2025 (6) TMI 1259 - HC - GST

Rejection of refund of unutilized Input Tax Credit (ITC) relating to zero rated supplies (Exports) of goods and services - rejection of refund on the ground that the recipients of the services located outside India are carrying on business through the agency in India i.e. the Petitioner and hence the Petitioner qualifies as mere establishment of distinct person - HELD THAT - The Petitioner does not carry on business of supply of goods or services or both on behalf of another (foreign recipient). The Petitioner provides design and engineering services to its customers on principal-to-principal basis by employing its own manpower and other resources. There is absolutely no control by the foreign recipient on the Petitioner which is contemplated in the agreement. Also the clause for inspection of books of account is to facilitate the verification of the actual costs charged by the Petitioner for services rendered by them and to determine that such costs are true and fair. Such a clause is very common where consideration is costs plus a reasonable mark up. In India most of the overseas entities have established their back office to supply services and consideration is paid on costs plus reasonable mark up. Such a clause does not necessarily make the Indian entity (incorporated under Indian Laws) as the agent of their counterpart located outside India. To qualify as an agent under Section 2 (5) of the CGST/MGST Act the person has to act on behalf of or representing the other. In such case there would be an involvement of a 3rd party viz. on whose behalf supply is made. However in the present case there are only 2 parties viz. the Petitioner and the recipients and hence there is no agency relationship between the Petitioner and its recipient of services - It is well settled that the agreement has to be read as whole and the intention of parties to agreement is of paramount importance. In absence of a specific agreement/ arrangement that one person is an agent of another acting as a principal agency cannot be created. On the contrary the agreement categorically states that the Petitioner shall not be an agent of the foreign recipient. In the present case the Petitioner is not a mere establishment of the recipient of services located outside India by reason of supplies being made to sister/ group companies or holding/subsidiary companies. The purported findings that Petitioner and foreign recipient are related persons in terms of Section 15 and the requirement of a third party in the transaction to qualify as an agent is irrelevant is clearly unsustainable in view of the above circular which clearly clarified that supply to a related party will also qualify as export of services. The said finding is otherwise absurd and perverse since the primary requirement to satisfy the definition of an agent is that the agent supplies goods or services or both on behalf another person viz. third party to the transaction. Undisputedly in the present case there are only two parties viz. the Petitioner and its foreign recipient and thus the Petitioner by no stretch of the imagination can qualify as an agent - it is beyond doubt that the Petitioner is not an agency of the foreign recipient and both are independent and distinct persons. Thus condition (v) of Section 2 (6) is fully satisfied in the present case. Having satisfied all the conditions of Section 2 (6) of the IGST Act the services supplied by the Petitioner qualifiy as export and thereby zero rated supplies. Conclusion - The Petitioner is eligible for refund of unutilized ITC on account of zero rated supplies in terms of Section 54 of the CGST Act and the same shall be granted to them along with statutory interest under Section 56 of the CGST Act. Petition allowed.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the Petitioner's supplies to foreign recipients qualify as "export of goods" or "export of services" under the IGST Act, specifically satisfying all conditions under Section 2(5) and Section 2(6) of the IGST Act, including condition (v) of Section 2(6) which requires that the supplier and recipient are not merely establishments of a distinct person.

2. Whether the Petitioner acts as an "agent" of the foreign recipient, thereby making the foreign recipient carry on business in India through the Petitioner's agency, which would disqualify the supplies from being zero-rated exports under Section 54(3) of the CGST/MGST Acts.

3. The interpretation and applicability of Section 8 and its explanations under the IGST Act, particularly the concept of "establishment of distinct person" and the treatment of branches, agencies, or representational offices as establishments of the same person.

4. The relevance and binding nature of the Circular No. 161/2017/2021 dated 20.09.2021 issued by the Central Board of Indirect Taxes and Customs (CBIC) clarifying the interpretation of condition (v) of Section 2(6) of the IGST Act.

5. The legal effect of the Petitioner's contractual agreements with foreign recipients, specifically whether the Petitioner is an independent contractor or an agent for the foreign recipients.

6. Whether the Petitioner is entitled to refund of unutilized Input Tax Credit (ITC) under Section 54(3) of the CGST/MGST Acts on account of zero-rated supplies.

Issue-wise Detailed Analysis:

Issue 1: Qualification of Supplies as Export of Services under Section 2(6) of the IGST Act

The relevant legal framework includes Section 2(6) of the IGST Act, which defines "export of services" by enumerating five conditions: (i) supplier located in India, (ii) recipient located outside India, (iii) place of supply outside India, (iv) payment received in convertible foreign exchange, and (v) supplier and recipient are not merely establishments of a distinct person as per Explanation 1 to Section 8.

The Court noted that the Petitioner undisputedly satisfied all conditions except condition (v). The crux was whether the Petitioner and foreign recipients were "merely establishments of a distinct person." The Court examined Section 8 and its explanations, which clarify that establishments of the same person in different territories are considered establishments of distinct persons, but if business is carried on through an agency or branch, that agency or branch is treated as an establishment of the same person.

The Court's interpretation focused on whether the Petitioner was an independent entity or an agency of the foreign recipient. The Court found that the Petitioner was a separate legal entity incorporated in India, distinct from the foreign recipients, which were foreign companies incorporated outside India. The Court relied on the principle that companies incorporated under Indian law and foreign companies are separate "persons" under the CGST Act.

Key evidence included the contractual agreements between the Petitioner and foreign recipients, which expressly stated that the Petitioner was an independent contractor and not an agent, servant, or employee of the foreign recipients. The agreements detailed that the Petitioner bore its own manpower and resources, invoiced the foreign recipients on a cost-plus markup basis, and allowed audits of costs to ensure transparency.

The Court applied the law to these facts, concluding that the Petitioner did not act on behalf of the foreign recipients but supplied services on a principal-to-principal basis. The Court rejected the department's contention that the Petitioner was an agent, emphasizing that the definition of "agent" under Section 2(5) of the CGST/MGST Act requires carrying on business on behalf of another, which was not the case here.

The Court treated competing arguments by the department, which relied on control and reimbursement clauses, as insufficient to establish agency. The department's reliance on related party status and transfer pricing arrangements was held irrelevant since the Petitioner and foreign recipients were separate legal entities and the agency relationship was not contractually or factually established.

Conclusion: The Petitioner satisfied condition (v) of Section 2(6) of the IGST Act, and the supplies qualified as export of services.

Issue 2: Whether the Petitioner is an Agent of the Foreign Recipient

The legal framework is Section 2(5) of the CGST/MGST Act, defining "agent" as a person who carries on the business of supply or receipt of goods or services on behalf of another. The Court emphasized that agency requires acting on behalf of a third party.

The department argued that the Petitioner was an agent based on control by the foreign recipient, reimbursement of expenses plus fixed markup, availability of books for inspection, and group company relationships. The department also invoked Explanation 2 to Section 8 of the IGST Act, which treats a person carrying on business through an agency as an establishment of the principal.

The Court analyzed the contractual terms, which explicitly negated any agency relationship. The Petitioner was an independent contractor, providing services on its own account, employing its own personnel, and invoicing the foreign recipients with a fixed markup. The Court noted that reimbursement plus markup does not equate to commission or agency remuneration.

The Court found no evidence of the Petitioner acting on behalf of a third party; only two parties were involved-the Petitioner and the foreign recipients. The Court rejected the department's reliance on control and group company relationships as insufficient to establish agency.

Conclusion: The Petitioner is not an agent of the foreign recipients and does not carry on business on their behalf.

Issue 3: Interpretation of Section 8 of the IGST Act and Establishments of Distinct Persons

Section 8 deals with intra-state supplies and defines establishments of distinct persons. Explanation 1 states that establishments in India and outside India of the same person are treated as establishments of distinct persons. Explanation 2 states that a person carrying on business through a branch or agency in any territory is treated as having an establishment in that territory.

The Court held that the Petitioner and foreign recipients are separate persons as they are incorporated under different laws. The Circular No. 161/2017/2021 by CBIC clarified that supplies between a company incorporated in India and its foreign related entities incorporated outside India are not covered by condition (v) of Section 2(6) of the IGST Act and qualify as exports.

The Court relied on this Circular, which is binding on the department, and held that the Petitioner is not a mere establishment of the foreign recipients by virtue of agency or branch, but a distinct legal person supplying services on principal-to-principal basis.

Conclusion: The Petitioner and foreign recipients are distinct persons, and supplies qualify as export of services under the IGST Act.

Issue 4: Binding Nature of Circular No. 161/2017/2021 and its Impact

The Court noted that the CBIC Circular clarified ambiguities regarding condition (v) of Section 2(6) of the IGST Act. It stated that supplies by subsidiaries, sister concerns, or group companies incorporated in India to foreign companies incorporated outside India are not barred from qualifying as exports under condition (v).

The Court emphasized that the Circular is binding on the department and adopted by the State tax authorities. The Circular directly contradicted the department's reasoning in rejecting the refund applications.

Conclusion: The Circular supports the Petitioner's case and mandates that the supplies qualify as exports.

Issue 5: Contractual Relationship and Intention of Parties

The Court underscored the importance of the parties' intention as expressed in the contracts. The agreements clearly stated the Petitioner was an independent contractor, not an agent. The Court held that absent a specific agreement creating agency, agency cannot be presumed.

The Court rejected the department's attempt to rely on external definitions of agency from legal dictionaries and foreign jurisprudence, holding that statutory definitions prevail.

Conclusion: The contracts establish the Petitioner's independent status, negating agency.

Issue 6: Entitlement to Refund of Unutilized ITC under Section 54(3) of the CGST/MGST Acts

Section 54(3) provides for refund of unutilized ITC in respect of zero-rated supplies. Since the Court held that the Petitioner's supplies qualify as zero-rated exports, the Petitioner is entitled to refund of unutilized ITC.

The Court also observed that the Petitioner had earlier been granted refunds for earlier periods on identical grounds, which were not challenged by the department, thus attaining finality. The department's rejection for subsequent periods on the same grounds was impermissible.

Conclusion: The Petitioner is entitled to refund of unutilized ITC along with statutory interest under Section 56 of the CGST Act.

Significant Holdings:

"The Petitioner is not an agency of the foreign recipient and both are independent and distinct persons. Thus, condition (v) of Section 2 (6) is fully satisfied in the present case."

"The services supplied by the Petitioner qualify as export and thereby zero rated supplies."

"The Circular No. 161/2017/2021 dated 20.09.2021 issued by the CBIC is binding on the department and clarifies that supply of services by a subsidiary or group company incorporated in India to foreign companies incorporated outside India would qualify as export of services and would not be barred by condition (v) of Section 2(6) of the IGST Act."

"The Petitioner is entitled to refund of unutilized Input Tax Credit on account of zero rated supplies in terms of Section 54 of the CGST Act and the same shall be granted along with statutory interest under Section 56 of the CGST Act."

"The definition of 'agent' under Section 2 (5) of the CGST/MGST Act is conclusive and cannot be supplemented by external definitions or judicial pronouncements."

"The contractual agreement clearly establishes the Petitioner as an independent contractor and not an agent of the foreign recipient."

"It is not open for the department to reject the refund claim on the ground that the services do not qualify as export of services when earlier identical claims were allowed and attained finality."