M/S Nokia Solutions And vs The Principal on 22 August, 2024

Outcome**

The High Court of Karnataka allowed the writ petition, quashing the impugned appellate order dated 18.05.2022, the show cause notices dated 06.09.2021 and 07.07.2022, and the ex-parte order dated 26.07.2022. Consequently, the refund claim of the petitioner for unutilized Input Tax Credit (ITC) for export of services stands reinstated.

2. Core Issue

The core issue was whether M/S Nokia Solutions And Networks India Pvt Ltd. (petitioner) was entitled to a refund of unutilized ITC on its services provided to overseas related entities, which it claimed were "export of services" and "zero-rated supplies." This hinged on two main disputes:
1. Whether the petitioner had adequately demonstrated the realization of foreign exchange for the services despite alleged procedural non-compliance in submitting Bank Realisation Certificates (BRCs)/Foreign Inward Remittance Certificates (FIRCs) and other minor discrepancies.
2. Whether the services provided by the petitioner qualified as "intermediary services" under Section 2(13) of the IGST Act, which would disqualify them as export of services.

3. Key Facts

• The petitioner, M/S Nokia Solutions And Networks India Pvt Ltd., is engaged in providing information and technology software and related support services, including to overseas related entities.
• The petitioner claimed to provide services to overseas related entities on a principal-to-principal basis, evidenced by contracts/agreements from 2016 and 2018.
• The petitioner filed four applications for a refund of unutilized ITC for the periods April 2018 to March 2020, related to export services.
• The Assistant Commissioner (3rd respondent) initially sanctioned a partial refund via four orders in 2020.
• The Revenue (respondents) filed appeals, challenging these refund orders before the Joint Commissioner of GST Appeals-II (2nd respondent), alleging non-submission of BRCs/FIRCs, discrepancies in remittance details (beneficiary location, purpose of remittance, bank account numbers), and that the services were "intermediary services."
• During the appeal, the Additional Commissioner (4th respondent) issued a Show Cause Notice (SCN) dated 06.09.2021 to recover the sanctioned refund.
• The 2nd respondent (Appellate Authority) set aside the refund sanction orders via an order dated 18.05.2022.
• Subsequently, the Joint Commissioner (5th respondent) issued a second SCN dated 07.07.2022 for recovery and later an ex-parte order dated 26.07.2022 reiterating the recovery.
• The petitioner challenged these SCNs and orders before the High Court.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioner) Arguments:
* The petitioner provided software development and support services directly to its overseas related entities on a principal-to-principal basis, not as an intermediary.
* It had produced sufficient proof of receipt of foreign exchange (FIRAs, eBRCs submitted later, CA certificates), and the RBI itself had discontinued FIRCs (RBI Circular No.74 dated 26.05.2016).
* Minor discrepancies cited by the Revenue (Gurgaon vs. Bengaluru location, "intercompany receipt" purpose, different bank account numbers) were for administrative/global finance purposes and did not negate the fact of foreign exchange realization or the export of services.
* Procedural requirements for refund claims are directory, not mandatory, and substantial compliance with proof of export and realization should suffice, as supported by various judicial precedents and CBIC circulars.
* The services did not fall under the definition of "intermediary services" as per Section 2(13) of the IGST Act, especially considering CBIC Circular No.159/15/2021-GST, which requires a minimum of three parties, two distinct supplies, an agent/broker role, and excludes persons supplying on their own account. The petitioner supplied services on its own account directly.

Revenue (Respondents) Arguments:
* The petitioner failed to submit BRCs/FIRCs along with the refund claim, violating CBIC Circular No.125/44/2019-GST and statutory provisions (Sections 54(1), (4) CGST Act r/w Rule 89(2)(c) CGST Rules).
* The services did not qualify as "export of services" under Section 2(6) of the IGST Act or "Zero rated supply" under Section 16(1)(a) of the IGST Act because foreign exchange payment was not proven or realized correctly.
* Discrepancies in remittance details (beneficiary location, purpose of remittance as "intercompany receipt," differing bank account numbers) indicated that the payments were not for export of services.
* The services provided were "intermediary services" under Section 2(13) of the IGST Act, meaning the place of supply was in India, thus not qualifying as export.

5. Court’s Reasoning

The Court systematically addressed each of the Revenue's grounds for rejecting the refund:

• Proof of Foreign Exchange Realization (BRCs/FIRCs & Discrepancies):

  • The Court noted that RBI Circular No.74 dated 26.05.2016 had discontinued FIRC issuance. The petitioner had provided FIRAs, eBRCs (subsequently), and CA certificates, which the 3rd respondent had initially accepted as sufficient proof.
  • It held that the cumulative effect of these documents clearly established the receipt of export proceeds. Mere non-submission of FIRCs along with the initial application could not be a basis for setting aside the refund, especially when proof was later available.
  • The Court found the Revenue's objections regarding beneficiary location (Gurgaon vs. Bengaluru), purpose of remittance ("against intercompany receipt"), and variations in bank account numbers to be "fallacious/erroneous" and immaterial. These were attributed to administrative convenience or global finance systems and did not negate the fact of foreign exchange realization.
  • The Court emphasized that procedural requirements are directory, not mandatory, citing multiple precedents. If substantial compliance and corroborative evidence establish export and realization, the claim should not be denied on hyper-technical grounds. CBIC Circular No.125/44/2019-GST itself clarified that realization is a condition for export of services.

• Classification as "Intermediary Services":

  • The Court found that the Revenue failed to appreciate that the petitioner's services were rendered on a "principal-to-principal basis" and did not involve any third party or an agency relationship.
  • By analyzing the agreements, the Court concluded that the petitioner was directly involved in software development, support, coding, documentation, and project management, on its own account, with proprietary rights resting with the recipient.
  • Crucially, the Court referred to CBIC Circular No.159/15/2021-GST (21.09.2021), which outlines four prerequisites for intermediary services: (i) minimum three parties, (ii) two distinct supplies, (iii) character of an agent/broker, and (iv) explicit exclusion of persons supplying on their own account.
  • The Court held that the petitioner's services did not meet these criteria, as they were provided on its "own account."
  • It relied on several High Court precedents that consistently held that services provided directly by a subsidiary to its overseas parent/related entity on a principal-to-principal basis, without arranging or facilitating services from a third party, do not constitute intermediary services. These precedents also affirmed the separate legal identity of Indian subsidiaries from their foreign counterparts.

• Conclusion: The Court concluded that the impugned orders and SCNs were illegal, arbitrary, without jurisdiction, and contrary to the material on record and legal provisions.

6. Statutory References

• Constitution of India: Articles 226
• Integrated Goods and Services Tax Act, 2017 (IGST Act):
  • Section 2(6): Definition of "export of services"
  • Section 2(13): Definition of "intermediary"
  • Section 8 Explanation I: Distinct persons
  • Section 13: Place of supply of services where location of supplier or recipient is outside India
  • Section 16(1)(a): "Zero rated supply"
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 54(1) & (4): Refund of tax
• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 89(2)(c): Application for refund
• Companies Act, 1956/2013 (cited in precedents)
• Central Excise Rules, 2002: Rule 18 (cited in precedents)
• Customs Act/Rules: Rule 16A (cited in precedents)

7. Precedents Cited

• Abb India vs. Union of India - 2020 (373) ELT 205 (Kar)
• Handicrafts and Handlooms Exports Corporation of India Ltd v. Jt. Secretary to the Govt of India - 2018 (359) ELT 170 (Mad.)
• Commissioner of Customs v. Jindal Drugs Ltd. - 2018 (360) ELT 988 (Bom.)
• Zandu Chemicals Ltd. v. Union of India - 2014 SCC OnLine Bom 5002
• Adwaith Lakshmi Industries Limited v. Ministry of Finance - 2017 SCC OnLine Mad 22146
• Genpact India (P) Ltd. v. UOI - 2022 SCC OnLine P&H 425
• M/s Ernst and Young Ltd. v. Commr., CGST - 2023 SCC OnLine Del 1764
• Ohmi Industries Asia (P) Ltd. v. Commr. (CGST) - 2023 SCC OnLine Del 2029 (reiterating Ernst & Young)
• Xilinx India Technology Services (P) Ltd. v. Commr. - 2023 SCC OnLine Del 5628
• Boks Business Services (P) Ltd. v. Commr. (CGST) - 2023 SCC OnLine Del 5312
• Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner, AIR 1992 SC 1520 (cited for mandatory vs. directory provisions)
• UM Cables Ltd. (judgment of Bombay High Court on 24th October, 2013, cited in Zandu Chemicals)
• Bacha F. Guzdar v. Commissioner of Income-Tax, AIR 1955 SC 74 (cited for separate legal identity of company)

Other Circulars/Guidelines Referenced:
* RBI Circular No.74 dated 26.05.2016 (Discontinuation of FIRC)
* CBIC Circular No.125/44/2019-GST dated 18.11.2019 (Guidelines on refund claims)
* CBIC Circular No.159/15/2021-GST dated 21.09.2021 (Clarification on intermediary services)
* CBIC Circular dated 20.09.2022 (Clarification on Indian subsidiary and foreign company as separate persons for Section 2(6)(v) IGST Act)