Indian Subsidiary Entitled to Unutilised ITC Refund for Services to Foreign Group Entity: Bombay High Court
The Court said the Petitioner was not an agency of the foreign recipient and therefore entitled to refund of unutilised ITC as the supply qualified as export under the IGST Act.
Justice B.P. Colabawalla, Justice Firdosh P. Pooniwalla, Bombay High Court
The Bombay High Court has held that a company incorporated in India supplying services to a foreign group or holding company is entitled to refund of unutilised Input Tax Credit (ITC), and such supplies qualify as “export of services” under the Integrated Goods and Services Tax Act, 2017. The Court held that the condition in clause (v) of Section 2(6) of the IGST Act was not violated where the Indian entity and the foreign recipient were distinct legal persons and not merely establishments of a distinct person.
A Division Bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla observed, “The Petitioner is not an agency of the foreign recipient and both are independent and distinct persons.”
The Court added, “Having satisfied all the conditions of Section 2(6) of the IGST Act, the services supplied by the Petitioner qualify as export and thereby zero rated supplies.”
Senior Advocate Prakash Shah appeared for the Petitioner, while Additional Government Pleader S. D. Vyas represented the Respondents.
Brief Facts
The Petitioner filed two refund applications under Section 54(3) of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017, read with Rule 89(4) of the respective Rules, claiming refund of unutilised Input Tax Credit for the quarters July to September 2021 and October to December 2021, in respect of zero-rated supplies made to its group entities located outside India.
The refund applications were rejected by the adjudicating authority, and the rejection was upheld in appeal on the ground that the Petitioner was merely an establishment of a distinct person under Section 2(6)(v) of the Integrated Goods and Services Tax Act, 2017. It was held that the Petitioner was acting as an agency of the foreign recipients and therefore the supplies could not qualify as exports.
The Petitioner submitted that similar refund applications for earlier periods had been allowed and that the services were provided on a principal-to-principal basis to recipients outside India, and challenged the orders rejecting the refund, and sought a direction for grant of refund with interest.
Reasoning of the Court
The Court examined Section 2(6) of the IGST Act and Section 2(5) of the CGST Act, and noted that the only disputed issue was whether clause (v) of Section 2(6), which disqualifies a transaction as export if the supplier and recipient are merely establishments of a distinct person, was attracted.
Referring to the agreement between the Petitioner and its foreign counterpart, the Court observed, “The agreement clearly provides that the Petitioner is an independent contractor and that neither the Petitioner nor its officers, directors, employees or sub-contractor are servants, agents or employees of the recipient of services.”
The Court observed that to qualify as an agent under Section 2(5) of the CGST Act, the person must carry on the business of supply or receipt on behalf of another, stating, “The Petitioner provides design and engineering services to its customers on principal-to-principal basis by employing its own manpower and other resources.”
The Court rejected the contention that reimbursement of costs with a fixed markup and audit access created an agency relationship. “The Petitioner earns consideration of 110 per cent of the costs fixed between the parties, which is consistent with general commercial practice and as per the transfer pricing norms. Merely because consideration is fixed and the Petitioner receives a fixed mark-up, the same does not become commission paid to the Petitioner as an agent”, the Court added.
The Court referred to the CBIC Circular September 20, 2021, which clarified that an Indian subsidiary and a foreign company are distinct legal entities. The Bench noted, “In terms of the aforesaid Circular, it is clear that what is sought to be covered under condition (v) to Section 2(6) of the IGST Act is the supply of services made by a branch or an agency or representational office of a foreign company, not incorporated in India... The said Circular has specifically clarified that the transactions between sister/group companies, holding/subsidiary companies are not covered under condition (v) to Section 2(6) of the IGST Act.”
The Court referred to the decision of the Delhi High Court in Xilinx India Technology Services Pvt. Ltd. v. Special Commissioner (2023), which held that services provided by an Indian subsidiary to a foreign parent on a principal-to-principal basis were not barred from being treated as exports under the IGST Act.
The Court further noted that the Respondents had granted refunds to the Petitioner for similar services in earlier periods, and the orders had attained finality.
Consequently, the Court allowed the petition and quashed the orders of rejection and directed the Respondents to grant refund of the unutilised Input Tax Credit under Section 54 of the CGST Act along with statutory interest under Section 56.
Cause Title: Sundyne Pumps and Compressors India Pvt Ltd v. Union of India & Ors. (Neutral Citation: 2025:BHC-AS:23503-DB)
Appearance:
Petitioner: Senior Advocate Prakash Shah; Advocate Jas Sanghavi, Mohit Raval, Vikas Poojary
Respondents: Addl. G.P. S. D. Vyas, Aditya Deolekar
