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TMI Blog2024 (9) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner responded to the aforesaid Show Cause 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering that the Petitioner had engaged in performing activities to 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich states that the reward only becomes payable on the Petitioner achieving certain specified targets. 11. 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of export as the place of supply is India in terms of Section 13 (3)(a) and 13 (8)(b) of the IGST Act is wholly sustainable. The finding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, with no legal or factual backing whatsoever. It is submitted that the Agreements are not a 'subterfuge' or 'sham' to claim input tax credit, as is evident from the submissions infra. 4.1. To understand 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Agreement dated 31.03.2019 has not been terminated by either - the Petitioner or Xiaomi HK, the same shall continue to operate, even during the plan period 2019 to 2020. Thus, the Agreement for the plan period 2019 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 supplemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike 'completion of the obligation.. to do an act…'. The risk that would have flowed from the above wordings would have been that an assessee could have argued in a typical case that the targets have not been met, say 1.495 times, instead of 1.5 times and 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censing agreement dated 18.05.2016indicated the shareholding of Xiaomi Hong Kong in the Petitioner. This itself reflects that the financial interests of Xiaomi Hong Kong are aligned with the success of the Petitioner, including its sales performance. 3. In light of the above agreements, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiaries) of the Licensor. The Investors are the shareholders of the Licensee and have made 100% foreign investments in the Licensee. The Licensor has authorized the Investors to make investments in the Licensee and to undertake single brand retail trading of the Products sold under the Brand in India through the Licensee. 1.1. The following words and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial year. 2.3 Reward Plan Components and Determination: As a direct inducement to encourage Xiaomi's growth in India, Xiaomi HK will reward as set forth below: a) Xiaomi India will be required to provide a report on the five (5) highest selling smart phones which has helped Xiaomi India capture the market share in India; b) For such five (5) top selling smart phones, Xiaomi HK will, at its discretion, give a reward at a certain USD 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 specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hong Kong is also willing to pay monetary award on meeting certain sales targets, nothing could give more business efficacy to the agreement than a term obligating the Petitioner to increase its market share and sales. 11. The Petitioner submits that it could not have been the intention of the parties that the agreement was a mere matter of making payments if sales targets are met, but not to require any party to actually make reasonable efforts to ensure that such sales targets 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed hosting the appellant airline's flights after normal working hours which increased the cost of operations of the appellant airline. Aggrieved, the appellant airline sued the respondent claiming damages. The trial court held in favour of the appellant and granted damages but refused certain declaratory reliefs. The court of appeal by a majority upheld the trial court's decision toward damages by holding that keeping the airport open beyond normal working hours was a reasonable expectation as part of the best 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 leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e best efforts to promote Xiaomi products in India, failure to do which shall create a legally enforceable right against the Petitioner by Xiaomi Hong Kong. Therefore, the Petitioner has clearly agreed to an obligation to undertake promotion of Xiaomi products and undertake ancillary activities, to ensure the market penetration of Xiaomi products in India in exchange of consideration, i.e. the monetary rewards. Thus, the transaction is a supply in terms of Section 7 read with Entry 5 (e) of Schedule II of the CGST Act, 2017. 25. 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 CGS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as mobile phones/smart phones etc. The said products are only sold by the Petitioner, upon procuring the same from within India, from third party manufacturers licensed by Xiaomi HK. 2.2. The Petitioner and Xiaomi HK entered into Reward Agreements for various plan periods, per which, the Petitioner was required to undertake certain activities to foster Xiaomi's revenue growth and market penetration in India. In terms of the agreements, the Petitioner would become eligible to receive monetary rewards from Xiaomi HK if the market performance of Xiaomi was as per the benchmark 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 financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration' as included in Schedule II to the CGST Act, and the consideration is the monetary reward received. 3.2. The Petitioner has placed reliance on the CBDT Circular No. 178/10/2022-GST dated 03.08.2022, to contend that so long as there is reasonable nexus between the supply (i.e. agreement to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act) and the consideration, the transaction would qualify as 'supply'. 4. Against the aforesaid backdrop and having regard to the contentions urged on behalf of the Petitioners, it is submitted on behalf of the Respondents that, prima-facie, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CGST Act. Further, the consideration must have a reasonable nexus with the obligation in order for the transaction to qualify as 'supply', vide CBDT Circular No. 178/10/2022-GST dated 03.08.2022. However, in the instant case, the monetary reward (stated to be the 'consideration') has a nexus, not with the promotional activity to be carried out the Petitioner, but to the happening of a continent event, i.e., meeting the 'target'. The monetary reward is given only if the target is met, and not on mere performance of promotional activities by the Petitioner. While the performance of promotional activities by the Petitioner may be said to be an 'obligation', the same is not 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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