Design & Engineering Services To Foreign Entities Are Zero-Rated Supplies; Assessee Eligible For Refund Of Unutilized ITC U/S 54 Of CGST Act: Bombay HC

The Division Bench of Justices B.P. Colabawalla and Firdosh P. Pooniwalla observed that assessee is not an agency of the foreign recipient and both are independent and distinct persons. Thus, condition (v) of Section 2(6) is fully satisfied in the case. The assessee 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.

In this case, the assessee/Petitioner had filed two refund applications for the period July to September 2021 and October to December 2021 claiming refund of the unutilised ITC under Section 54(3) of Central Goods and Services Act, 2017 read with Rule 89 (4) of Central Goods and Services Rules, 2017 for making zero rated supplies.

The two refund applications were rejected by the Original Authority – State Tax officer and, upheld by the Appellate Authority on the ground that the recipients of the services located outside India are carrying on business through the “agency” in India i.e. the assessee and hence the assessee qualifies as “mere establishment of distinct person”.

Thus, the assessee did not provide zero rated supplies and consequently, not entitled to a refund of unutilized ITC under Section 54(3) of the CGST/MGST Act.

The assessee filed two separate refund applications under Section 54(3) of CGST Act/ MGST Act read with Section 16 of the IGST Act and Rule 89(4) of the CGST Rules/ MGST Rules for refund of unutilized ITC on account of zero-rated supplies made by the assessee for the period April 2020 to March 2021 and April to June 2021.

The said applications were duly allowed, and the assessee was granted the refunds. According to the assessee, the said orders granting refund are not challenged by the State and have attained finality.

A show cause notice was issued to the assessee by holding that the assessee did not qualify the conditions of export of services by invoking clause (v) of Section 2(6) IGST Act, which defines “Export of Service”.

The assessee submitted that the overseas entities [to which supplies were made] are independent body corporates/ legal undertakings incorporated under the laws of their respective jurisdictions. Since, the entire supplies of the assessee were to the recipient located outside India, the said supplies qualified as “Exports of Goods” and “Export of Services”, under Section 2(5) and 2(6) of the Integrated Goods and Services Tax Act, 2017 respectively, and they were zero-rated supplies in terms of Section 16 of the IGST Act. Therefore, the assessee was entitled to a refund of unutilised ITC in terms of Section 54(3) of the CGST/MGST Act read with Rule 89(4) of the CGST/MGST Rules.

The department submitted that the assessee is not an independent contractor but an agent as defined under Section 2(5) of CGST/MGST Act, as clauses of the agreement and conduct of the parties prove that the foreign recipient has created an agency in India through the assessee.

The bench stated that the department has completely lost sight of the fact that the agreement clearly provides that the assessee is an independent contractor and that neither the assessee nor its officers, directors, employees or sub-contractor are servants, agents or employees of the recipient of services.

The assessee does not carry on business of supply of goods or services or both on behalf of another (foreign recipient). The assessee provides design and engineering services to its customers on principal-to-principal basis by employing its own manpower and other resources, noted the bench.

The bench stated that “the for the period April 2020 to March 2021 and April to June 2021 the assessee for the same services applied for a refund and was granted. Respondents did not prefer any Appeal against the earlier two orders passed granting refund to the assessee. The refunds were granted on the premise that the services provided by the assessee qualify as “export of services”. These orders have reached finality. 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 assessee do not qualify as “export of service”, especially when the agreements with the clients and all other surrounding facts remain the same.”

The bench held that the assessee 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.

In view of the above, the bench allowed the petition.

Case Title: Sundyne Pumps and Compressors India Pvt. Ltd. v. The Union of India

Case Number: WRIT PETITION NO.15228 OF 2023

Counsel for Petitioner/Assessee: Jas Sanghavi, Mohit Raval, Vikas Poojary

Counsel for Respondent/Department: Aditya Deolekar