Bombay High Court Upholds ITC Refund for Indian Subsidiary, Clarifies 'Export of Services' to Foreign Group Companies

Mumbai: The Bombay High Court, in a significant ruling, has held that an Indian subsidiary supplying goods and services to its foreign group companies qualifies for a refund of unutilized Input Tax Credit (ITC) as "export of services," provided it does not act as a mere "agency" of the foreign entity. The bench, comprising Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla , quashed orders passed by tax authorities that had denied such refunds to Sundyne Pumps and Compressors India Pvt Ltd.

The Court emphasized the binding nature of CBIC circulars and the importance of contractual terms in determining the nature of the relationship between the Indian supplier and the foreign recipient.

Case Background: Dispute Over ITC Refund

Sundyne Pumps and Compressors India Pvt Ltd (formerly HMD Seal/Less Pumps Industrial Pvt Ltd) had filed writ petitions challenging two Orders-in-Appeal dated August 10, 2023. These orders, passed by the Deputy Commissioner of State Tax (Respondent No. 4), upheld the rejection of refund claims for unutilized ITC amounting to Rs. 13,75,244 for July-September 2021 and Rs. 25,88,634 for October-December 2021.

The refunds were claimed under Section 54(3) of the CGST/MGST Act, read with Rule 89(4) of the CGST/MGST Rules, for zero-rated supplies (exports) of engineering services and goods to its group companies located outside India. The tax authorities rejected the claims, contending that the foreign recipients were carrying on business in India through the Petitioner as their "agency." This, they argued, meant the Petitioner and its foreign recipients were "merely establishments of a distinct person" under Explanation 1 to Section 8 of the IGST Act, thus violating condition (v) of Section 2(6) of the IGST Act, which defines "export of services." Consequently, the supplies were not considered zero-rated, and no refund was deemed due.

Petitioner's Contentions: Independent Exporter

Sundyne argued that its supplies to overseas group companies were independent transactions qualifying as "Exports of Goods" and "Export of Services" under Sections 2(5) and 2(6) of the IGST Act, respectively. They highlighted: * The overseas entities were independent body corporates. * Agreements explicitly stated that the Petitioner was an "independent contractor" and not an agent of the foreign recipients. * The Petitioner had received refunds for identical services in previous periods (April 2020 to June 2021), and these orders had attained finality. * The conditions for "export of services" were met, including the crucial condition (v) of Section 2(6) of the IGST Act.

Tax Authorities' Stand: Petitioner as an "Agency"

The Respondents, particularly Respondent No. 4 (Appellate Authority), concluded that the Petitioner was an "agency" of the foreign recipients because: * The foreign party allegedly exerted control over the Petitioner (a subsidiary). * Managerial control vested with the foreign recipient. * Expenses were reimbursed, and the Petitioner was remunerated on a cost-plus basis, which was construed as a fixed commission. * Books of accounts were available for inspection by the foreign recipient. * A fiduciary relationship existed due to the parent-subsidiary structure.

High Court's Analysis: Interpreting "Export of Services" and "Agency"

The High Court meticulously examined the statutory provisions, contractual agreements, and relevant circulars to arrive at its decision.

Contractual Terms and Nature of Business

The Court found that the tax authorities had "completely lost sight of the fact that the agreement clearly provides that the Petitioner is an independent contractor." Clause 14 of a specimen agreement explicitly stated: > "It is expressly understood that HMD India is an independent contractor, and that neither HMD India nor its officers, directors, employees or subcontractors are servants, agents or employees of SISA."

The Court noted, "The reading of the above agreement does not in any way bring out that the Petitioner is providing services to the foreign recipient as its agent or that the recipient is carrying business in India through the Petitioner." It further observed that the Petitioner "provides design and engineering services to its customers on principal-to-principal basis by employing its own manpower and other resources."

The cost-plus remuneration model was deemed a "general commercial practice and as per the transfer pricing norms," not indicative of a commission-based agency.

The Decisive CBIC Circular

A crucial aspect of the Court's reasoning was the reliance on CBIC Circular No. 161/2017/2021 dated September 20, 2021. This circular clarifies the interpretation of condition (v) of Section 2(6) of the IGST Act in the context of supplies between related entities. The Court quoted: > "5.1. ...a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India... are separate persons under CGST Act, and thus are separate legal entities. Accordingly, these two separate persons would not be considered as 'merely establishments of a distinct person in accordance with Explanation 1 in section 8'." > "5.2 Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India... to the establishments of the said foreign company located outside India... would not be barred by the condition (v) of the sub-section (6) of the section 2 of the IGST Act 2017..."

The Court stated, "The impugned orders run contrary to above Circular and wrongly refuses to follow the same..." It also affirmed that departmental circulars are binding on the Respondents.

Definition of "Agent" and Precedent

The Court emphasized that the definition of "agent" under Section 2(5) of the CGST/MGST Act ("who carries on the business of supply or receipt of goods or services or both on behalf of another ") must be adhered to. Since the Petitioner supplied services on its own account to the foreign recipient, and no third party was involved, the criteria for an agency relationship were not met. The Court also cited the Delhi High Court's decision in Xilinx India Technology Services (P.) Ltd. Vs. Special Commissioner Zone VIII, 2023 (78) G.S.T.L. 24 (Del.) , which reached a similar conclusion on identical facts.

Consistency in Departmental Stand

The Court also noted that refunds for previous periods on the same services and agreements had been granted and not challenged, stating: > "Having done so, it is not open for the department now to reject the refund claim on the ground that the services provided by the Petitioner do not qualify as 'export of service', especially when the agreements with the clients and all other surrounding facts remain the same."

Judgment: Refund Granted with Interest

Finding that the Petitioner satisfied all conditions for "export of services" under Section 2(6) of the IGST Act and was not an agency of its foreign recipients, the High Court held: > "Accordingly, we hold that the Petitioner is eligible for refund of unutilized ITC on account of zero rated supplies in terms of Section 54 of the CGST Act and the same shall be granted to them along with statutory interest under Section 56 of the CGST Act. This exercise shall be done within a period of 4 weeks from the date of uploading of this order..."

The Rule was made absolute, and the impugned orders were quashed.

Implications of the Ruling

This judgment provides significant clarity for Indian companies, especially subsidiaries of foreign entities, engaged in providing services or goods to their overseas group companies. It reinforces that: 1. A subsidiary is a distinct legal entity from its foreign parent/group company for GST purposes. 2. Supplies to such foreign group companies can qualify as "exports" if the Indian entity operates as an independent contractor and not merely as an agent or branch. 3. Contractual terms explicitly defining the relationship as independent are crucial. 4. CBIC circulars are binding on tax authorities and must be followed. 5. The department cannot arbitrarily change its stance on identical transactions for different periods if earlier decisions have attained finality.

The ruling is a welcome relief for businesses structured similarly and underscores the importance of proper documentation and adherence to statutory definitions in GST law.