9911796707
TMI Blog2024 (9) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... on on the merits / demerits of the rival contentions, it is deemed just and appropriate to set aside the impugned orders at Annexure A dated 29.05.2023 and 20.12.2022 respectively and remit the matters back to respondent No. 2 for reconsideration of the appeals afresh in accordance with law within a stipulated time frame. Petition allowed by way of remand. - HON'BLE MR JUSTICE S.R. KRISHNA KUMAR For the Petitioner : (By Sri. G. Shivadass, Senior Counsel for Sri. Syed Peeran And Miss. Meghana Lal., Advocates). For the Respondents : (By Sri. Hema Kumar, AGA; Sri. Vikram Huilgol, Senior Counsel AS Amicus Curiae). ORAL ORDER In W.P.No.15740/2023, petitioner seeks the following reliefs: a) Issue a writ in the nature of certiorari or any other appropriate writ or order or direction under Article 226 of the Constitution quashing the impugned Order in-Appeal dated 29.05.2023 passed by Respondent No. 2 at Annexure-A, rejecting refund of Rs. 106,17,11,427/- and Rs. 110,70,94,987/- for the period October 2019 to December 2019 and January 2020 to June 2020 respectively; b) Hold that the services provided by the Petitioner to Xioami HK under the Reward Agreement dated 31.03.2019 vide Anne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use Notices by submitting a reply dated 21.01.2022, 15.04.2022 and 29.07.2021 respectively, which were followed by the orders at Annexure-J dated 31.05.2022, Annexure-P dated 02.06.2022 (in W.P. No. 15740/2023) and Annexure H dated 13.08.2021 (in W.P. No. 11311/2023) respectively passed by respondent No. 3 rejecting the claim for refund of Rs. 106,17,11,427/-, Rs. 110,70,94,987/- (in W.P. No. 15740/2023) and Rs. 145,09,13,633/- (in W.P. No. 11311/2023) made by the petitioner. Aggrieved by the aforesaid impugned orders at Annexures J, P and H dated 31.05.2022, 02.06.2022 and 13.08.2021, petitioner preferred appeals before the respondent No. 2, who proceeded to dismiss the appeals vide impugned orders dated 29.05.2023 and 20.12.2022 respectively. Aggrieved by said impugned orders dated 31.05.2022, 02.06.2022 and 13.08.2021 passed by respondent No. 3 and the impugned orders at Annexure-A dated 29.05.2023 and 20.12.2022 respectively passed by respondent No. 2 Appellate Authority, petitioner is before this Court by way of the present petitions. 4. In addition to reiterating the various contentions urged in the petitions and referring to the material on record, learned Senior Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure market growth of Xiaomi products in India, to fulfill their obligation in terms of the Reward Agreement, the transaction was treated as export of services to Xiaomi HK as per Section 2 (6) of the IGST Act, 2017, with the reward received being consideration for such export of service. 5. Accordingly, in terms of Section 54 of the CGST Act, 2017 read with Rule 89 (4) of the CGST Rules, 2017, the Petitioner filed refund claims towards refund of unutilized input tax credit relating to export of services for the period June 2019 to September 2019 and October 2019 to June 2020. 6. The refund claims of the Petitioner were rejected by the Department and the appeals filed against such rejection was also dismissed by Respondent No. 2 vide the impugned orders dated 20.12.2022 and 29.05.2023. The grounds of rejection were that a) that the services rendered by the Petitioner are in respect of making goods of Xiaomi HK available in India and thus, the place of supply shall be India in terms of Section 13 (3) (a) of the IGST Act, 2017 and b) that the reward being incidental and conditional to achievement of sales target, cannot be considered as consideration for export of any service. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Circular dated 178/10/2022-GST also clarifies that there should exist an express or implied promise by the recipient of money to agree to doing something in return for the money paid to him. Such arrangement or agreement can take the form of an independent stand-alone contract or may form part of another contract. 12. In the present case, it is submitted that the Petitioner has made supplies to Xiaomi HK under the Reward Agreements for the plan period 01.04.2018 to 31.03.2019 and 01.04.2019 to 30.03.2020. It is evident that the Petitioner shared an understanding with Xiaomi HK since the inception of the plan period April 2018 to March 2019 that the outstanding performance of the Petitioner s smart phones in the Indian market would make the Petitioner eligible for certain rewards. The same was conceptualized vide the Reward Agreement dated 31.03.2019. 13. It is also submitted that the Reward Agreement dated 31.03.2019 continued to exist well past the mentioned Plan Period of April 2018 to March 2019, as is evident from the Clause 9.1 of the Reward Agreement, which states that the said agreement shall continue to be in force until terminated by either of the parties. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that service requires the goods to be physically made available in India and thus, the place of supply of service is India is incorrect. It is submitted that Xiaomi HK does not supply any goods as a recipient of service, to the Petitioner for performing services on such goods. The eventual import of the goods is merely incidental to the performance of the service. As regards, Section 13 (8)(b), the Petitioner does not qualify as an intermediary in terms the definition contained in Section 2 (13) of the IGST Act. 19. Therefore, in accordance with the provisions of the IGST Act, 2017, the Petitioner agreeing to the obligation to generate revenue growth and increase market penetration of Xiaomi products in India, is in the nature of export of service by the Petitioner to Xiaomi HK and thus, the refund claimed by the Petitioner for the indicated periods deserve to be allowed and the impugned orders, passed on incorrect understanding of the law are liable to be quashed. 1. The Petitioner is in receipt of the Written Submissions dated 22.06.2024 submitted by the Respondents and is hereby filing their brief submissions rebutting the allegations raised therein. The submissions herein m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand the nature of the Agreement, it is pertinent that the scheme of the Reward Agreement be examined in light of the global business arrangement between the Petitioner, Xiaomi Hong Kong (Xiaomi HK) and the third-party manufacturers of the mobile phones. Xiaomi HK in the present situation is supplier of raw materials to manufacture Xiaomi branded mobile phones. The said raw materials are supplied to third-party manufacturers who undertake the manufacturing of the Xiaomi branded mobile phones as contract manufacturers. The manufactured products are procured by the Petitioner from such manufacturers and thereafter, ultimately sold in the Indian market, on payment of applicable taxes. This has been in vogue since July 2015. 4.2. On viewing the transactions from a holistic perspective, it becomes apparent that an increased market penetration of Xiaomi brand in India, would lead to an increase in the sale of the mobile phones. With higher sales, the procurement from the third-party manufacturers would also increase to cater to the demand. The said manufacturers in-turn would procure more raw materials from Xiaomi HK, leading to an increase in their revenue as well. It therefore, made m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019 to 2020 being undated is of no consequence. 4.8. It has also been alleged that the Petitioner has altered the targets for each of the plan period of the Petitioner, which is indicative of the self-serving nature of the Agreement. This allegation also has no legs to stand on. Once the Xiaomi brand is established in India, it is perfectly reasonable and acceptable for Xiaomi HK to amend the targets to encourage the Petitioner to retain the market-leader position already attained by the Petitioner in the previous plan period. 4.9. It is significant to note that the veracity and genuineness of the Agreements was never doubted by the Respondent authorities in the appeal / adjudication proceedings and the allegations of subterfuge has been made for the first time before this Court that too on mere assumptions and presumptions. It is settled law that an order passed by a statutory authority must be judged by the reasons so mentioned in the order and cannot be supplemented by fresh reasons and grounds which are not arising out of such order. In this background, it is submitted that the Department s attempt to supplement their case with fresh reasons at this juncture deserves to be reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore, there has not been a supply as contemplated under the Act. 5.4 This is precisely the reason why the taxable event is at an earlier stage of mere entering into an agreement and having an obligation to do an act. What is required to be therefore seen is whether there is an obligation to do an activity and whether there is a consideration for the existence of the obligation. The targets being met or not met is not relevant once the consideration is to be paid on the entering of the agreement having an obligation. 5.5 It has also been alleged that the consideration paid does not have a nexus with the promotional activities carried out by the Petitioner. 5.6 The Petitioner submits that in terms of the Agreement, the Petitioner has agreed to undertake the obligation to reach the specified targets. Once the said targets are achieved, the Petitioner becomes eligible for the reward. It is submitted that the parties can always fashion a contract in such a manner that the consideration is paid only upon fulfillment of certain targets and not on mere performance, as is the case in the present fact seven though the taxable event has occurred once there is an agreement with an obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eements, Xiaomi Hong Kong wished to encourage the Petitioner s growth as any growth of the company in which it has investments would be in its own interest. 4. In this background, it was agreed that the Petitioner would generate revenue growth and increase market penetration of Xiaomi products in India. In return for this promise, Xiaomi Hong Kong promised to pay a monetary reward to the Petitioner if certain sales targets were met. 5. In order to effectuate the above understanding between the Petitioner and Xiaomi Hong Kong, they entered into a Sales Reward Agreement (SRA) dated 31.03.2019. The recitals of the contract at clause C provided that the objective was to increase Xiaomi s growth in India. Clause 2.1 of the SRA provided that in addition, the objective of the SRA was to generate revenue growth and increase market penetration of Xiaomi products. Further, as per clauses 2.2 and 2.3 of the SRA, if the Petitioner achieved certain sales targets, Xiaomi Hong Kong was required to make payment of monetary rewards. Relevant clauses of the Distributorship Agreement and SRA Distributorship Agreement 1. Definitions and Interpretations Good Industry Practices means that the obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d expressions shall have the following meanings: Execution Date means the date of the execution of this Agreement as stated in the beginning Agreement; License effective date means 7 October 2014 2. Grant Of License 2.1 The Licensor, in consideration of the mutual covenants herein, hereby grants to the Licensee, who hereby accepts a non-exclusive, non-transferable, royally-free, and sub-licensable license (License) to use the Brand within the Territory for the purposes of the Business Use. The License shall be effective from the License Effective Date. 3. Conditions of Use 3.1 The License has been granted to the Licensee only in respect of Use of the Brand for the purpose of Business Use. 4. Consideration It is expressly agreed between the Parties that the Licensee's use (subject to conditions laid down in Clause 3 of the agreement) of the Brand within the Territory for the purpose of the Business Use is deemed to be a sufficient consideration for the purpose of this Agreement and therefore the License shall be on a royalty-free basis 9. Indemnity Each party agrees to indemnify, defend and hold harmless the other Party and its Affiliates and their respective officers, directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D rate per dovice for the identified devices sold in India during the plan period. 9.2 Termination 9.2.1 This Agreement may be terminated by either Party upon the occurrence of any of the following (whichever is earliest): 9.2.2. This Agreement may be terminated by either Party, without assigning any reasons, by giving a prior written notice of two (2) months to the other Party. Notwithstanding the foregoing, the Parties may, by mutual written consent, agree to dispense with the notice requirement and terminate the Agreement immediately. 14.7 Specific Performance Xiaomi India agrees that damages may not be an adequate remedy and that Xiaomi HK shall be entitled to an injunction, restraining order, right for recovery, suit for specific performance or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriate to restrain Xiaomi India from committing any violation or enforce the performance of the covenants, representations, and obligations contained in this Agreement. Obligation as an implied term 6. It is submitted that a close perusal of these contractual terms reveals that not only was Xiaomi Hong Kong under an obligation to make payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are met in the first place. Therefore, it is submitted that there can be no doubt that the SRA had an implied term casting an obligation on the Petitioner to increase its market share and product sales. 12. The fact that the Petitioner had such an obligation to increase its market share and its product sales, is also forthcoming from the prior Distributorship agreement between the Petitioner and Xiaomi Hong Kong, which in Clause 8.4 required the Petitioner to diligently and honestly execute its distributorship responsibilities in compliance with good industry practice. 13. In light of the above, it could be safely said that the Petitioner was required to make best efforts to promote Xiaomi Hong Kong s products in the Indian market. This included engaging in marketing activities, expanding market reach, and increasing sales, all of which were essential services rendered to Xiaomi Hong Kong. Such an obligation on the part of the Petitioner was not dependent on achieving the target but was a continuous duty to promote and sell Xiaomi Hong Kong s products. 14. In contract law, the obligation to use best efforts is a well-recognized concept. Even if the SRA did not guarantee a particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endeavours clause and could be rightly enforced. The relevant portions of the judgement are extracted below: The content of an obligation to use best endeavours to promote another person's business is not so uncertain as to be incapable of giving rise to a legally binding obligation, although it may be difficult to determine in any given case whether there has been a breach of it. (Emphasis supplied) 18. Therefore, failure to use best endeavours does give rise to claim for legally enforcing such an obligation. Thus, it is submitted that as rightly held by the court, the fact that it may be difficult to determine a breach thereof, does not prevent it from being a legally enforceable obligation. 19. In another decision of the English Court of Appeal in IBM United Kingdome Limited v. Roackware Glass Limited, 1980 FSR 335 , one of the parties was required to use best endeavours to obtain a planning permission. Once the application was rejected, the party failed to appeal the decision. The court held that such failure to appeal the decision constituted a failure to use best endeavours which gave rise to a claim for damages for enforcing such obligation. 20. In light of the above, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Once it is established that the transaction is a supply under the CGST Act, 2017, it is submitted that the same shall amount to export of service in terms of Section 2 (6) of the IGST Act, 2017. In view of the above, it is humbly prayed that the impugned order be set aside and the Writ Petition be allowed with directions to the Respondents to sanction the refund to the Petitioner. 5. It is submitted that non-consideration of the aforesaid contentions urged by the petitioner would vitiate the impugned orders and the same deserve to be set aside. In support of his submissions, learned Senior counsel placed reliance upon the relevant provisions of the CGST and IGST and Circulars, which reads as under: RELEVANT PROVISIONS 1. Section 2 (5) of the CGST Act, 2017 2. Section 7 of the CGST Act, 2017 3. Schedule II of the CGST Act, 2017 4. Section 2 (6) of the IGST Act, 2017 5. Section 2 (13) of the IGST Act, 2017 6. Section 8 of the IGST Act, 2017 7. Section 13 of the IGST Act, 2017 8. Rule 4 of the Place of Provisions of Service Rule, 2012 CIRCULARS AND EDUCATION GUIDE 1. Circular No.178/10/2022-GST dated 03.08.2022 2. Circular No.161/17/2021-GST dated 20.09.2021 3. Circular No.159/15/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmark stipulated for each plan period, in the respective agreement. A tabulated statement has been presented hereinbelow, with details as to the targets prescribed for each of the plan periods in question, under different agreements: Sl.No. Date of the Agreement Plan Period Target 1. 31.03.2019 01.04.2018-31.03.2019 As per Clause 2.2. of the Reward Agreement, monetary reward would be payable if: a. Xiaomi India continues to hold/retains the position of market leader in smart phones b. The volume of smart phones sold by Xiaomi India is atleast 1.5 times the total volume sold in the previous financial year; and c. The revenue from sale of smart phones by Xiaomi India is atleast1.5 times the total volume sold in the previous financial year. 2. Date not indicated 01.04.2019-31.03.2020 As per Clause 2.2. of the Reward Agreement, monetary reward would be payable if: a. Xiaomi India continues to hold/retains the position of market leader in smart phones and other mutually agreed products b. The volumes of smart phones and other mutually agreed products sold by Xiaomi India is atleast equal to or more than the total volume sold in the previous financial year; and c. The revenue from sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction in question appears to be a subterfuge, designed to claim refund of ITC. The real (sham) nature of the transaction in question becomes readily apparent upon careful consideration of the following details: 4.1. At the outset, it is to be noticed that the agreement which purportedly prescribes targets for the plan period between 01.04.2018 and 31.03.2019, was entered into on the very last day of the said plan period, i.e., on 31.03.2019. This fact would point towards the inference that the target already having been met, an agreement has been entered into as an afterthought with the sole object of availing refund of unutilized ITC. There arises no question of Xiaomi HK offering an inducement to the Petitioner herein, as consideration for the Petitioner s endeavors to enhance Xiaomi s market share in India, given that the agreement was entered into at the end of the plan period, when the targets stipulated therein had already been achieved; In other words, the target had already been achieved, before it was set. 4.2. It also deserves to be noticed that the targets are altered for each plan period, as highlighted in the tabulated statement presented hereinabove. Such a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot met with consideration, hence, no supply-there is no reciprocity between performing promotional activities and receipt of consideration. Consideration is paid only when Xiaomi, by virtue of the operation of market forces, retains/enhances its market position-an occurrence which the Petitioner cannot undertake to perform. In light of the submissions made hereinabove, it is prayed that this Hon ble Court may be pleased to hold that the transaction in question would not qualify as a supply as defined under Section 7 of the CGST Act. In fine, and for the reasons stated hereinabove, the claim of the Petitioner for refund under Section 54 of the CGST Act r/w Rule 89 (4) of the CGST Rules, is unsustainable in law. 7. So also, learned Senior Counsel Sri. Vikram Huilgol, who was appointed as amicus curiae would fairly submit that various contentions and submissions made on behalf of the petitioner as well as the respondents State have not been considered by respondent No. 2 Appellate Authority and since the same require to be addressed in detail, the matters have to be remitted back to the Appellate Authority for reconsideration afresh in accordance with law. 8. A perusal of the material ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
