2025 (6) TMI 1065 - HC - GST

Refund claim - no invoice raised in respect of services rendered by foreign affiliate to a domestic related entity - applicability of Circular No. 210/4/2024-GST issued by the Central Board of Indirect Taxes and Customs (CBIC) which treats the value of such services as nil when no invoice is raised - HELD THAT - This petition has been filed by the Petitioner seeking refund of the sum of Rs. 8, 99, 61, 147/- in terms of the order in Thales India Private Limited v. Additional Commissioner of CGST Audit-II Delhi Anr. 2025 (2) TMI 245 - DELHI HIGH COURT - As can be seen from the above decision the Coordinate Bench has followed the earlier judgment in Metal One Corporation Pvt. Ltd. v. Union of India 2024 (10) TMI 1534 - DELHI HIGH COURT which dealt with an identical controversy and had quashed the Show Cause Notice therein dated 31st May 2024. Today learned Counsel appearing for the Department submits that there is no challenge to the order dated 07th January 2025 - In view thereof let the refund of the Petitioner be processed and be credited within two months. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the value of services rendered by a foreign affiliate to a domestic related entity, in the absence of any invoice being raised, should be deemed as 'nil' for the purposes of valuation under the Central Goods and Services Tax (CGST) Rules, specifically Rule 28.

- Whether the Circular No. 210/4/2024-GST issued by the Central Board of Indirect Taxes and Customs (CBIC), which treats the value of such services as 'nil' when no invoice is raised, is binding and applicable in the present case.

- Whether the petitioner is entitled to refund of the amount paid under reverse charge mechanism on services rendered by the foreign affiliate, given the above valuation principles.

- Whether the departmental authorities can refuse to comply with the judicial pronouncements, particularly the judgments in the present case and the precedent Metal One Corporation Pvt. Ltd. case, on the valuation of such services.

- The nature of the employer-employee relationship in the context of seconded employees and its impact on the classification of services and tax liability under the CGST Act and IGST Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Valuation of services rendered by foreign affiliate in absence of invoice

The legal framework governing this issue is Rule 28 of the CGST Rules, 2017, which regulates the value of supply of goods or services between related persons or distinct persons. Rule 28 prescribes that the value shall be the open market value or, if not available, the value of supply of like kind and quality, or failing that, the value determined by application of Rule 30 or 31. The second proviso to Rule 28 states that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value.

The Court extensively referred to the judgment in Metal One Corporation Pvt. Ltd., which dealt with an identical controversy. That judgment recognized that where no invoice is raised by the domestic entity for services rendered by its foreign affiliate, the value of such services is deemed to be 'nil' under the CBIC Circular No. 210/4/2024-GST, specifically paragraph 3.7. The Circular clarifies that in such cases, the 'nil' value is to be treated as the market value for the purposes of the second proviso to Rule 28.

The Court acknowledged that while the Circular's correctness or consistency with statutory provisions could be contentious, it is binding on the respondents and unchallenged in the present proceedings. The Court emphasized that it is not obliged to question the CBIC's wisdom or tenability of the Circular in this context.

Applying the law to facts, it was undisputed that no invoices were raised by the petitioner in respect of services provided by the foreign affiliate. Consequently, the value of such services must be treated as 'nil', resulting in no taxable value or tax liability under the Act. This led to the conclusion that the Show Cause Notices (SCNs) and subsequent proceedings were rendered futile and impractical.

The Court also dealt with competing arguments regarding the possibility of parties manipulating invoice generation to avoid tax liability but held that such policy considerations do not affect the binding nature of the Circular on the authorities.

Issue 2: Entitlement to refund of tax paid under reverse charge mechanism

The petitioner sought refund of Rs. 8,99,61,147/- paid as tax on services rendered by the foreign affiliate under the reverse charge mechanism. The refund claim was rejected by the Assistant Commissioner on the ground that the Department did not accept the Metal One Corporation judgment and contended that the overseas group entity was the actual employer of seconded employees, thereby establishing a supply of services liable to tax.

The Court observed with concern that the Department was refusing to follow the binding judicial decision and holding up the refund despite no challenge or stay against the judgments. The Court noted that the petitioner was entitled to relief identical to that granted in Metal One Corporation, which had quashed similar SCNs and held no tax liability arose where no invoice was raised.

In light of the binding precedent and absence of any challenge to the relevant judgments, the Court directed the refund to be processed and credited within two months, emphasizing that the Department cannot disregard judicial pronouncements.

Issue 3: Employer-employee relationship and classification of seconded employees' services

The Assistant Commissioner's order noted that the overseas group entity is the effective employer of the seconded employees, and no real employer-employee relationship exists between the petitioner and the seconded employees. This was used to argue that the services fall under the definition of supply under Section 7 of the CGST Act and import of service under Section 5(3) of the IGST Act.

The Court, however, did not delve deeply into this issue in the present order, as it was confined to the valuation and refund aspects related to seconded employees. The Court clarified that all other issues raised in the impugned SCNs, including those concerning employer-employee relationships and other tax implications, remain open for adjudication by the respondents and that the order does not express any opinion on those matters.

3. SIGNIFICANT HOLDINGS

"In circumstances where no invoice is raised in respect of services rendered by its foreign affiliate, the value of such services will be 'deemed' to have been declared as 'nil' and it is this 'nil' value which shall be treated as the market value of the services in question, in terms of the second Proviso to Rule 28 of the CGST Rules."

"While the correctness of the position as advocated in terms of that Circular and whether it would be consistent with the statutory provisions or may be viewed as being contentious or contrary to the intent of the Second Proviso to Rule 28 itself, we are today constrained to proceed further on the basis thereof... it is not for this Court to be boggled by or question the wisdom of the CBIC as the Circular in any case binds the respondents."

"In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as 'Nil'. This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created."

"It is concerning to note that the Department is refusing to follow the decision of this Court... Even if the Department wishes to challenge the judgment... so long as there is no challenge and no stay, the refund could not have been held up."

Core principles established include the binding nature of CBIC Circulars on valuation under CGST Rules, the treatment of non-invoiced services by foreign affiliates as having 'nil' value for tax purposes, and the obligation of departmental authorities to comply with binding judicial decisions absent any challenge or stay.

The final determination was that the petitioner was entitled to refund of the tax paid under reverse charge mechanism on services rendered by the foreign affiliate, as no taxable value arises in the absence of invoice generation, in accordance with the CBIC Circular and judicial precedents. The impugned order rejecting the refund was quashed, and the refund was directed to be processed expeditiously. Other issues in the SCNs remain open for adjudication.