Reverse charge for services held valid by high court

By Ranjeet Mahtani and Divya Jeswant, Economic Laws Practice

The Allahabad High Court, in Glyph International Ltd v Union of India and Ors, recently upheld the constitutional validity of the provisions dealing with the “reverse charge mechanism” for services, contained in the Indian service tax enactment. Under this mechanism, service recipients in India are required to pay service tax in respect of an “import” of taxable service from a service provider outside India.

Ranjeet Mahtani Senior associate Economic Laws Practice
Ranjeet Mahtani
Senior associate
Economic Laws

Depending on the taxable service in question, “import” is determined by one of three criteria: (i) location of immovable property in relation to which the service is provided within India; (ii) place of physical performance (partial or whole) of the service within India; or (iii) location of the service recipient being India.

The petitioner in this case contended that the reverse charge mechanism created an “artificial” taxing event for services provided outside India, which exceeded the geographical boundary of the operation of the legislation. Such a levy could also give rise to double taxation of a single transaction by two countries.

The court relied on the recent decision of the Supreme Court in GVK Industries Ltd & Anr v Income Tax Officer & Anr, and held that so long as the legislation evinced a “real connection” with India, it would not be invalid purely on the basis of extraterritorial operation, as specifically provided in article 245(2) of the constitution of India. Further, no quantitative test as to the sufficiency or significance of the connection need be applied.

In the Glyph International case, promotional services were provided by a US-based entity to the petitioner (an Indian registered company), and the resultant leads yielded work which was to be performed by the petitioner in India. The court ruled that, prima facie, this constituted a “real connection” with India so as to justify the application of the reverse charge mechanism.

‘Real connection’

On the aspect of territorial overreach, the high court relied on the test laid down in GVK Industries: a “real connection” is constituted “when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians”.

In view of this, meeting criteria (i) and (ii) of the legislated test for “import” above establishes a connection; however, in relation to criterion (iii) – which relies on location of service recipient – it is questionable whether a “real connection” is established owing to mere location of the recipient in India.

Divya Jeswant Associate Economic Laws Practice
Divya Jeswant
Economic Laws

Geographical boundaries

The service tax legislation operates throughout India (excluding the state of Jammu and Kashmir), its Continental Shelf and Exclusive Economic Zone (EEZ). The charging provision, as interpreted by various judgements, levies the tax on the provision of services. The petitioner therefore argued that a demand in relation to services provided outside India, its Continental Shelf and EEZ, and sought to be taxed merely because the recipient of services was Indian, was not sustainable.

The court held that the reverse charge mechanism, far from altering the basis for tax, merely shifted the liability for payment of the service tax to the service recipient in India, and deemed such services to be provided within India. Consequently, the geographical boundaries within which the tax applied had effectively not been overreached.

Double taxation

The petitioner also raised concerns over the double taxation of services by both the country of the service provider and the country of the service recipient, as a result of the reverse charge mechanism. Notwithstanding the potential for countries to dually tax such transactions, it is common practice for countries to zero rate any “export” of services in the interests of not exporting taxes and fostering international competitiveness of their services.

There may be cases where the tests for import and export in two given countries are markedly different from each other, or where a country has adopted a system of taxation that varies from typical value-added tax/goods and services tax (VAT/GST) regimes. These situations could be addressed through double taxation avoidance agreements, similar to those currently employed in the realm of direct tax laws.

This judgment is the first on the issue, and is expected to have persuasive value in similar cases pending before other high courts in India. Courts may also consider that other jurisdictions with VAT/GST regimes have similar reverse charge mechanisms, which have not been invalidated and continue to operate, keeping in mind that these regimes operate under different constitutions and laws.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani, a senior associate at the firm, and Divya Jeswant, an associate, can be reached at and


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