9911796707
TMI Blog2024 (9) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... ami HK under the Reward Agreement dated 31.03.2019 vide Annexure-C qualifies as 'export of service' under Section 2 (6) of the IGST Act, 2017; c) Hold that the Petitioner is not an 'intermediary' in terms of Section 2 (13) of the IGST Act, 2017; d) Order for sanction of refund of Rs. 106,17,11,427/- and Rs. 110,70,94,987/- being the accumulated input tax credit relating to the export of services to Xiaomi HK during the period October 2019 to December 2019 and January 2020 to June 2020 respectively with interest; e) Pass such further order(s) and other reliefs as the nature and circumstances of the case may require." In W.P.No.11311/2023, petitioner seeks for the following reliefs: "a) issue a writ in the nature of Certiorari or any other appropriate writ or order or direction under Article 226 of the Constitution quashing the impugned Order GST. AP. No. 388/2021-22 dated 20.12.2022 passed by Respondent No. 2 at Annexure-A, rejecting refund of Rs. 145,09,13,633/- for the period June 2019 to September 2019; b) Hold that the services provided by the Petitioner to Xioami HK under the Reward Agreement dated 31.03.2019 qualifies as 'export of service' under Section 2 (6) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntions urged in the petitions and referring to the material on record, learned Senior Counsel for the petitioner submits that both respondent No. 3 - Original Authority as well as respondent No. 2 - Appellate Authority have committed a grave and serious error of law and fact in rejecting the refund claims of the petitioner and not considered the various contentions urged by the petitioner before respondent Nos.3 and 2 respectively. It is submitted that both before respondent No. 3 as well as before respondent No. 2, the petitioner had urged several contentions and made various submissions, which have not been considered by the respective respondents. Learned counsel would elaborate his submissions and reiterate the written submissions / synopsis, which are extracted as hereunder: 1. The Petitioner is a private limited company engaged in the sale of Xiaomi branded products, including mobile phones, which are procured from third party contract manufacturers on payment of taxes. Such third-party manufacturers in turn procures the raw materials for manufacture of such Xiaomi branded products from Xiaomi HK Limited ('Xiaomi HK'). The Petitioner on procurement, sells these Xiaomi brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd conditional to achievement of sales target, cannot be considered as consideration for export of any service. 7. The details of the refund claims and impugned orders rejecting such refund claims are tabulated as below for ease of reference: Sl.No. Period Date of the refund claim Impugned Order Refund rejected (in Rs.) Writ Petition 1. June 2019 to September 2019 16.06.2021 Order dated 20.12.2022 145,09,13,633 WP No. 11311/2023 2. October 2019 to December 2019 06.11.2021 Order dated 29.05.2023 106,17,11,427 WP No. 15740/2023 3. January 2020 to June 2020 18.01.2022 110,70,94,987 Submissions A. The Petitioner has supplied services to Xiaomi HK under the Reward Agreement 8. The Petitioner submits that in accordance with Section 7 (1A) read with Entry 5 (e) of Schedule II of the CGST Act, 2017, the activity of 'agreeing to the obligation to inter alia do an act for a consideration' is in the nature of supply of service under the CGST Act, 2017. From a plain reading of the provision, it follows that a mere existence of an obligation to do an act for consideration is enough to cover a transaction within the ambit of the said entry. If an assessee receives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Clause 9.1 of the Reward Agreement, which states that the said agreement shall continue to be in force until terminated by either of the parties. Since the said Reward Agreement has not been terminated by either the Petitioner or Xiaomi HK, the same shall continue to operate, during the disputed period. 14. Therefore, the existence of the above Reward Agreements make it amply clear that the Petitioner has agreed to undertake activities to ensure market penetration of Xiaomi branded products in India for the indicated rewards. Thus, it is submitted that the obligation to do an act expressly captured by way of the Reward Agreements undisputedly exists herein. 15. The said Circular has further stated that a payment which is merely an event in the course of performance of the agreement, and does not represent the 'object' of the contract cannot be considered as consideration. The Petitioner submits that in the present case, the reward or incentive is payable to the Petitioner in the event that the conditions laid down under Para 2.3 of the Agreement are met by the Petitioner by performance of their actions. 16. Therefore, it is submitted that the present transaction, being the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of the Written Submissions dated 22.06.2024 submitted by the Respondents and is hereby filing their brief submissions rebutting the allegations raised therein. The submissions herein may be read as part and parcel of the Writ Petition, along with its annexures and the brief synopsis dated 25.04.2024 filed before this Court. 2. The Respondents vide the Written Submissions has made the following submissions: (a) That the transaction in question appears to be a subterfuge, designed to claim input tax credit basis the following grounds: (Para 4) * That the Agreement for the plan period 2018 to 2019 was entered into on the very last day of the plan period, i.e. 31.03.2019; that the Agreement has been entered into as an afterthought and the target was already achieved before it was set; * That the targets have been altered for each plan period revealing the self-serving nature of the Agreement; * That Agreement for the plan period 2019-2020 was undated and has been inferred to be entered into at the end of the plan period as well. (b) That in any case, the transaction is not a supply in terms of Section 7 of the CGST Act, 2017: (Para 5) * That an agreement to receive con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the third-party manufacturers would also increase to cater to the demand. The said manufacturers in-turn would procure more raw materials from Xiaomi HK, leading to an increase in their revenue as well. It therefore, made more business sense for the Petitioner to ensure that there is continuous growth in the sales of the phones and to undertake concerted efforts to achieve that. 4.3. In the said background, it is submitted that the Petitioner was undertaking promotional activities which positively benefitted all the parties in the process. The increased procurement of mobile phones from the contract manufacturers and subsequent supply by the Petitioner to the customers also resulted in increased revenue for the exchequer by way of payment of GST on such supplies. 4.4. From the above, it is evident that the Petitioner shared an understanding with Xiaomi HK and was under an obligation, since the inception of the plan period 2018 to 2019, to increase the sales of mobile phones in the Indian market in exchange for certain rewards. For meeting such obligations, the Petitioner took various steps and promotional activities in India. This understanding or arrangement was merely cry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cannot be supplemented by fresh reasons and grounds which are not arising out of such order. In this background, it is submitted that the Department's attempt to supplement their case with fresh reasons at this juncture deserves to be rejected. 5. As regards the allegations at Para 5 of the Written Submissions, it is submitted as under: 5.1 The Ld. AGA has advanced a contention that the agreement to receive consideration on happening of an uncertain and contingent event cannot be termed as an 'obligation' more so when the event is primarily dependent on market forces. 5.2 It is submitted that the present case is not a transaction where the Petitioner has no role to play and has simply agreed to receive money from Xiaomi HK on the happening of a contingent event. As is evident from the Agreement, the Petitioner has to undertake and has indeed undertaken extensive marketing activities to ensure that the obligation to reach the targets specified in the Agreement are duly met by the Petitioner. As-such the obligation in the Agreement is to undertake activities that enable the Petitioner to reach the specified targets, the fulfillment of which entitles the Petitioner to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties can always fashion a contract in such a manner that the consideration is paid only upon fulfillment of certain targets and not on mere performance, as is the case in the present fact seven though the taxable event has occurred once there is an agreement with an obligation to do an activity. 5.7 In terms of Circular No. 178/10/2022-GST dated 03.08.2022 issued to clarify the scope of Entry 5(e) of Schedule II of the CGST Act, 2017, the promise to do an act may be express or implied. Thus, as long as there exists an implied promise by the recipient of money to agree to do something in return for the money paid to him, the transaction shall be a valid supply, irrespective of the presence of the Agreement or not. Since the Petitioner has agreed to the obligation of increasing Xiaomi HK's growth in the Indian market in exchange of the rewards, the said pre-condition is met and thus, the transaction amounts to a supply of service and the amount paid has a nexus with the 'supply' so as to represent consideration for the said supply. In fact this clarifies that the agreement can be on a standalone basis or form part of another contract and such a contract can be implied or expressed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SRA, if the Petitioner achieved certain sales targets, Xiaomi Hong Kong was required to make payment of monetary rewards. Relevant clauses of the Distributorship Agreement and SRA Distributorship Agreement "1. Definitions and Interpretations "Good Industry Practices" means that the obligations under this Agreement will be performed with the standard of skill, care, knowledge, reliability, professionalism and foresight which would reasonably be expected from a Person to achieve the transactions as envisaged under this Agreement." "8. RIGHTS AND OBLIGATIONS 8.4 The Purchaser shall at all times perform its obligations under this Agreement, including in relation to the import, storage, distribution and sale of the Products, honestly and diligently, in compliance with Applicable Laws and Good Industry Practice." Brand License Agreement THIS BRAND LICENSE AGREEMENT (Agreement) is made on 18 May 2016 (Execution Date). BETWEEN: Xiaomi Technology Company Limited (erstwhile known as Beijing Xiaomi Technology Co Ltd and the curTent official corporate name being Xiaomi Inc). a company incorporated under the laws of China whose principal office is at Floor g, Rainbow City Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agreement) of the Brand within the Territory for the purpose of the Business Use is deemed to be a sufficient consideration for the purpose of this Agreement and therefore the License shall be on a royalty-free basis 9. Indemnity Each party agrees to indemnify, defend and hold harmless the other Party and its Affiliates and their respective officers, directors, employees, agents, representatives, successors, and assigns from all claims, demands, suits, proceedings, damages, costs, expenses, liabilities (including, without limitation, reasonable legal fees) or causes of action (collectively, Losses) brought against or incurred by such other Party as a result of the breach by the indemnifying Party of any of the (i) obligations, representations, warranties or covenants under this Agreement; (i) infringement of third party intellectual property rights by the indemnifying Party; (ii) wilful or negligent acts of the indemnifying Party; and (iv) any damages for bodily injury (and death) and damage to property caused by the indemnifying Party. 11. Consequences Of Termination On expiry or termination of this Agreement for any reason, all rights, obligations and licenses of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain Xiaomi India from committing any violation or enforce the performance of the covenants, representations, and obligations contained in this Agreement. 'Obligation' as an implied term 6. It is submitted that a close perusal of these contractual terms reveals that not only was Xiaomi Hong Kong under an obligation to make payment of monetary rewards to the Petitioner if the sales targets were met, but the Petitioner was also under a corresponding obligation to increase its market share in India by increasing penetration of Xiaomi products. The latter is forthcoming from clause 2.1. 7. While it is true that the SRA does not stipulate an express obligation on the Petitioner to increase its market share or increase penetration of Xiaomi products, it is submitted that the same is nothing but an implied term of the agreement between the parties. The question of when an implied term or condition can be read into an agreement has been considered by the Supreme Court in Nabha Power Limited v. Punjab State Power Corporation, (2018) 11 SCC 508. 8. In Nabha Power, supra the Supreme Court he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et. This included engaging in marketing activities, expanding market reach, and increasing sales, all of which were essential services rendered to Xiaomi Hong Kong. Such an obligation on the part of the Petitioner was not dependent on achieving the target but was a continuous duty to promote and sell Xiaomi Hong Kong's products. 14. In contract law, the obligation to use "best efforts" is a well-recognized concept. Even if the SRA did not guarantee a particular outcome in terms of sales targets or market share, there was an underlying expectation that translated into an obligation for the Petitioner to do everything reasonably possible to achieve the desired result. 15. Further, besides the Distributorship agreement between the Petitioner and Xiaomi Hong Kong, the Brand Licensing agreement also has a bearing on the construction of the SRA. The shareholding of Xiaomi Hong Kong in the Petitioner itself reflects that the financial interests of Xiaomi Hong Kong are aligned with the success of the Petitioner. This necessarily meant that any increase in the Petitioner's market share or product sales could only be to Xiaomi Hong Kong's benefit. Therefore, it is submitted that the prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother decision of the English Court of Appeal in IBM United Kingdome Limited v. Roackware Glass Limited, 1980 FSR 335, one of the parties was required to use best endeavours to obtain a planning permission. Once the application was rejected, the party failed to appeal the decision. The court held that such failure to appeal the decision constituted a failure to use best endeavours which gave rise to a claim for damages for enforcing such obligation. 20. In light of the above, it is clear that best effort obligations are contractually enforceable before a court of law. At this stage, it is pertinent to note that the fact that the Petitioner and Xiaomi Hong Kong are related parties and that either party may not enforce any claim against the other matters little. That may be a practical result due to the close relationship between the parties to the agreement. However, the non-enforcement of claims as a matter of expediency between two parties does not change the nature of the obligation or make the corresponding right any the less enforceable. 21. The fact that both the parties have a right to enforce their respective rights (the Petitioner's right to receive payments on achievi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: RELEVANT PROVISIONS 1. Section 2 (5) of the CGST Act, 2017 2. Section 7 of the CGST Act, 2017 3. Schedule II of the CGST Act, 2017 4. Section 2 (6) of the IGST Act, 2017 5. Section 2 (13) of the IGST Act, 2017 6. Section 8 of the IGST Act, 2017 7. Section 13 of the IGST Act, 2017 8. Rule 4 of the Place of Provisions of Service Rule, 2012 CIRCULARS AND EDUCATION GUIDE 1. Circular No.178/10/2022-GST dated 03.08.2022 2. Circular No.161/17/2021-GST dated 20.09.2021 3. Circular No.159/15/2021-GST dated 20.09.2021 4. Relevant portion of the Taxation of Services : An Education Guide 6. Per contra, learned AGA would reiterate the various contentions urged in the statement of objections and submits that there is no merit in the petitions and that the same are liable to be dismissed. In support thereof, learned AGA would elaborate his submissions and reiterate the written submissions which are extracted as hereunder: 1. Writ Petition No. 15740 of 2023 has been filed by the Petitioner, assailing the Order-in-Appeal dated 29.05.2023, issued in Form GST APL-04, passed in GST Appeal Nos. 102 & 116/22-23, by the Joint Commissioner of Commercial Taxes (Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of smart phones by Xiaomi India is atleast1.5 times the total volume sold in the previous financial year." 2. Date not indicated 01.04.2019-31.03.2020 As per Clause 2.2. of the Reward Agreement, monetary reward would be payable if: "a. Xiaomi India continues to hold/retains the position of market leader in smart phones and other mutually agreed products b. The volumes of smart phones and other mutually agreed products sold by Xiaomi India is atleast equal to or more than the total volume sold in the previous financial year; and c. The revenue from sale of smart phones and other mutually agreed products sold by Xiaomi India is atleast equal to or more than the total volume sold in the previous financial year." 2.3. In order to avail the monetary incentive, the Petitioner was required to provide a report to Xiaomi HK indicating the five highest selling smart phones which have enabled Xiaomi to capture the market share in India. Upon submission of such report, Xiaomi HK, would, at its discretion, give a monetary reward at a certain USD rate per device, for the devices sold in India during the relevant plan period. [Clause 2.3 of the Reward Agreement] The amounts so r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the sole object of availing refund of unutilized ITC. There arises no question of Xiaomi HK offering an 'inducement' to the Petitioner herein, as consideration for the Petitioner's endeavors to enhance Xiaomi's market share in India, given that the agreement was entered into at the end of the plan period, when the 'targets' stipulated therein had already been achieved; In other words, the 'target' had already been achieved, before it was set. 4.2. It also deserves to be noticed that the 'targets' are altered for each plan period, as highlighted in the tabulated statement presented hereinabove. Such a design would also reveal the self-serving nature of the agreement. 4.3. It is further pertinently highlighted that the Reward Agreement in respect of the plan period between 01.04.2019 and 31.03.2020, is an undated agreement, perhaps, also entered into at the end of the plan period, or at any subsequent time, having already met the 'target' stipulated therein. 5. Without prejudice to the aforesaid and in any event, it is submitted on the merits of the matter that the transaction in question would not qualify as a "supply" as defined under Section 7 of the CGST Act. The Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reasons stated hereinabove, the claim of the Petitioner for refund under Section 54 of the CGST Act r/w Rule 89 (4) of the CGST Rules, is unsustainable in law. 7. So also, learned Senior Counsel - Sri. Vikram Huilgol, who was appointed as amicus curiae would fairly submit that various contentions and submissions made on behalf of the petitioner as well as the respondents - State have not been considered by respondent No. 2 - Appellate Authority and since the same require to be addressed in detail, the matters have to be remitted back to the Appellate Authority for reconsideration afresh in accordance with law. 8. A perusal of the material on record including the various contentions and written submissions of both sides are sufficient to come to the conclusion that the various factual and legal contentions and submissions made by both sides have not been addressed correctly or properly by respondent No. 2 - Appellate Authority while passing the impugned orders at Annexure-A dated 29.05.2023 and 20.12.2022. 9. Under these circumstances, in order to provide one more opportunity to both sides to put-forth their respective claims and contentions before respondent No. 2 - App ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
