Indian Subsidiaries Gain Clarity On ITC Refunds With Gujarat HC Judgment

Introduction:

The case Infodesk India Pvt. Limited vs Union of India[1] concerns a petition filed by an Indian subsidiary of InfoDesk Inc., USA, challenging the rejection of its Input Tax Credit (ITC) refund application under the Central Goods and Services Tax (CGST) Act, 2017, and the Integrated Goods and Services Tax (IGST) Act, 2017. The petitioner, a wholly-owned subsidiary, provides services such as content integration, software development, editorial assistance, IT infrastructure management, and customer support exclusively to its parent company. These services are vital for the parent company’s technical and business operations.

Background of the Case:

The petitioner’s claim that the services provided to InfoDesk Inc. qualify as “export of services” under Section 2(6) of the IGST Act is grounded in the statutory criteria for export services. According to Section 2(6), for a service to qualify as an export, it must meet certain conditions, including the delivery of services outside India, the receipt of payment in convertible foreign exchange, the distinctness of the supplier and the recipient as separate legal entities, and the regular raising of tax invoices. The petitioner met all these criteria. The services were delivered outside India, directly benefiting InfoDesk Inc. in the United States. Payments were made in convertible foreign exchange, fulfilling a core requirement for exports. Additionally, the petitioner and InfoDesk Inc. are legally distinct entities, and the petitioner raised tax invoices for the services rendered, further supporting the export classification. These factors collectively align with the definition of “export of services,” entitling the petitioner to claim the benefits of zero-rated supply under Section 16 of the IGST Act, which exempts exported services from the levy of GST.

In contrast, the tax authorities contended that the petitioner acted as an “intermediary,” as defined under Section 2(13) of the IGST Act. According to this provision, an intermediary is a person who facilitates the supply of goods or services between two parties but does not supply goods or services on their own account. The authorities argued that the petitioner’s role was more about facilitating services for InfoDesk Inc. rather than directly providing them. Based on this reasoning, they rejected the petitioner’s refund application for Input Tax Credit (ITC), asserting that the services were not exports but intermediary services. Furthermore, the authorities contended that the refund application was filed beyond the prescribed time limit under Section 54(1) of the CGST Act, further complicating the petitioner’s claim. This dispute centers around whether the petitioner’s services truly constituted direct exports or intermediary services, impacting its entitlement to ITC refunds.

Key Legal Issue:

The central question before the Gujarat High Court was whether the services rendered by the petitioner to its parent company constituted “export of services” or “intermediary services” under the IGST Act. The resolution of this issue required a detailed examination of the service agreement between the petitioner and InfoDesk Inc., as well as the legal definitions provided under the Act.

Analysis:

Definition of Intermediary: Under Section 2(13) of the IGST Act, an intermediary is defined as a broker, agent, or person who arranges or facilitates the supply of goods or services between two or more parties. Crucially, this definition excludes persons who supply goods or services on their own account.

Definition of Export of Services: Section 2(6) of the IGST Act defines “export of services” as the supply of services where:

1. The supplier is located in India.
2. The recipient is located outside India.
3. The payment for the service is received in convertible foreign exchange.
4. The supplier and recipient are distinct persons.

The petitioner maintained that its services met these criteria, as they were provided independently, and payments were received in foreign currency.

The Gujarat High Court’s analysis of the petitioner’s operations and service agreement highlighted several critical factors to establish the nature of the services rendered and their classification under the IGST Act. First, the court emphasized the independent nature of the petitioner’s operations, noting that it employs its own staff, infrastructure, and resources to provide services directly to InfoDesk Inc. This independence was pivotal in distinguishing the petitioner’s role from that of an intermediary, as it does not merely facilitate interactions between its parent company and third parties but instead delivers substantive services on its own account.

Second, the petitioner’s status as a distinct legal entity was a key consideration. As a wholly owned subsidiary incorporated in India, the petitioner maintains separate financial accounts, operational autonomy, and charges its parent company a markup on costs. This profit-generation model further validated the petitioner’s independence and its role as a direct service provider rather than an agent or broker.

Third, the court closely examined the nature of the services rendered, including IT management, product development, editorial content creation, and customer support. These activities demonstrated that the petitioner actively engaged in delivering services, as opposed to simply arranging or facilitating them for its parent company. The court also recognized that payment terms were consistent with the requirements for export of services under the IGST Act. Payments received in convertible foreign exchange satisfied the statutory criteria, further reinforcing the classification of the services as exports.

Finally, the court referred to the precedent set in M/s Ernst & Young Limited vs. Additional Commissioner, CGST Appeals-II, Delhi, where similar professional services provided to entities outside India were deemed exports. This case strengthened the petitioner’s position, highlighting that independent services rendered to overseas recipients qualify as exports, thereby entitling the petitioner to input tax credit refunds.

Distinction Between Exporter and Intermediary: The court highlighted the critical distinction between an intermediary and an exporter. While an intermediary merely arranges or facilitates the supply of goods or services between two parties, an exporter provides goods or services directly to the recipient. The petitioner, in this case, was directly delivering services to its parent company and not acting as an intermediary between InfoDesk Inc. and its clients.

The court also addressed the issue of the refund application’s timeliness. It found that the application was filed within the prescribed two-year period. The tax authorities’ claim that the filing date should be interpreted differently was deemed incorrect.

Significance of the Decision:

The Gujarat High Court concluded that the petitioner’s services to its parent company qualified as “export of services” under Section 2(6) of the IGST Act. It emphasized that treating the petitioner as an intermediary would be inconsistent with the factual and legal framework of the case. The court directed the tax authorities to process the refund claims in accordance with the law and quashed the orders rejecting the refunds. The entire process was to be completed within twelve weeks.

The Gujarat High Court judgment provides critical guidance for subsidiaries of foreign companies in India, particularly concerning the classification of services under the GST regime. This ruling ensures fairness in determining eligibility for export-related benefits, distinguishing between intermediary services and direct export of services. A key takeaway is the emphasis on operational autonomy, with the court underlining that subsidiaries operating as distinct legal entities, maintaining separate accounts, employing their own resources, and charging a markup on costs are more likely to be recognized as exporters. This autonomy highlights their role as independent service providers rather than intermediaries, reducing the risk of misclassification.

Conclusion:

In conclusion, the Gujarat High Court’s judgment provides much-needed clarity and reinforces the principles of fairness and transparency in the implementation of GST laws. By distinguishing between intermediary services and export of services, the court has set a critical precedent that will guide future cases involving similar disputes.

[1] Special Civil Application (SCA) No. 25609 of 2022.

King Stubb & Kasiva,
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