Software export refund claim allowed after satisfying Section 2(6) IGST Act requirements despite subsidiary relationship

The Madras HC allowed a writ petition challenging rejection of refund claim for export of software development services. The court held that petitioner satisfied requirements under Section 2(6)(i) to (iv) of IGST Act, 2017, and since petitioner and its subsidiary are distinct entities, Section 2(6)(v) requirements were also met. The court distinguished the Segoma Imaging Technologies ruling and found petitioner and subsidiary constitute distinct establishments under Section 8 explanation 1 of IGST Act, 2017. The second respondent was directed to process the refund claim with interest within 12 weeks.

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ISSUES PRESENTED AND CONSIDERED

1. Whether supply of services by an Indian-incorporated company to its related foreign establishment (a subsidiary incorporated outside India) qualifies as "export of services" under Section 2(6) of the IGST Act, 2017, specifically with reference to condition (v) that "the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8."

2. Whether the circular issued by the Central Board of Indirect Taxes and Customs (Circular No.161/17/2021-GST dated 20.09.2021) clarifies that an Indian company and a foreign-incorporated related entity are separate persons for GST purposes and thus are not "merely establishments of a distinct person" under Explanation 1 of Section 8, and if such circular can be relied upon to determine eligibility for refund of tax paid on export of services.

3. Whether the decision of an Authority for Advance Ruling (AAR) in Segoma (AAR-GST) - treating certain intra-group Indian entity as a representational office/establishment of a foreign parent and denying export treatment - is applicable or binding on the question in issue.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Whether supply from an Indian-incorporated group company to its foreign subsidiary qualifies as "export of services" under Section 2(6)(v) IGST Act, 2017

Legal framework: Section 2(6) IGST Act defines "export of services" and requires satisfaction of several conditions, including (v) that "the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8." Explanation 1 to Section 8 treats an "establishment" as, inter alia, a branch, office or representational presence of a distinct person.

Precedent treatment: The AAR in Segoma treated facts as constituting a representational/establishment relationship, concluding the Indian entity was merely an establishment of a foreign distinct person and thus could not claim export status. The High Court of Delhi in Xilinx considered the CBIC circular and took a contrary view supporting export treatment where the entities are separately incorporated.

Interpretation and reasoning: The Court found that where the supplier and recipient are separately incorporated legal entities (Indian company and foreign company incorporated under foreign law), they are distinct persons and not merely establishments of a distinct person under Explanation 1, unless facts demonstrate an agency/branch/representational relationship. The impugned order erred in treating corporate relationship and common business interest alone as sufficient to render the entities "merely establishments" of a distinct person. The Court accepted that the petitioner satisfied conditions (i)-(iv) of Section 2(6) and held that mere subsidiary/related-party status, without factual matrix showing a representational office/branch/agency relationship, does not negate export status under clause (v).

Ratio vs. Obiter: Ratio - where supplier and recipient are separately incorporated companies (one in India, another abroad), they are not "merely establishments of a distinct person" under Explanation 1 and therefore clause (v) does not bar export classification; factual determination is required to establish an establishment/representational relationship. Obiter - references to arm's length bargaining power and independence as descriptive indicators were explanatory but ancillary to the statutory construction.

Conclusions: The Court concluded the services supplied by the Indian company to its foreign subsidiary qualified as "export of services" under Section 2(6) IGST Act, 2017, subject to satisfaction of other statutory conditions, because the entities were distinct legal persons and not mere establishments of a distinct person under Explanation 1.

Issue 2 - Validity, effect and applicability of CBIC Circular No.161/17/2021-GST (20.09.2021) in construing clause (v) of Section 2(6) IGST Act

Legal framework: Administrative circulars of CBIC are instruments of executive clarification on tax law interpretation. They do not override statutory text but assist in understanding statutory provisions and are relevant when construing terms like "merely establishments" and "distinct person."

Precedent treatment: The Delhi High Court has applied the circular in favour of taxpayers in similar fact-situations; administrative pronouncements have been treated as persuasive guidance though not strictly binding on courts.

Interpretation and reasoning: The Court found the circular to be a correct exposition of the legal position that a company incorporated in India and a body corporate incorporated outside India are separate persons and therefore not to be treated as "merely establishments of a distinct person" under Explanation 1. Although the circular post-dated the respondent's order, the Court held that the Revenue cannot contend against its own circular and that the circular correctly clarifies the statutory position. The Court observed that the impugned orders failed to apply this view and thus were erroneous.

Ratio vs. Obiter: Ratio - the circular correctly clarifies that supplies by an Indian-incorporated company to its related entities incorporated outside India are not barred by clause (v) and may qualify as export of services, subject to other conditions. Obiter - remarks regarding the non-binding nature of circulars on courts were noted but did not prevent the Court from adopting the circular's view as persuasive and correct.

Conclusions: The Court accepted the circular's clarification and applied it to hold that the petitioner's supplies to its foreign subsidiary qualify as exports for refund purposes. The Court directed processing of the refund with interest.

Issue 3 - Applicability and weight of the Segoma AAR decision to the facts

Legal framework: AAR decisions are authoritative vis-à-vis the applicant but are not binding precedent for other fact situations; they are persuasive depending on similarity of facts and legal reasoning.

Precedent treatment: The AAR in Segoma relied on factual indicia (operational control, representational role, system restrictions) to treat the Indian entity as a mere establishment of the foreign parent. The Court distinguished Segoma on its facts.

Interpretation and reasoning: The Court held Segoma inapplicable because the factual basis in Segoma demonstrated a representational/establishment relationship (e.g., functional dependence, operational control) that is absent on the present record. The Court emphasized the necessity of fact-based inquiry rather than a blanket application of Segoma to all subsidiary-to-parent transactions.

Ratio vs. Obiter: Ratio - Segoma is distinguishable on facts and cannot be applied where the entities are separately incorporated without indicia of an establishment/representational role. Obiter - observations in Segoma regarding statutory compliance not altering relationship were noted but not adopted as dispositive for the present case.

Conclusions: The Court declined to apply Segoma to deny export treatment; instead it required factual demonstration of establishment/representational relationship to negate export classification.

Remedial Direction (incidental to conclusions)

Because the Court accepted that clause (v) does not preclude export treatment for the petitioner and that the petitioner satisfied other statutory conditions, it set aside the impugned denial and directed the revenue authority to process the refund claim with interest within a specified reasonable time frame.

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