Section 13(8)(b) and Section 8(2) of the IGST Act, it can be reckoned that
when an intermediary supplies a service to a person outside India, the tax on the same is covered
under the ambit of intra-state supply by way of deeming fiction. It is prudent to examine the
validity of such provisions vis-à-vis the constitution. The relevant provision in this aspect is Article
286, which is reproduced below:

“286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the
supply of goods or of services or both, where such supply takes place—

(a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of
the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of
goods or of services or both in any of the ways mentioned in clause (1).”8

Article 286 in its clause (1) explicitly prohibits states from imposing or authorizing the imposition
of tax when (a) inter-state supply takes place, and when (b) supply in the course of import or export
takes place. In clause (2), the constitution empowers the Parliament to decide principles for
determining the time or event as to when inter-state supply or supply in the course of import or
export takes place. After reading the above-mentioned articles harmoniously, there is no shadow

6 R K Garg and Ors v Union of India (UOI) and Ors (1981) 4 SCC 675
7 Union of India v Exide Industries Ltd (2020) 425 ITR (SC) 1
8 The Constitution of India 1950, Article 286.

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of a doubt that the constitution intended Parliament to legislate on laws on interstate supply and
states to legislate on intrastate supply only.
The scheme of GST is of a consumption-based tax as opposed to origin-based tax.9 The
fundamental objective of the IGST Act is to make provisions for imposition and collection of tax
on inter-state supply by the Central Government. It is evident that the State Legislatures cannot
formulate laws for taxation on exports. However, a supply of services by an intermediary to a
business outside India, which should be regarded as an export of services, has been deemed to be
an intra-state supply through the IGST Act.
For intra-state transactions, State Goods and Services Tax Act, 2017 is applicable. This becomes
problematic from the constitutional perspective because although the supplier is rendering his
services outside India, the states get the authority to impose a tax on the services of the supplier
and such taxation is prohibited.10 Therefore, the effect created by provisions of the IGST Act is
contrary to Article 286(1) when by operation of IGST provision, states are empowered to tax
export of supply. It is upon the legislature to rectify a situation that goes contrary to the cornerstone
of the constitution.11
PART II: FUNDAMENTAL RIGHTS OF INTERMEDIARY SERVICE PROVIDERS
UNDER THE IGST ACT

9 'Goods and Service Tax (GST) Concept & Status' (Central Board of Indirect Taxes and Customs, 1 February 2019) Pg 12
<https://www.cbic.gov.in/resources/htdocs-cbec/gst/01022019-%20GST-Concept%20and%20Status.pdf> accessed 20 October
2021
10 GVK Industries Limited v ITO (2011) 332 ITR 130; Central India Spinning and Weaving and Manufacturing Co Ltd v Municipal
Committee, Wardha AIR 1958 SC 341; State of Travancore, Cochin v Bombay Co Ltd AIR 1952 SC 366
11 Income Tax Officer v M K Mohammed Kunhi (1969) 2 SCR 65

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GST is a consumption-based destination tax that is levied in the case of supply of goods and
services where consumption of such supply takes place i.e., location of the recipient.12 However,
section 13(8)(b) allows a situation wherein the location of export of intermediary services is the
location of the supplier instead of the recipient. Then, by virtue of Section 8(2) a cross-border
supply is treated as a local supply. This treatment of intermediary services leads to extra-territorial
operation of provisions of a central Act and this situation is prohibited in India.13
The present issue is regarding such operation of provisions that the export of services is deemed
as local supply. The relevant provisions of the IGST Act are reproduced below:

“2(6) defines 'export of services' means a supply of any service where:
i. The supplier of service is located in India;
ii. The recipient of service is located outside India;

iii. The place of supply of service is outside India;
iv. Payment for such service has been received by the supplier of service in

convertible foreign exchange; and
v. The supplier of service and the recipient of service are not merely

establishments of a distinct person in accordance with Explanation 1 in
section 8.
...
2(13) 'intermediary' means a broker, agent, or any other person who facilitates supply
of goods or services between two or more persons and does not include a person who
supplies goods or services by himself.”

12 ‘Circular 90/09/2019-GST’ (Central Board of Indirect Taxes and Customs, 18 February 2019)
https://www.cbic.gov.in/resources//htdocs-cbec/gst/circular-cgst-90.pdf;jsessionid=7D2467955A3E03067727C9DEF5B6CE7E
accessed 20 October 2021
13 All India Federation of Tax Practitioners v Union of India (2007) (7) STR 625

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Gujarat High Court considered the issue of in the case of Material Recycling Association of India
v. Union of India and OR’s.,14 and held that because the third condition, i.e., the place of supply
must be outside India, is not satisfied, intermediary services do not qualify as ‘export of services’.
However, it is only in pursuance of section 13(8)(b) that intermediary services do not satisfy the
condition. When a provision is challenged on the basis of it being discriminatory, its support should
not be derived by presupposing that the position of discrimination is justified. In simple words, the
justification for excluding certain services should not be based on an unreasonable provision. A
service provider that renders services to foreign recipients would fall within the ambit of export of
service, if it was not for section 13(8), as it meets the requisite criteria for it.

HISTORY OF TAXATION OF EXPORT OF INTERMEDIARY SERVICES

In the foregoing paragraphs, the history of export of services with reference to intermediary
services has been discussed. The Finance Act, 1994 (“Finance Act”) was the first to impose a
service tax, which took effect on July 1, 1994. The relevant service tax provisions were laid out in
Chapter V of the FA. Section 64 (1) of the Finance Act stated that Chapter V would apply to all of
India except Jammu and Kashmir and according to Section 64(3) service tax applied to taxable
services on or after the commencement of the Act. Section 93(1) of the Finance Act empowered
the central government to exempt a taxable service of any specified description from all or part of
the service tax levied on it, either generally or subject to conditions. Section 93(2) allowed the
central government to issue a special-order to exempt individuals from paying service tax in
exceptional circumstances.

Pursuant to the same, the central government issued the Export of Services Rules 2005 (“ESR”)
under sections 93 and 94(2)(f) of the Finance Act. As per rule 4 of ESR, any service that is taxable
under section 65 of the Act, clause (105), may be exported without paying service tax. As per rule
3(2) of the ESR, the following are the conditions for any taxable service specified in Rule 3(1) to
be treated as export of service, namely:

(a) such a service must be provided and used outside of India; and

14 Material Recycling Association of India v Union of India and Ors (2020) 79 GSTR 232

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(b) the service provider must receive payment in convertible foreign exchange for such services
provided outside of India.

Out of these two conditions, the first condition was omitted after subsequent amendments in 2007
and 2010. Prior to 1 July 2012, the position with regards to the export of taxable service was that
even if a portion of the service was performed outside India and the rest was performed in India,
it would still be treated as having been performed outside India and thus be construed as an export
of service. And all taxable services, if exported, were exempt from taxation. This position
continued until July 1, 2012.

The Finance Act of 2012 made significant changes to Chapter V of the Finance Act, which took
effect on July 1, 2012. The term 'taxable service' was defined in Section 65B (51) of the Finance
Act to mean any service that is subject to service tax under the charging provision i.e., Section
66B. The resultant effect was that service tax was only levied on services provided or agreed to be
provided in the 'taxable territory,' i.e., the entire country of India, excluding Jammu and Kashmir.15
In terms of section 66B, to be a taxable service, a service must be:

● Provided by a person to another
● In the taxable territory
● And must not form part of the negative list under section 66D.

As a result, services specified in the negative list and the service rendered outside of India's taxable
territory were not considered a 'taxable service' under the FA.

Subsequently, the Place of Provision of Services Rules, 2012 (“PoPS”) were brought, through a
notification16 in terms of section 66C, to replace two operating rules of that time regarding cross-
border transactions, namely: Export of Services, Rules, 2005 and the Taxation of Services
(Provided from Outside India and Received in India) Rules, 2006. PoPS outlined how to determine

15 The Finance Act 2012, combined reading of § 66B, § 64(1), and § 65B (52).
16 ‘Notification No. 28/2012’ (Central Board of Indirect Taxes and Customs, 20 June 2012)
<https://www.cbic.gov.in/resources//htdocs-servicetax/strules-place-of-
provsn.pdf;jsessionid=49590A61A53ED791B4F07A0A09B3D4FE> accessed 20 October 2021

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a taxing jurisdiction for services, since identifying the same in case of import and export of services
was difficult at that time. The rationale behind this was to harmonize rules for determining the
place of service with international practices to avoid double taxation or non-taxation.17
It was common to tax services provided by businesses to other businesses based on the location of
their customers, as well as services provided by businesses to consumers based on the location of
the service provider. An amendment was brought in Service Tax Rules, 1994, which inserted rule
6A, defining “export of services”. The same is reproduced below:18

“(1) The provision of any service provided or agreed to be provided shall be treated
as export of service when, -
(a) the provider of service is located in the taxable territory,
(b) the recipient of service is located outside India,
(c) the service is not a service specified in the section 66D of the Act,
(d) the place of provision of the service is outside India,
(e) the payment for such service has been received by the provider of service in
convertible foreign exchange, and
(f) the provider of service and recipient of service are not merely establishments of a
distinct person in accordance with item (b) of Explanation 2 of clause (44) of section
65B of the Act.”

17 'Taxation of Services: An Education Guide' (Central Board of Indirect Taxes and Customs, 20 June 2012) Pg 51
<https://www.cbic.gov.in/resources//htdocs-
servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402> accessed 20 October 2021
18 ‘Notification No. 36/2012-ST’ (Central Board of Indirect Taxes and Customs, 20 June 2012) <https://www.cbic.gov.in/htdocs-
servicetax/st-notifications/st-notifications-2012/st36-2012>

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To determine place of provisions of service under sub-clause (d) of clause (1) of Rule 6A of PoPS
rules had to be referred. Rule 3 provided place of provision generally to be location of recipient,19
and Rule 9 provided place of provision of specified services to be location of service provider.20
Both of the rules are reproduced below:

“3. The place of provision of a service shall be the location of the recipient of service.

...

9. The place of provision of following services shall be the location of the service

provider: —

(a) Services provided by a banking company, or a financial institution, or a
nonbanking

(b) financial company, to account holders;
(c) Online information and database access or retrieval services;
(d) Intermediary services;
(e) Service consisting of hiring of all means of transport other than, —

i. Aircrafts, and
ii. Vessels except yachts, up to a period of one month”

Intermediary services fell within the operation of Rule 9, due to which the place of provision for
these services was the location of the service provider. Central Board of Indirect taxes and Customs
issued a guidance note which provided the scope of intermediary services to be a person who
arranges or facilitates a supply of goods, a provision of service, or both, between two people
without any material alteration or additional processing.21 The guidance note further provided that,

19 Place of Provision of Services Rules 2012, Rule 3.
20 Place of Provision of Services Rules 2012, Rule 9.
21 'Taxation of Services: An Education Guide' (Central Board of Indirect Taxes and Customs, 20 June 2012) Pg 67
<https://www.cbic.gov.in/resources//htdocs-
servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402> accessed 20 October 2021

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at any given time, an intermediary is involved in two supplies: the supply between the principal
and the third party; and the supply of his own service (agency service) to his principal, for which
a fee or commission is typically charged. An intermediary in the sale of goods (such as a
commission agent, a buying or selling agent, or a stockbroker) was by definition excluded from
this rule. A person who arranges or facilitates the provision of a service (referred to in the rules as
"the main service") but performs the main service on his own account was also exempted from
this sub-rule.

The following factors were enumerated to determine whether a person is an intermediary,
namely:22

● Nature and value: Although the principal may authorise the intermediary to negotiate a
different price, an intermediary cannot change the nature or value of the service he facilitates
on behalf of his principal. Furthermore, the principal must be aware of the exact price at
which the service is provided (or obtained) on his behalf, and any discounts obtained by the
intermediary must be passed on to the principal.

● Separation of value: The value of an intermediary's service must be distinguishable from the
main supply of service that he is coordinating. It can be based on a percentage of the sale or
purchase price that has been agreed upon. The amount charged by an agent to his principal
is referred to as "commission" in most cases.

● Identity and title: Intermediary services provided on behalf of the principal are clearly
identifiable from the main supply.

An amendment was brought to PoPS wherein the definition of intermediary was changed with
effect from October, 2014, to include a broker or an agent with respect to supply goods.23 Earlier,
if an intermediary was engaged in supply of goods, the location of service was location of recipient,
qualifying such supply as export of service when provided to a foreign recipient. The amended
definition given in Rule 2 is reproduced below:

22 Ibid.
23 ‘Notification No. 14/2014 - Service Tax’(Ministry of Finance (Department of Revenue), 11 July 2014)
<https://www.indiabudget.gov.in/budget2014-2015/ub2014-15/cen/142014ST.pdf>

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“(f) “intermediary” means a broker, an agent, or any other person, by whatever name
called, who arranges or facilitates a provision of a service (hereinafter called the
‘main’ service) or a supply of goods, between two or more persons, but does not
include a person who provides the main service or supplies the goods on his
account”24

Additionally, through an amendment, online information and database access or retrieval
(“OIDAR”) services were excluded from Rule 9 of PoPS with effect from December, 2016.25
OIDAR services are primarily delivered over the internet or an electronic network that relies on
the internet or a similar network for delivery. Another important feature of these services is that
they are fully automated and require very little human intervention. The effect of this amendment
was that in case of supply of OIDAR services, the location of provision of services changed from
location of supplier to location of recipient. It qualified supply of these services as export of
services when provided to a foreign recipient. Thus, the position prior to this amendment was
reversed, export of OIDAR services was exempted instead of their import.26 This amendment was
brought to provide a level playing field to suppliers of OIDAR services located in India and tax
their import.27

Representations were made to on similar provisions for intermediary services as well, to exclude
them from Rule 9 and bring the position at par with global best practice.28 However, the position
after this amendment was continued in the GST regime as well. Section 13(8) is analogous to Rule

24 Place of Provision of Services Rules 2012, Rule 2.
25 ‘Notification No 46/2016-Service Tax’ (Central Board of Indirect Taxes and Customs, 09 November 2016)
<https://www.cbic.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st46-
2016.pdf;jsessionid=C521FE5D0EFB96805E52B6AAE0082A4B>
26 ‘Press Release’ (Central Board of Indirect Taxes and Customs) <https://www.cbic.gov.in/resources//htdocs-cbec/press-
release/cbec-press-release-11-11-16.pdf;jsessionid=66848EBF7E5B4322B44DB434906A1910> accessed 20 October 2021
27 Ibid.
28 ‘Pre-budget Memorandum 2017’ (The Institute of Chartered Accountants of India) Pg 38 <https://idtc-
icai.s3.amazonaws.com/download/preBudget-Memorandum-2017-IndTaxes.pdf> accessed 20 October 2021

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9 of the PoPS. Numerous representations have been made in the GST regime to give relief to
suppliers of intermediary services so that they could efficiently participate in international trade.
With this background, the next portion examines the IGST Act on the bedrock of all statutes –
Article 14.

IGST ACT VIS-À-VIS ARTICLE 14
When it comes to an economic or financial legislation, the state is the vested with utmost
flexibility. However, such laws must not be in violation of Article 14 of the Constitution, i.e., it
must not violate the people’s right to equality, and if it does, it will be declared void up to the
degree of such repugnancy under Article 13(2) of the Indian Constitution.29 As a result, every law
must satisfy the constitutionality test, which is nothing more than a sparkly term for the rationality
test. It is a general understanding that anytime fiscal legislation is enacted with the aim of levying
taxes on a certain product or exempting some other product from taxation, the creation of a
classification is essential.30
The Supreme Court in the case of East India Tobacco Co v. State of Andhra Pradesh31 held that it
is incumbent on the person who challenges a law as discriminatory to prove that it is not based on
a valid classification, and this burden is amplified when the law being challenged is a taxing statute.
While the state has broad discretion in deciding which people or things to tax, and the statute would
not be open to challenge merely because it taxes some people or things but not others, the statute
must pass the constitutional test of Article 14. For a classification to be valid, it must not create a
class of person or things to put them in a disadvantageous position than others. Article 14 states
that all people who are subjected to legislation should be treated equally in the same circumstances
and under the same conditions.

29 Kerala Hotel and Restaurant Association and Ors v State of Kerala and Ors (1990) 2 SCC 502
30 Ibid.
31 East India Tobacco Co v State of Andhra Pradesh (1962) AIR 1733

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To pass the test of reasonable classification, a legislation must not be arbitrary. To prove
reasonability of a legislation, two conditions must be met:32
(i) the classification done in the legislation must be based on an intelligible differentia that

distinguishes those who are grouped together from those who are not, and
(ii) the differentia must have a rational relationship to the object that the statute is attempting to

achieve. While classification can be based on a variety of factors, there must be a link
between the basis of classification and the purpose of the Act under consideration.
The IGST Act discriminates certain services provided under section 13(8) of IGST Act from other
services. The same is reproduced below:
“13(8) The place of supply of the following services shall be the location of the supplier
of services, namely: –
(a) services supplied by a banking company, or a financial institution, or a non-
banking financial company, to account holders;
(b) intermediary services;
(c) services consisting of hiring of means of transport, including yachts but excluding
aircrafts and vessels, up to a period of one month.”33
Intelligible Differentia
In the above-mentioned provision, apart from intermediary services, banking services and
transport services are also kept out of the purview of export of services by designating location of
services as location of supplier. The group of classes created therein is not based on an intelligible
differentia because there is no reason provided to designate the location of these services in a
manner different from the rest of the services. The absence of reason was first noted during the
service tax regime and continued in the GST regime.

32 Motor General Traders v State of Andhra Pradesh (1984) 1 SCC 222
33 The Integrated Goods and Services Tax Act 2017, § 13(8).

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| Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition 2021 |

The mechanism to tax intermediary services provided to foreign enterprises is arbitrary, with
reference to other similar services provided to foreign enterprises. The rationale behind taxing an
intermediary for providing services to foreign enterprises is not specifically stated by the
government, and the same was not a part of discussion in the parliamentary speeches or debates.
There are several exemptions available for exports with the aim of increasing foreign reserves,
however, no such exemption has been granted to the intermediary suppliers.

Relation of differentia with the object of the Act

For a classification to pass the test of Article 14, it must not be arbitrary but has to be rational, it
means that the classification must be based on some qualities or characteristics that are shared by
all those grouped together, but not by those who are excluded, and those qualities or characteristics
must have a reasonable relationship to the legislative object.34 In the present case there are no
shared objective qualities provided by the government which the banking services, intermediary
service and transport service share that distinguish them from the rest of the services.

Furthermore, the statement of objects and reasons accompanied by one hundred and twenty second
bill carves out the scope of entire IGST Act, which is to levy GST on inter-state transactions.35
The preamble to the IGST Act is given below:

“An Act to make a provision for levy and collection of tax on inter-State supply of
goods or services or both by the Central Government and for matters connected
therewith or incidental thereto.”36

It is clear that the legislation was enacted to tax inter-state supply of goods and services. The
classification of the specified services under section 13(8) artificially creates an opportunity to tax
the export of those services. Even if the same is permissible, it is not related to the object of the

34 R K Garg v Union of India (1981) 4 SCC 675
35 'The Constitution (One Hundred and Twenty-seventh Amendment) bill, 2014' (Central Board of Indirect Taxes and Customs)
<https://www.cbic.gov.in/resources//htdocs-cbec/gst/consti-amend-bill-122-2014-
new.pdf;jsessionid=466BDBD15560E9FD065FF7CE99716184> accessed 20 October 2021
36 The Integrated Goods and Services Tax Act 2017, Preamble.

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