REJECTION OF ITC REFUND CLAIM BY ADJUDICATING AUTHORITY AND APPELLATE AUTHORITY ON DIFFERENT GROUNDS

[Mr. M. GOVINDARAJAN]

In M/S. MCDONALDS INDIA PVT. LTD. VERSUS ADDITIONAL COMMISSIONER, CGST APPEALS - II, DELHI & ANR. - 2023 (5) TMI 1123 - DELHI HIGH COURT, the petitioner is the company incorporated in India and a subsidiary of McDonald’s Corporation, USA.  The petitioner has entered into two agreements with its holding company.  One agreement, a Master Licence Agreement (‘MLA’ for short) is the agreement had developed and operates a restaurant system.  The said system includes the proprietary rights in valuable names, service marks and trademarks including the trade name ‘McDonald’s’ and McDonald’s Hamburgers’ designs and color schemes for the restaurant buildings, signs, equipment lay outs, formulas and specification for certain food products etc.

During the period April 2018 to March 2019 the writ petitioner provides the services under the said agreement without payment of integrated tax.  Therefore the petitioner is eligible to claim refund of tax paid on the inputs used for the services rendered to its holding company.  The writ petitioner filed a claim of refund vide application dated 04.08.2020.  The Department issued a show cause notice dated 14.08.2020 proposing to reject the refund claim of the petitioner Rs.9,26,34,542/-.  The petitioner filed a reply to the said cause notice.  The Adjudicating Authority considered the reply filed by the petitioner.  The Adjudicating Authority also considered the agreements and concluded that the services rendered by the petitioner were in the nature of ‘intermediary services’.  The Adjudicating Authority observed that the base of the whole agreement is to enhance their holding company’s restaurant service having specialization of its known how.  The know-how term is nothing but an intellectual property right for which franchisee give them franchise fee and royalty.  The input invoices also support it.  In view of the above the Adjudicating Authority rejected the refund claim of the petitioner.

Being aggrieved against the order of Adjudicating Authority the petitioner filed an appeal before the Appellate Authority.  The Appellate Authority upheld the decision of Adjudicating Authority vide their order dated 14.02.2022.  The Appellate Authority held that the services rendered by the petitioner were intermediary services and the place of supply of was in India.  The Appellate Authority further held that the services included making periodic visits to existing and prospective suppliers on behalf of the holding company and in terms of Section 13(3)(b)  of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’ for short) , the supply of such services was located in India as it required the personal presence of the recipient of services or the person acting on behalf of its behalf.  Section 13(3)(b), 13(5) and 13(8) of the IGST Act covered the petitioner’s case and the place of supply of service was in the taxable territory of India and did not qualify as export of services under Section 2(6) of the IGST Act.

The writ petitioner filed the writ petition impugning the order of Appellate Authority.  The petitioner submitted the following before the High Court-

• The order passed by the Appellate Authority is beyond the scope of the show cause notice dated 14.08.2020.
• The order of Appellate Authority did not arise from the petitioner’s appeal against the order-in-original dated 31.08.2020 passed by the Adjudicating Authority.
• The Adjudicating Authority as well as Appellate Authority misconstrued the services rendered by the petitioner in terms of service agreement.
• There was a separate agreement between the petitioner and its holding company whereby the petitioner was granted non exclusive rights to certain intellectual property of McDonald’s USA including the rights to sub licence the same with the approval of McDonald’s USA.
• In terms of MLA the petitioner had entered into franchisee agreements with various parties. 
• The petitioner was duly discharging its liability to pay royalty to its holding company under the said agreement.
• The Authorities had confused the MLA with the services provided under the service agreement.
• The services rendered by the petitioner under the said agreement were independent services and did not involve any third party supplier. 

The principal question involved in the present case as to whether the petitioner is an intermediary within the meaning of section 2(13) of the IGST Act in respect of the services rendered under the service agreement.

The High Court observed that the petitioner had entered into two agreements with its holding company.  In terms of MLA, McDonalds’s USA had granted a non exclusive licence to the petitioner to adopt and use McDonald’s system in respect of certain intellectual property owned by it.  In terms of licence granted to the petitioner by McDonald’s USA the petitioner has entered into franchise agreements with various franchisees for operating McDonald’s USA Restaurants.  The petitioner also paid tax on the royalties received by the petitioner.  There is no controversy in the payments made by the petitioner to its holding company under MLA.

The High Court analyze article 2 of the Service agreement entered by the petitioner with its holding company.  On this the High Court observed that the scope of the services as mentioned in the service agreement, read in isolation, do not entail procurement or facilitating services from third party supplies.  The show cause notice dated 14.08.2020 did not specifically set out any reason in detail for denial of refund of input tax credit as claimed by the petitioner.  The show cause notice merely says that ‘place of provision appears to be in India. Input Tax Credit availed appears to be not admissible as per CGST Act.

The Adjudicating Authority had considered the Service Agreement and highlighted the Recitals in the said agreement, for the purposes of concluding that the services rendered by the petitioner were in the nature of intermediary services. 

The High Court held that rendering of service on behalf of another person does not render the service provider an intermediary. 

The High Court further observed that the impugned order appears to be proceeded on a somewhat different basis. The Appellate Authority has held that the petitioner was acting as a mediator between prospective joint ventures and franchisees, where the main supplies were made by McDonald’s USA and the ancillary supplies were provided by the petitioner.  The High Court found no basis for the Appellate Authority to have concluded that the petitioner acts as a mediator between joint ventures/franchisees and McDonald’s USA. 

According to the Appellate Authority the place of services supplied by the petitioner is in India under Section 13(3)(b) and 13(5) of IGST Act.  The High Court observed that it is not the subject matter of the show cause notice and held that the Appellate Authority travelled beyond the scope of the show cause notice.

Next the High Court considered as to whether the provisions of Section 13(3)(b) and 13(5) of the IGST Act.  The High Court analyzed the said provisions.  Under the Service Agreement the service recipient is McDonald’s USA and the petitioner is the service provider.  The supply of services by the petitioner to McDonald’s USA does not require the physical presence of McDonald’s USA.  The High Court further questioned as to why the physical presence of service recipient, McDonald’s USA in India is necessary for receiving the services rendered by the petitioner or any third party supplier.  The High Court further held that conducting interviews, making reference checks or performing any screening services in connection with potential joint venture partners, franchisees or employees has no connection with the services as contemplated under Section 13(5) of the IGST Act.

The High Court, therefore, set aside the order passed by the passed by the Adjudicating Authority and Appellate Authority and remanded the matter the to the Adjudicating Authority to consider the petitioner’s case afresh in the light of the observations of the High Court in its order.