In its recent decision in Glyph International Ltd v UOI,(1) the Allahabad High Court upheld the validity of the reverse charge mechanism set out in Section 66A of the Finance Act 1994.

The court first noted that Article 245(2) of the Constitution provides that no law made by Parliament shall be deemed to be invalid because it has extraterritorial operation. Based on previous Supreme Court rulings (including GVK Industries Ltd v Income Tax Officer),(2) the court observed that the correct test to apply was whether the legislation in question had no direct or indirect impact or consequence for India. However, if a 'real' connection with India existed, no quantitative test as to the sufficiency or significance of the connection was to be applied.

In the case under consideration, the marketing services rendered by the US entity to the Indian entity resulted in work being executed by the latter in India, for which it would receive a share of the gross revenue from the client. Consequently, the court held that there was a prima facie connection with India, although the precise factual aspects were left to be determined in the course of adjudication.

This judgment will have persuasive value for other petitions challenging the validity and/or applicability of service tax on services provided from overseas. However, the specific issue of whether the mere location of the recipient of service in India (the third prerequisite for the import of service) would establish a 'real' connection to India remains open. Similar reverse charge mechanisms exist and operate in several value added tax or goods and service tax jurisdictions globally, including the United Kingdom.

For further information on this topic please contact Ranjeet Mahtani at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email ([email protected]).


(1) 2011-VIL-59-ALH-ST.

(2) [2011] 4 SCC 36.