GST: HC Says Back Office with Cost Plus Model Not Agency, Allows Export Refund

The petitioner in this case submitted two refund applications for unused Input Tax Credit (ITC) for zero-rated supplies (exports) for the July–September and October–December 2021 periods as per Section 54(3) of the CGST/MGST Act read with Rule 89(4). The petitioner provides engineering services and products only to its group companies, which are based outside India and have no business within the domestic tariff area. While similar refund claims for earlier periods had been granted without challenge, the current claims were rejected by the original adjudicating authority and later upheld by the appellate authority. Show cause notices were issued against the petitioner, and on challenging the notices, refund claims for the current period were denied by the original authority. The authority held that the petitioner did not meet the requirements of Section 2(6)(v) of the IGST Act because it was functioning as an “agent” of its foreign affiliates rather than as an independent supplier.

Appellant Authority Held: The appellate authority upheld the view taken by the original authority, relying on the relationship between the petitioner and the foreign companies, the reimbursement-based billing model, and the access of the foreign party to the petitioner’s books. The petitioner was ruled to have acted as an “agency” rather than an independent contractor, which precluded the transactions from being classified as “export of services.”

Issue Raised: Whether the petitioner could be deemed an “agency” of its foreign recipient entities and therefore disqualified from claiming a refund of unutilized ITC on the ground that the supply of services does not qualify as “export of services” under Section 2(6) of the IGST Act.

HC’s Ruling: The High Court set aside the orders passed by both the original and appellate authorities. It held that the petitioner is an independent legal entity incorporated in India rather than an agency of the foreign recipient that provides goods and services on a principal-to-principal basis. The Court referred to the petitioner as an independent contractor and reviewed the service agreement, which categorically denied any agency relationship. According to Section 2(5) of the CGST Act, it was determined that the existence of a fixed markup, reimbursement model, or audit rights was insufficient to establish an agency relationship. The Court held that since all export conditions were met, it directed a refund with interest.

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