Subsidiary Not Intermediary Under IGST Act: Gujarat High Court

The Gujarat High Court has clarified the distinction between "intermediary services" and "export of services" under the Integrated Goods and Services Tax (IGST) Act, ruling in favour of a wholly-owned subsidiary that provides technical services to its parent company based in the USA.

The bench, comprising Honorable Mr. Justice A.S. Supehia and Honorable Mr. Justice Pranav Trivedi, set aside orders previously denying the petitioner’s refund claims, emphasizing that a company operating on a principal-to-principal basis cannot be classified as an "intermediary."

Beyond the "Intermediary" Tag: The Case Background

M/s. Infodesk India Pvt. Limited, engaged in content integration and software consultancy, challenged the rejection of its GST refund applications. The tax authorities had argued that the services rendered by the petitioner to its parent entity, Info Desk Inc., fell squarely under the definition of "intermediary services" as defined in Section 2(13) of the IGST Act, thereby disqualifying them from being treated as an "export of service" eligible for zero-rated supply benefits under Section 16.

The petitioner maintained that it functioned as an independent entity, providing software consultancy and IT infrastructure management on a principal-to-principal basis. According to the petitioner, the services were provided for the parent company’s consumption, not to facilitate transactions between third parties.

Arguments from the Industry and Revenue

The petitioner, represented by learned advocate Mr. Anand Nainawati, argued that the service agreement did not designate them as a broker or agent. Crucially, it was noted that the petitioner was paid a markup on the operational costs incurred, confirming a business model of independent service provision rather than commission-based facilitation.

Conversely, counsel for the respondents contended that the subsidiary essentially acted as a facilitator for the parent organization, justifying the "intermediary" classification.

Legal Analysis: The Principal-to-Principal Distinction

The High Court’s ruling hinges on the definition of an intermediary as someone who arranges or facilitates supply between two or more persons. The court observed that the petitioner’s contract involved only two parties and that all business risks and expenses were shouldered by the subsidiary.

The court referenced precedents such as M/s. Ernst and Young Limited vs. Additional Commissioner and Genpact India Pvt. Ltd. vs. Union of India , which clarified that there has been no substantial shift in the definition of "intermediary" from the erstwhile Service Tax regime to the current GST framework.

Key Observations

The judgment provides significant clarity on how service agreements with foreign parent entities should be interpreted:

> "On conjoint reading of the scope of services to be provided by the petitioner, it cannot be said that the petitioner is only to work as an agent or a broker between parent company and its customers without supplying any goods or services on its own account."

> "In view of the above terms of the agreement... it cannot be said that the petitioner was not exporting services but was working as an intermediary for its parent company."

> "The petitioner is an independent company incorporated in India having distinct entity and in such circumstances, the service provided by the petitioner to its parent company was in independent capacity and not in the capacity of either agent or broker or any other person."

Final Decision: A Greenlight for Refunds

The High Court quashed the order-in-original and the subsequent appeal rejection. The court directed the tax authorities to process the petitioner’s refund claim within 12 weeks, acknowledging that the services qualify as an "export of service."

This decision provides a crucial roadmap for domestic subsidiaries of multinational corporations, reinforcing that the mere presence of a corporate relationship does not automatically trigger the "intermediary" label under the IGST Act, provided the service delivery model is based on a principal-to-principal framework.