Design & Engineering Services to Foreign Entities Are Zero-Rated Supplies: Bombay HC Allows Refund of Unutilized ITC u/s 54 of CGST Act [Read Order]

In accordance with Section 54(3) of the Central Goods and Services Act, 2017 read with Rule 89(4) of the Central Goods and Services Rules, 2017, Sundyne Pumps and Compressors India Pvt. Ltd, the assessee/petitioner, submitted two refund applications for the July–September 2021 and October–December 2021 periods, requesting reimbursement of the unused ITC for creating zero-rated supplies.

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The two refund applications were denied by the State Tax Officer, the Original Authority, and upheld by the Appellate Authority on the grounds that the assessee, who is the recipient of the services located outside of India, is considered to be a "mere establishment of distinct person" because they are conducting business through the "agency" in India. As a result, the assessee was not eligible for a refund of unused ITC under Section 54(3) of the CGST/MGST Act since they did not supply zero-rated supplies.

Under Section 54(3) of the CGST Act/MGST Act read with Section 16 of the IGST Act and Rule 89(4) of the CGST Rules/MGST Rules, the assessee submitted two distinct refund applications seeking reimbursement of unused ITC for zero-rated supplies that the assessee made between April 2020 and March 2021 and April to June 2021. The assessee received the refunds after the aforementioned applications were properly approved. The assessee asserts that the aforementioned reimbursement orders are final and have not been contested by the State.

The assessee was given a show-cause notice when it was determined that the assessee had not met the requirements for exporting services by using clause (v) of Section 2(6) IGST Act, which defines "export of service."

In accordance with the rules of their respective countries, the assessee argued that the foreign corporations [to whom supplies were made] are autonomous body corporates or legal undertakings. Since all of the assessee's supplies were going to a recipient outside of India, they were zero-rated supplies under Section 16 of the IGST Act and qualified as "exports of goods" and "exports of services" under Sections 2(5) and 2(6) of the Integrated Goods and Services Tax Act, 2017 respectively. Accordingly, in accordance with Section 54(3) of the CGST/MGST Act read with Rule 89(4) of the CGST/MGST Rules, the assessee was entitled to a refund of the unused ITC.

The department argued that the assessee is an agent as defined by Section 2(5) of the CGST/MGST Act rather than an independent contractor since the parties' actions and the terms of the agreement demonstrate that the overseas receiver established an agency in India through the assessee.

The department has completely forgotten that the agreement explicitly states that the assessee is an independent contractor and that neither the assessee nor its officers, directors, employees, or subcontractors are servants, agents, or employees of the service recipient, according to the bench.

The Division Bench of Justices B.P. Colabawalla and Firdosh P. Pooniwalla observed that the 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.

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The bench said that the assessee for the same services applied for and received a refund for the April 2020–March 2021 and April–June 2021 periods. The responders chose not to appeal the two previous orders that gave the assessee a refund. The assumption for the refunds was that the assessee's services qualified as "export of services." Finality has been obtained on these orders. After this, the department cannot deny the refund claim on the grounds that the assessee's services do not constitute "export of service," particularly if the client agreements and all other relevant information are still the same.

The bench granted the petition, ruling that the assessee is entitled to a refund of unused ITC due to zero-rated supply under Section 54 of the CGST Act. Additionally, Section 56 of the CGST Act stipulates that the assessee will receive the refund along with statutory interest.

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