TaxTMI 
TaxTMI 
2024 (9) TMI 1218
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld that the services provided by the Petitioner to Xioami 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 R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y, petitioner is before this Court by way of the present petitions. 4. In addition to reiterating the various contentions 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iaomi HK available in India and thus, the place of supply shall be India in terms of Section 13 (3) (a) of the IGST Act, 2017 and b) that the reward being incidental and 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain rewards. The same was conceptualized vide the Reward Agreement dated 31.03.2019. 13. It is also submitted that the Reward Agreement dated 31.03.2019 continued to exist well past the mentioned Plan Period of April 2018 to March 2019, as is evident from the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d increase market penetration of Xiaomi products in India, is in the nature of export of service by the Petitioner to Xiaomi HK and thus, the refund claimed by the Petitioner for the indicated periods deserve to be allowed and the impugned orders, passed on incorrect understanding of the law are liable to be quashed. "1. The Petitioner is in receipt 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d products are procured by the Petitioner from such manufacturers and thereafter, ultimately sold in the Indian market, on payment of applicable taxes. This has been in vogue since July 2015. 4.2. On viewing the transactions from a holistic perspective, it becomes apparent that an increased market penetration of Xiaomi brand in India, would lead to an increase in the sale of the mobile phones. With higher sales, the procurement from 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 paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
....attained by the Petitioner in the previous plan period. 4.9. It is significant to note that the veracity and genuineness of the Agreements was never doubted by the Respondent authorities in the appeal / adjudication proceedings and the allegations of subterfuge has been made for the first time before this Court that too on mere assumptions and presumptions. It is settled law that an order passed by a statutory authority must be judged by the reasons so mentioned in the order and 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....met or not met is not relevant once the consideration is to be paid on the entering of the agreement having an obligation. 5.5 It has also been alleged that the consideration paid does not have a nexus with the promotional activities carried out by the Petitioner. 5.6 The Petitioner submits that in terms of the Agreement, the Petitioner has agreed to undertake the obligation to reach the specified targets. Once the said targets are achieved, the Petitioner becomes eligible for the reward. It is submitted that the parties 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for this promise, Xiaomi Hong Kong promised to pay a monetary reward to the Petitioner if certain sales targets were met. 5. In order to effectuate the above understanding between the Petitioner and Xiaomi Hong Kong, they entered into a Sales Reward Agreement (SRA) dated 31.03.2019. The recitals of the contract at clause C provided that the objective was to increase Xiaomi's growth in India. Clause 2.1 of the SRA provided that in addition, the objective of the SRA was to generate revenue growth and increase market penetration of Xiaomi products. Further, as per clauses 2.2 and 2.3 of the 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 OBLIGAT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the execution of this Agreement as stated in the beginning Agreement; License effective date means 7 October 2014 2. Grant Of License 2.1 The Licensor, in consideration of the mutual covenants herein, hereby grants to the Licensee, who hereby accepts a non-exclusive, non-transferable, royally-free, and sub-licensable license (License) to use the Brand within the Territory for the purposes of the Business Use. The License shall be effective from the License Effective Date. 3. Conditions of Use 3.1 The License has been granted to the Licensee only in respect of Use of the Brand for the purpose of Business Use. 4. Consideration It is expressly agreed between the Parties that the Licensee's use (subject to conditions laid down in Clause 3 of 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, director....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elped Xiaomi India capture the market share in India; b) For such five (5) top selling smart phones, Xiaomi HK will, at its discretion, give a reward at a certain USD rate per dovice for the identified devices sold in India during the plan period. 9.2 Termination 9.2.1 This Agreement may be terminated by either Party upon the occurrence of any of the following (whichever is earliest): 9.2.2. This Agreement may be terminated by either Party, without assigning any reasons, by giving a prior written notice of two (2) months to the other Party. Notwithstanding the foregoing, the Parties may, by mutual written consent, agree to dispense with the notice requirement and terminate the Agreement immediately. 14.7 Specific Performance Xiaomi India agrees that damages may not be an adequate remedy and that Xiaomi HK shall be entitled to an injunction, restraining order, right for recovery, suit for specific performance or such other 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Petitioner to increase its market share and sales. 11. The Petitioner submits that it could not have been the intention of the parties that the agreement was a mere matter of making payments if sales targets are met, but not to require any party to actually make reasonable efforts to ensure that such sales targets are met in the first place. Therefore, it is submitted that there can be no doubt that the SRA had an implied term casting an obligation on the Petitioner to increase its market share and product sales. 12. The fact that the Petitioner had such an obligation to increase its market share and its product sales, is also forthcoming from the prior Distributorship agreement between the Petitioner and Xiaomi Hong Kong, which in Clause 8.4 required the Petitioner to diligently and honestly execute its distributorship responsibilities in compliance with good industry practice. 13. In light of the above, it could be safely said that the Petitioner was required to make best efforts to promote Xiaomi Hong Kong's products in the Indian market. This included engaging in marketing activities, expanding market reach, and increasing sales, all of which were....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant airline. Aggrieved, the appellant airline sued the respondent claiming damages. The trial court held in favour of the appellant and granted damages but refused certain declaratory reliefs. The court of appeal by a majority upheld the trial court's decision toward damages by holding that keeping the airport open beyond normal working hours was a reasonable expectation as part of the best endeavours clause and could be rightly enforced. The relevant portions of the judgement are extracted below: "The content of an obligation to use best endeavours to promote another person's business is not so uncertain as to be incapable of giving rise to a legally binding obligation, although it may be difficult to determine in any given case whether there has been a breach of it." (Emphasis supplied) 18. Therefore, failure to use best endeavours does give rise to claim for legally enforcing such an obligation. Thus, it is submitted that as rightly held by the court, the fact that it may be difficult to determine a breach thereof, does not prevent it from being a legally enforceable obligation. 19. In another decision of the English Court of Appeal in IBM Unite....
X X X X Extracts X X X X
X X X X Extracts X X X X
....do which shall create a legally enforceable right against the Petitioner by Xiaomi Hong Kong. Therefore, the Petitioner has clearly agreed to an obligation to undertake promotion of Xiaomi products and undertake ancillary activities, to ensure the market penetration of Xiaomi products in India in exchange of consideration, i.e. the monetary rewards. Thus, the transaction is a supply in terms of Section 7 read with Entry 5 (e) of Schedule II of the CGST Act, 2017. 25. Once it is established that the transaction is a supply under the CGST Act, 2017, it is submitted that the same shall amount to 'export of service' in terms of Section 2 (6) of the IGST Act, 2017. In view of the above, it is humbly prayed that the impugned order be set aside and the Writ Petition be allowed with directions to the Respondents to sanction the refund to the Petitioner. 5. It is submitted that non-consideration of the aforesaid contentions urged by the petitioner would vitiate the impugned orders and the same deserve to be set aside. In support of his submissions, learned Senior counsel placed reliance upon the relevant provisions of the CGST and IGST and Circulars, which reads as under: ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es Tax Act, 2017 ("KGST Act"), engaged in the sale of Xiaomi products, such as mobile phones/smart phones etc. The said products are only sold by the Petitioner, upon procuring the same from within India, from third party manufacturers licensed by Xiaomi HK. 2.2. The Petitioner and Xiaomi HK entered into Reward Agreements for various plan periods, per which, the Petitioner was required to undertake certain activities to foster Xiaomi's revenue growth and market penetration in India. In terms of the agreements, the Petitioner would become eligible to receive monetary rewards from Xiaomi HK if the market performance of Xiaomi was as per the benchmark stipulated for each plan period, in the respective agreement. A tabulated statement has been presented hereinbelow, with details as to the 'targets' prescribed for each of the plan periods in question, under different agreements: Sl.No. Date of the Agreement Plan Period 'Target' 1. 31.03.2019 01.04.2018-31.03.2019 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 b. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion qualifies as a supply wherein the service supplied is covered within the entry 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for consideration' as included in Schedule II to the CGST Act, and the consideration is the monetary reward received. 3.2. The Petitioner has placed reliance on the CBDT Circular No. 178/10/2022-GST dated 03.08.2022, to contend that so long as there is reasonable nexus between the supply (i.e. agreement to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act) and the consideration, the transaction would qualify as 'supply'. 4. Against the aforesaid backdrop and having regard to the contentions urged on behalf of the Petitioners, it is submitted on behalf of the Respondents that, prima-facie, the transaction in question appears to be a subterfuge, designed to claim refund of ITC. The real (sham) nature of the transaction in question becomes readily apparent upon careful consideration of the following details: 4.1. At the outset, it is to be noticed that the agreement which purportedly prescribes 'targets' for the plan period betwe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted, it would lead to an absurdity in law. 5.2. It is next submitted that receipt of 'Consideration', as defined under Section 2 (31) of the CGST Act, is a sine-qua-non for any transaction to qualify as 'supply' as defined under Section 7 of the CGST Act. Further, the consideration must have a reasonable nexus with the obligation in order for the transaction to qualify as 'supply', vide CBDT Circular No. 178/10/2022-GST dated 03.08.2022. However, in the instant case, the monetary reward (stated to be the 'consideration') has a nexus, not with the promotional activity to be carried out the Petitioner, but to the happening of a continent event, i.e., meeting the 'target'. The monetary reward is given only if the target is met, and not on mere performance of promotional activities by the Petitioner. While the performance of promotional activities by the Petitioner may be said to be an 'obligation', the same is not met with consideration, hence, no supply-there is no reciprocity between performing promotional activities and receipt of consideration. Consideration is paid only when Xiaomi, by virtue of the operation of market forces, retains/enhances its market position-an occu....