2023 (5) TMI 1123 - HC - GST

Refund of tax paid on inputs - services rendered to McDonald s USA, its holding company, under the Service Agreement without payment of Integrated Goods and Services Tax - intermediary services or not - place of supply of services. Whether the petitioner is an intermediary within the meaning of Section 2(13) of the IGST Act in respect of services rendered under the Service Agreement? HELD THAT - The petitioner is liable to pay an initial franchisee fee for each restaurant operated or franchised by it. In addition, it is also liable to pay royalty equal to 5% of the gross sales from the operation of all restaurants on a monthly basis. There is no controversy regarding the payments made by the petitioner to McDonald s USA under the MLA - It is material to note that the scope of services as mentioned in the Service Agreement, read in isolation, do not entail procurement or facilitating services from third-party suppliers. The Adjudicating Authority held that the petitioner was performing services on behalf of McDonald s USA in the backdrop of McDonald s USA s obligations - the Adjudicating Authority rejected the petitioner s claim for refund of ITC. Rendering service on behalf of another person does not render the service provider an intermediary - However, if it is found that McDonald s USA is obliged to perform certain services to third parties and the petitioner is facilitating or arranging such services from third-party suppliers; the services performed by the petitioner may fall within the scope of intermediary services. However, it is essential that the principal service, the supplier of such services, and the service purchaser are identified to ascertain whether the services performed by the petitioner are those of a facilitator or one that arranges such services. The Order-in-Original has not analysed the services rendered by the petitioner on the aforesaid anvil. There are no basis for the Appellate Authority to have concluded that the petitioner acts as a mediator between joint ventures/ franchisees and McDonald s USA. The Appellate Authority has not considered that the MLA, which entitles the petitioner to enter into sub-licenses with franchisees, is a separate agreement. Further, certain observations made in the impugned order also indicates that the Appellate Authority has proceeded on the basis that providing services on behalf of another party amounts to acting as an intermediary. In order to examine whether Section 13(3)(b) of the IGST Act is applicable, it is necessary to identify the service provider and the service recipient. In the present case, under the Service Agreement, the service recipient is McDonald s USA and the petitioner is the service provider. The supply of services by the petitioner to McDonald s USA does not require the physical presence of McDonald s USA. We are unable to follow as to why the physical presence of the service recipient, that is, McDonald s USA, in India is necessary for receiving the services rendered by the petitioner or any third-party supplier. Section 13(3)(b) of the IGST Act contemplates the location of service, whereby the presence of a service recipient is necessarily to be in India. Section 13(5) of the IGST Act contemplates the supply of services by way of admission to, or organisation of a cultural, artistic, sporting, scientific, educational or entertainment event. It also contemplates admission to, or organisation of a celebration, conference, fair, exhibition or similar events. Conducting interviews, making reference checks or performing any screening services in connection with potential joint venture partners, franchisees or employees has no connection with the services as contemplated under Section 13(5) of the IGST Act. The impugned order as well as the order passed by the Adjudicating Authority set aside - matter remanded to the Adjudicating Authority to consider the petitioner s case afresh - petition disposed off.

Summary

Issues Involved:
1. Whether the petitioner is an intermediary within the meaning of Section 2(13) of the IGST Act.
2. Whether the Appellate Authority's order was beyond the scope of the Show Cause Notice.
3. Applicability of Sections 13(3)(b) and 13(5) of the IGST Act to the services rendered by the petitioner.

Summary:

Issue 1: Whether the petitioner is an intermediary within the meaning of Section 2(13) of the IGST Act.

The petitioner, M/s McDonald's India Pvt. Ltd., entered into a Service Agreement with McDonald's USA, claiming the services rendered were independent and 'zero rated supplies' under Section 16 of the IGST Act. The Adjudicating Authority and Appellate Authority held that the services were intermediary services, thus the place of supply was in India, making the petitioner ineligible for ITC refund. The court noted that rendering service on behalf of another does not automatically make one an intermediary, referencing recent decisions in M/s Ernst and Young Limited and M/s Ohmi Industries Asia Private Limited cases. The court emphasized the need to identify the principal service, supplier, and purchaser to determine intermediary status, which was not adequately analyzed in the Order-in-Original.

Issue 2: Whether the Appellate Authority's order was beyond the scope of the Show Cause Notice.

The petitioner argued that the Appellate Authority's order was beyond the scope of the Show Cause Notice and did not arise from the petitioner's appeal. The court found merit in this contention, noting that the Show Cause Notice was broad and did not detail reasons for denying the ITC refund. The court held that the Appellate Authority could not raise additional grounds for rejecting the refund claim suo motu in an appeal preferred by the petitioner. Thus, the impugned order was liable to be set aside on this ground alone.

Issue 3: Applicability of Sections 13(3)(b) and 13(5) of the IGST Act to the services rendered by the petitioner.

The court examined the applicability of Sections 13(3)(b) and 13(5) of the IGST Act. Section 13(3)(b) applies where the physical presence of the service recipient or its representative is necessary. The court found that the service recipient, McDonald's USA, did not need to be physically present in India for the services rendered by the petitioner. Section 13(5) pertains to services related to events, which was irrelevant to the services provided by the petitioner under the Service Agreement. The court concluded that these provisions did not apply to the petitioner's case.

Conclusion:

The court set aside the impugned order and the Order-in-Original, remanding the matter to the Adjudicating Authority for fresh consideration in light of the observations made. The petition was disposed of accordingly.