2025 (12) TMI 633 - HC - GST

Export of services confirmed u/s 13(2) IGST Act, refund of unutilized ITC and notices quashed

HC held that services supplied by Petitioner to its foreign affiliate qualify as 'export of services' under the IGST Act. The Court found that ... Export of Services or not - Substance over form - Description/nomenclature mentioned on Invoice - Refund on account of ITC accumulated on export of goods or service - liability of GST on services provided by the Petitioner - amount to a local supply or not - place of provision of services - HELD THAT:- The material on record clearly indicates that the payment for such service supplied by the petitioner has been received by it in convertible foreign exchange as can be seen from the EBRCs enclosed along with the refund applications; so also, the condition pertaining to establishment of distinct persons would not be applicable where the supplier and recipient of services are separate legal entities and the said condition would apply only to a situation, wherein a person has an establishment in India as supplier of service and the same person (same legal entity) has another establishment outside India as a recipient of service. Circular No. 161/17/2021-GST dated 20.09.2021 clarifies that a company incorporated in India and the foreign company incorporated outside India are separate persons / entities and any supplies made by the company incorporated in India to a foreign company incorporated outside India will qualify as export of services. It is therefore clear that in the case on hand, the petitioner and the foreign entity are different legal entities and cannot be considered as a branch and the petitioner and the contractor are not mere establishment of distinct persons - the conditions for services to be construed as export of services have been cumulatively satisfied by the petitioner herein, whose services provided are in the nature of export of services and consequently, the erroneous findings recorded by the respondent in the impugned order deserve to be set aside. In Linde Engineering’s case [2020 (8) TMI 181 - GUJARAT HIGH COURT], the Gujarat High Court held that 'the services rendered by the petitioner No. 1-Company outside the territory of India to its parent Company would have to be considered “export of service” as per Rule 6A of the Rules, 1994 and Clause (f) of Rule 6A of the Rules, 1994 would not be applicable in the facts of the case as the petitioner No. 1, who is the provider of service and its parent Company, who is the recipient of services cannot be said to be merely establishment so as to be distinct persons in accordance with Item (b) explanation 3 of Clause (44) of Section 65B of the Act, 1994.' The respondent placed reliance upon Notification No. 4/2019-Integrated Tax dated 30.09.2019 wherein the Government had specified the place of supply of services related to Research and Development (R & D) activities by pharmaceutical companies. In this context, it is relevant to state that the nature of services provided by the petitioner differs significantly from those covered under the Notification and petitioner provides services to a medical equipment company and is not involved in pharmaceutical industry. The material on record discloses that the Revisionary Notice in GST RVN-01 dated 05.10.2023 issued by the respondent, the respondent has denied the benefit of N/N. 04/2019 - Integrated Tax dated 30.09.2019, pertaining to the supply of research and development service related to the pharmaceutical sector, on the ground that the place of supply of service is within the territory of India, which does not fulfil the conditions under Section 2(6) of the IGST Act. However, the objections filed by the respondent states that Notification No. 04/2019 dated 30.09.2019 is solely applicable to the pharmaceutical industry, and since the petitioner does not fall under the said category, the said Notification shall not be applicable to the petitioner. It is therefore clear that the respondent is adopting a contradictory stance merely to deprive the petitioner of refund of unutilized credit pertaining to export of service - By applying the general test of ‘substance over form’, irrespective of the nomenclature used in the invoice, the facts of the case show that the transaction is an export of service. Therefore, the place of supply for such composite services is the location of the service recipient as per Section 13(2) of the IGST Act i.e., the location of the foreign entity in the present case. In Genpact (1)’s case [2022 (11) TMI 743 - PUNJAB AND HARYANA HIGH COURT], the Hon’ble Division Bench of Punjab and Haryana Court held that 'A bare perusal of the recitals and relevant clauses of the MSA do not in any manner indicate that petitioner is acting as an “intermediary” so as to fall within the scope and ambit of the definition of “intermediary” under Section 2 (13) of the IGST Act. Such clauses cannot also be interpreted to conclude that the petitioner has facilitated the services. The said clauses are in relation to the modalities of how the actual work would be carried out and do not in any manner establish that the petitioner was required to arrange/facilitate a 3rd party to render the main service which has actually been rendered by the petitioner'. The impugned refund rejection order as well as impugned show cause notices in these writ petitions respectively are liable to be quashed - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the services supplied by the petitioner to its foreign group entities qualify as 'export of services' under Section 2(6) of the IGST Act, 2017, including determination of place of supply under Section 13. (2) Whether the petitioner and the foreign recipient entities are 'merely establishments of a distinct person' under Explanation 1 to Section 8 of the IGST Act, so as to deny export status and treat the supplies as domestic. (3) Whether Notification No. 4/2019 - Integrated Tax dated 30.09.2019 (R&D services in pharmaceutical sector) and related circulars are applicable to the petitioner's engineering/software services and affect the place of supply/export character. (4) Whether cross-charged expenses (employee education, training, compensation and benefits, etc.) and the description 'Non-INR cross charge' alter the nature of the supply or prevent it from being treated as export of services, including characterization as composite supply. (5) Whether the refund rejection orders dated 13.03.2023 and the subsequent show cause notices dated 01.01.2024 and 31.05.2024, which seek to reclassify exports as domestic supply, deny/recall refunds, and proceed on an assumption of a 'Goa branch', are without jurisdiction, arbitrary or contrary to the statutory scheme, warranting quashing in writ jurisdiction and a direction to grant refund of accumulated ITC. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Qualification of petitioner's services as 'export of services' under Section 2(6) IGST Act Legal framework discussed (a) Section 2(6) of the IGST Act - conditions for 'export of services': (i) supplier in India; (ii) recipient outside India; (iii) place of supply outside India; (iv) payment in convertible foreign exchange/INR as permitted; (v) supplier and recipient not merely establishments of a distinct person as per Explanation 1 to Section 8. (b) Sections 13(1)-(2) of the IGST Act - determination of place of supply where location of supplier or recipient is outside India; default rule: place of supply is the location of the recipient for services not covered in Section 13(3)-(13). (c) Sections 16 IGST Act and 54 CGST Act, read with Rule 89 of the CGST Rules - zero rated supplies and refund of accumulated input tax credit. Interpretation and reasoning (d) The Court found on the record that the petitioner (supplier) is located in India and the service recipients are group entities located outside India. The incorporation documents and agreements establish supplier in India and recipients outside India. (e) The services consist of contract-based engineering and software development/support for medical systems, including development of new software features, enhancements, workflow improvements and quality fixes, performed in Bengaluru and integrated with the global code, which is then reviewed, verified and deployed by foreign entities abroad. (f) The Court held that these services do not fall under any of the specific categories in Section 13(3)-(13) IGST Act. Accordingly, Section 13(2) applies and the place of supply is the location of the service recipient, i.e., the foreign entities outside India. (g) Circular No. 309/1/2018-ST dated 04.05.2018 and Circular No. 118/37/2019-GST dated 11.10.2019 were noted as clarifying that, in software/software-testing and similar composite arrangements where work is performed in India for foreign customers (even using sample hardware/test kits), the place of supply is the location of the overseas service recipient. (h) The Court recorded that payment for the services is received by the petitioner in convertible foreign exchange, evidenced by EBRCs filed with refund applications. (i) On these facts, the Court held that all four positive conditions in Section 2(6)(i)-(iv) are satisfied and, subject to Issue (2), the supplies qualify as export of services. Conclusions (j) The services supplied by the petitioner to its foreign group entities are 'export of services' within the meaning of Section 2(6) of the IGST Act, as the supplier is in India, the recipients and place of supply are outside India, and consideration is received in convertible foreign exchange. (k) Consequently, such supplies constitute zero rated supplies under Section 16 IGST Act and entitle the petitioner to refund of accumulated ITC under Section 54 CGST Act read with Rule 89 of the CGST Rules. Issue (2): Whether petitioner and foreign entities are 'establishments of a distinct person' and effect of alleged 'Goa branch' Legal framework discussed (a) Section 2(6)(v) IGST Act - for export of services, supplier and recipient must not be 'merely establishments of a distinct person' as per Explanation 1 to Section 8 IGST Act. (b) Circular No. 161/17/2021-GST dated 20.09.2021 - clarifies that a company incorporated in India and a foreign company incorporated outside India are distinct legal persons and not 'establishments of a distinct person' of the same legal entity; supplies between them can qualify as export of services. (c) The Court also referred to the reasoning in Linde Engineering India Pvt. Ltd. (service tax regime, Rule 6A of Service Tax Rules and Section 65B(44) Finance Act, 1994) holding that an Indian subsidiary and its foreign parent are separate legal entities and not the same 'establishment'. Interpretation and reasoning (d) The Court held that the 'establishment of distinct person' exclusion applies only where the same legal person has one establishment in India and another establishment outside India. It does not apply where the supplier and recipient are separate incorporated entities. (e) The petitioner and the foreign recipient entities are separate legal persons incorporated in different jurisdictions. On this basis, the Court held that they are not 'merely establishments of a distinct person' under Section 2(6)(v) read with Explanation 1 to Section 8. (f) The description 'Non-INR cross charge' on certain invoices and the fact that certain expenses were cross-charged was held not to alter the distinct legal personality of the entities, nor to convert the relationship into that of branches of the same person. (g) In the show cause notices for 2018-19 and 2019-20, the respondent alleged that services were rendered to the petitioner's 'branch' in Goa and hence constituted local/domestic supply. The Court examined the material on record, including documents relating to place of business, and found that the petitioner has no branch in Goa and does not provide services to any entity in Goa. (h) The allegation of a Goa branch recipient was held to be factually unsubstantiated and contrary to the record. On that foundation being incorrect, the classification of the services as domestic/local supplies failed. Conclusions (i) The petitioner and its foreign group companies are distinct legal entities and are not 'establishments of a distinct person'; the exclusion in Section 2(6)(v) does not apply. (j) The alleged provision of services to a 'branch in Goa' is unsupported by the record; there is no such branch or domestic recipient. The finding that services are domestic/local supplies on that basis is arbitrary and unsustainable. (k) The fifth condition for 'export of services' under Section 2(6)(v) IGST Act is satisfied; there is no legal bar to treating the impugned supplies as exports. Issue (3): Applicability and interpretation of Notification No. 4/2019 - IGST (pharmaceutical R&D) and related concepts of effective use and enjoyment Legal framework discussed (a) Notification No. 4/2019 - Integrated Tax dated 30.09.2019, particularly Table A, Sl. No. 1, prescribing that for specified research and development services 'related to pharmaceutical sector' enumerated in Table B, place of supply shall be the location of recipient of services, subject to conditions and effective use/enjoyment outside India. (b) Entry No. 1 of Table B - 'Integrated discovery and development' for pharmaceutical sector, described as involving discovery and development of molecules for medicinal use, including compound design, drug metabolism evaluation, biological activity, manufacture of target compounds, stability and toxicology studies. (c) Section 13(13) IGST Act - power of Government to notify services/circumstances where place of supply is place of effective use and enjoyment. Interpretation and reasoning (d) The respondent relied on Notification No. 4/2019 in the show cause notices to contend that the petitioner's activities are research and development services falling within the notified category and that the place of supply is in India, thereby denying export status. (e) The Court compared the notified pharmaceutical R&D description with the petitioner's services, which are development of new features and enhancements of software programs installed in medical equipment, aimed at improving workflow, productivity and quality fixes, integrated into medical devices used by foreign entities. (f) The Court held that the petitioner's engineering/software services are fundamentally different from 'discovery and development of molecules by pharmaceutical sector for medicinal use' and related toxicology and drug development activities. The Notification is sector-specific to pharmaceuticals and not applicable to software/engineering services for medical equipment. (g) The Revisionary Notice (GST RVN-01 dated 05.10.2023) was noted as having denied the benefit of this Notification on the premise that the place of supply was within India and the conditions of Section 2(6) were not satisfied, while the respondent's objections in these proceedings simultaneously stated that the Notification applies only to the pharmaceutical industry and not to the petitioner. The Court characterized this as a contradictory stance employed to deny refunds. (h) The Court observed that, conceptually, the Notification is based on 'place of effective use and enjoyment' of services. In the petitioner's case, the services are effectively used and enjoyed outside India by the foreign entities (through integration of software into their equipment abroad). Therefore, even on the underlying principle, the location of the recipient abroad is the place of supply. Conclusions (i) Notification No. 4/2019 - IGST applies to R&D services in the pharmaceutical sector and does not cover the petitioner's engineering/software services for medical equipment. (j) The respondent's reliance on the Notification to reclassify the petitioner's export services as domestic supply is misconceived and internally inconsistent with its own pleadings. (k) The principle reflected in the Notification - that place of supply follows effective use and enjoyment abroad - in fact supports the petitioner's position that the place of supply is outside India. Issue (4): Effect of 'Non-INR cross charge' and ancillary expenses; characterization as composite supply Legal framework and clarifications discussed (a) Section 13(2) IGST Act - default rule that place of supply is location of recipient, for services not covered by specific sub-sections (3)-(13). (b) Concept of composite supply and principal/ancillary supplies, as addressed in Circular No. 118/37/2019-GST dated 11.10.2019 (in context of ESDM sector and software development/testing on hardware kits). Interpretation and reasoning (c) During adjudication, sample invoices for October-December 2021 bore the description 'Non-INR cross charge'. The petitioner clarified that these referred to employee education, training, and compensation & benefits expenses incurred as part of R&D services provided to foreign affiliates. An excel sheet was provided describing most invoices as 'service export'. (d) The respondent treated all services, based on some such descriptions, as services rendered in India, and inferred that parties were 'establishments of a distinct person'. (e) The Court accepted the petitioner's contention that the primary activity is provision of R&D/engineering services to foreign entities and that employee training, C&B and related expenses are ancillary to the principal supply. This constitutes a composite supply where research/engineering services are the principal supply and ancillary expenses form part of that supply. (f) Applying the 'substance over form' test, including the express terms of the collaboration agreement (which states that funding from the foreign entity is reimbursement for design, development and implementation of new technology), the Court held that, irrespective of invoice nomenclature or cross-charge terminology, the true nature is export of services. (g) The Court also relied on Circular No. 118/37/2019-GST, which clarifies that, in composite contracts involving software development and testing on prototype hardware supplied by foreign recipients, testing is ancillary and the overall supply is software development, with place of supply at the recipient's location. (h) On that reasoning, the Court held that the place of supply for the composite services in question is determined by Section 13(2), i.e., the location of the foreign service recipient, and not by any isolated reference to cross-charged ancillary elements. Conclusions (i) Descriptions such as 'Non-INR cross charge' and cross-charged employee-related expenses do not alter the nature of the main supply, which remains export of engineering/R&D services. (j) The services constitute a composite supply with research/engineering as the principal supply and employee-training/C&B and other costs as ancillary; the place of supply for the composite supply is the location of the foreign recipient under Section 13(2). (k) The respondent's inference that such cross-charges converted the relationship into 'establishments of distinct person' or domestic supply is erroneous and contrary to the substance of the transactions and the collaboration agreement. Issue (5): Validity and jurisdiction of refund rejection orders and subsequent show cause notices; entitlement to refund of accumulated ITC Legal framework and precedents discussed (a) Sections 16 IGST Act and 54 CGST Act - zero rated supplies and refund of unutilised input tax credit. (b) Rule 89 of the CGST Rules - application for refund. (c) Linde Engineering India Pvt. Ltd. (Gujarat High Court) - held that services by an Indian subsidiary to a foreign holding company are export of services; show cause notice treating them as services between 'establishments of distinct person' was issued on misinterpretation and was therefore without jurisdiction, warranting quashing in writ jurisdiction. (d) Whirlpool and related Supreme Court decisions - jurisdiction of High Court under Article 226 to interfere despite alternative remedy where proceedings are without jurisdiction or based on misinterpretation leading to lack of authority. (e) Genpact India (P&H High Court, Genpact (1) and Genpact (2)) - held that similar BPO services rendered to foreign entities were exports and not 'intermediary' services; refunds of ITC for zero rated supplies were allowed; subsequent show cause notice for recovery of refunds was quashed, with the Department consciously deciding not to challenge the earlier judgment. Interpretation and reasoning (f) The Court noted that under the erstwhile service tax regime (Finance Act, 1994) the petitioner's services had been treated as export of services and refunds were sanctioned by a detailed Order-in-Original. Under the GST regime, refunds had been consistently granted from July 2017 up to September 2021, recognizing the services as exports. (g) The impugned refund rejection orders dated 13.03.2023 for October-December 2021 partially rejected refund on the basis that the services did not qualify as export of services and that the place of supply was in India; refunds for export of goods were adjusted against a demand created treating the services as local supply at 18% GST. (h) During pendency of the first writ petition, show cause notices dated 01.01.2024 and 31.05.2024 were issued for FY 2018-19 and 2019-20, proposing to (i) reject refunds already granted for export of services; and (ii) create outward tax liability with interest and penalty on the footing that services were domestic (including on the erroneous basis of a 'Goa branch'), and by misapplying Notification No. 4/2019-IGST. (i) Having held on Issues (1)-(4) that the petitioner's services are exports, that the place of supply and effective use are outside India, that there is no Goa branch recipient, and that the 'establishment of distinct person' and pharmaceutical R&D arguments are unsustainable, the Court concluded that the impugned orders and show cause notices proceed on clear misinterpretation of the law and incorrect facts. (j) In line with Linde Engineering, the Court treated such misinterpretation - converting an export of service between distinct legal entities into a domestic service between 'establishments of a distinct person' - as an assumption of jurisdiction on an erroneous legal foundation, rendering the show cause notices and consequential orders without jurisdiction and amenable to interference under Article 226 despite availability of statutory remedies. (k) The Court also took note that, similar to Genpact, refunds had been routinely granted treating the services as exports; in absence of any change in operations or law, the Revenue's abrupt reclassification of the same services as domestic supply was held to be arbitrary and inconsistent. (l) The contention that the petitioner had misclassified domestic supplies as exports, or suppressed material facts, was rejected, particularly in light of the consistent prior treatment and the clarity of legal position on separate legal entities and export of services. Conclusions (m) The refund rejection orders dated 13.03.2023, to the extent they deny refund of ITC on export of services and reclassify such export as local supply, are contrary to Sections 2(6), 13 and 16 of the IGST Act and Section 54 of the CGST Act, and based on erroneous factual and legal premises. They are liable to be quashed. (n) The show cause notices dated 01.01.2024 and 31.05.2024, issued to deny previously sanctioned refunds and to create fresh tax demands by re-characterizing exports as domestic supplies (including on the incorrect assumption of a Goa branch and misapplication of Notification No. 4/2019-IGST), are without jurisdiction, arbitrary and unsustainable, and are liable to be quashed in writ jurisdiction. (o) The services rendered by the petitioner are export of services; corresponding supplies are zero rated; the petitioner is entitled to refund of accumulated input tax credit in terms of Section 16 IGST Act read with Section 54 CGST Act. (p) The Court accordingly allowed all three writ petitions, quashed the impugned orders and show cause notices, and directed the respondents to grant and sanction the due refund along with applicable interest to the petitioner within six weeks.