2024 (10) TMI 1308 - HC - GST

IT service provider wins GST classification dispute, entitled to input tax credit refund

The Delhi HC allowed the petition challenging classification of services as intermediary services for GST purposes. The court held that petitioner ... Export of services - place of supply of services - intermediary services - Input Tax Credit refund - principal to principal supply - arm's length mark upExport of services - place of supply of services - intermediary services - principal to principal supply - Whether the services supplied by the petitioner qualified as export of services (and were therefore eligible for refund of unutilised ITC) or were intermediary services such that the place of supply rules would exclude them from export treatment - HELD THAT: - The court applied Section 13(2) of the IGST Act and the definition of 'export of services' in Section 2(6), holding that where the supplier is located in India and supplies services directly to a recipient located outside India the place of supply is governed by sub section (2) and is the location of the recipient. The sample agreement on record showed the petitioner furnished ITS on a principal to principal basis to the foreign holding company and did not merely 'arrange or facilitate' a main supply between other parties. The Board's Circular No.159/15/2021 GST was applied to explain that an intermediary requires a minimum of three parties and performs an ancillary role distinct from the main supply; subcontracting or provision of the main supply on principal to principal basis is not intermediary activity. The mere presence of a contractual provision for a mark up over costs, assessed at arm's length, did not convert the supplier into an intermediary. There was no material or finding of a tripartite arrangement or of the petitioner acting as a conduit; on the facts the petitioner supplied the service itself to a recipient outside India and thus met the conditions for export of services. Consequentially the impugned findings treating the petitioner as an intermediary were unsustainable and the entitlement to refund of unutilised ITC was established for the claimed periods. [Paras 13, 14, 15, 16, 17]The orders characterising the petitioner as an intermediary were quashed; the petitioner is entitled to the refunds of unutilised ITC claimed for the specified periods along with statutory interest.Final Conclusion: Writ petition allowed; the Orders in Original dated 19 December 2022 and 13 March 2023 and the Order in Appeal dated 22 June 2023 are quashed. The petitioner is entitled to the refunds claimed for June 2020 to September 2020 and October 2020 to December 2020 with statutory interest. Issues Involved:1. Classification of the petitioner as an 'intermediary' under the IGST Act.2. Entitlement to refund of unutilized Input Tax Credit (ITC).3. Applicability of Section 13 of the IGST Act to determine the place of supply.4. Interpretation of the service agreement between the petitioner and its holding company.5. Consideration of the mark-up in the service fee agreement.Detailed Analysis:1. Classification as an 'Intermediary':The core issue revolved around whether the petitioner should be classified as an 'intermediary' under the IGST Act. The respondents had rejected the petitioner's refund applications on the grounds that the petitioner acted as an intermediary between its holding company in Singapore and other parties. The court examined Section 2(13) of the IGST Act, which defines an intermediary as an entity that 'arranges or facilitates' the supply of goods or services between two or more persons. The court scrutinized the service agreement and found that the petitioner was directly providing services to its holding company and not facilitating services between multiple parties. The court referred to Circular No. 159/15/2021-GST, which clarified that an intermediary must involve at least three parties, with the intermediary acting as a conduit. The court concluded that the petitioner did not meet the criteria of an intermediary, as there was no tripartite agreement or facilitation of services between multiple parties.2. Entitlement to Refund of Unutilized ITC:The petitioner sought a refund of unutilized ITC amounting to INR 46,05,196/- for specific periods. The rejection of the refund was based on the classification of the petitioner as an intermediary. Since the court found this classification unsustainable, it held that the petitioner was entitled to the refund. The court emphasized that the petitioner was supplying services on a principal-to-principal basis, and thus, the denial of the refund was unwarranted.3. Applicability of Section 13 of the IGST Act:The court examined Section 13 of the IGST Act, which determines the place of supply for services where either the supplier or recipient is located outside India. The respondents argued that the petitioner, being an intermediary, should have the place of supply determined under Section 13(8), which pertains to intermediary services. However, the court found that the petitioner was directly supplying services to its holding company in Singapore, making Section 13(2) applicable. This section stipulates that the place of supply is the location of the recipient, which, in this case, was outside India.4. Interpretation of the Service Agreement:The court reviewed the service agreement between the petitioner and its holding company, which indicated that the petitioner provided services on a principal-to-principal basis. The agreement specified that the petitioner acted as an independent contractor and was responsible for developing and maintaining technology platforms. The court noted that the agreement did not suggest any intermediary role or facilitation of services between multiple parties. The agreement's terms reinforced the petitioner's position as a direct service provider, not an intermediary.5. Consideration of the Mark-up in the Service Fee Agreement:The respondents contended that the inclusion of a mark-up in the service fee agreement implied an intermediary role. The court rejected this argument, stating that the mark-up was consistent with arm's length transactions and did not inherently classify the petitioner as an intermediary. The court clarified that the entitlement to a mark-up did not affect the petitioner's status as a direct service provider. The court found the respondents' reasoning flawed and held that the mark-up did not justify the classification of the petitioner as an intermediary.Conclusion:The court allowed the writ petition, quashing the impugned orders and directing the respondents to grant the refund along with applicable statutory interest. The judgment emphasized the importance of accurately interpreting the definitions and provisions under the IGST Act and the significance of the contractual terms in determining the nature of services provided.