Vodafone Idea decision of Bombay High Court: Clearing the air on refund controversy

 

Priyanka Rathi, Advocate, Supreme Court of India

 

Historically, Governments have kept incentivization of exports at the centre stage in fiscal planning to stimulate forex earnings for the Indian economy. Accordingly, provisions for refund of taxes and duties on the exports have always formed an integral part of the tax legislations and the same has been followed even under the GST regime.

 

Under the GST law, quite similar to the erstwhile service tax regime, the exports of goods and services have been zero rated and the assessee can obtain either refund of input tax credit or claim refund of IGST paid on account of export of goods or services. Further, the criteria for qualification of export of goods and services are contained under S. 2(5) and S.2(6) of the IGST Act, 2017. One of the important criteria for fulfillment of condition of export vis-à-vis services is that the place of supply of services should be outside India.

 

As far as service exports are concerned, ever since the implementation of GST, the refund claims have met with a serious resistance from the Department in several cases. In a spate of cases, refunds have been sought to be rejected primarily on two issues, firstly, on the basis of intermediary issue and secondly, on the ground that the services are delivered in India and hence, the place of supply of service as such is in India.

 

In this article, an emphasis has been laid on the second category of cases whereunder the Department is disagreeing with the export position with respect to services which are in nature of business support, telecommunication, marketing, sales promotion etc., on the ground that the place of supply of service is in India.

 

Before delving into this, it would be pertinent to briefly summarise the controversy with respect to the intermediary issue. The issue of rejection of refund on account of nature of the services being intermediary has swooped its way into GST from the erstwhile regime. The intermediary issue was an area of concern for the assesses even previously where relief in plethora of such cases was provided by the Tribunal. Now as far as emergence of this issue in GST is concerned, the Hon'ble Bombay High Court in Dharmendra M. Jani Vs Union of India and others, 2021-VIL-470-BOM has delivered a split verdict on the issue of constitutional validity of provisions with respect to taxability of intermediary services. Further, on merits, this issue warrants more factual (than legal) analysis such as whether the transaction is on principal to principal basis, nature of activities etc.

 

Further, the CBIC, in order to simplify the issue, has also issued Circular No. 159/15/2021-GST dated 20.09.2021 clarifying the scope of intermediary services wherein the concept of intermediary has been well explained. However, the fact remains that even post the Circular, the transactions which are entirely between two independent parties and lack characteristics of intermediary are again sought to be trapped.

 

Now as far as the second category of cases are concerned, services such as marketing telecommunication, support services are provided to the overseas entity under an agreement, however, the persons to whom the services are rendered are located in India. In Department's view, the services are performed in India and hence the place of supply of service is in India. Due to this narrow and pedantic approach of Department, the exporters of services are having a sour experience when it comes to claiming refund of taxes on export of services.

 

Further, the exporter's woes have been intensified due to absence of the GST Appellate Tribunal in the sense that this dispute has not been under the scrutiny of any proper appellate forum apart from Commissioner (Appeals) under GST. However, to the respite of exporters, the recent judgment of Bombay High Court in the case of Vodafone Idea Limited v. Union of India & Ors., 2022-VIL-486-BOM dated 4th July 2022 has made certain clear and important observations with respect to this particular issue and opined on - what is material for determination of recipient of services is the contractual relationship between the service provider and the service recipient and receipt of consideration. This would determine as to who is the actual customer i.e. the recipient of the services and the Court emphasized on the principle that the customer's customer cannot be construed as the customer of the supplier. It was thus held that place of supply would be determined accordingly.

 

In this aforesaid case, it has been held that roaming services provided by Vodafone Idea Limited ("Vodafone Idea") to the Foreign Telecom Operators ("FTOs") is an Export of Service for the purpose of IGST Act.

 

Here, Vodafone Idea provided telecom services under the telecommunication license granted by the Government of India to the FTOs in the nature of international Inbound Roaming Services etc. These services were categorized as exports and refund claim was filed accordingly. The said refund was sought to be rejected on the ground that the place of supply of these services is in Maharashtra therefore the transaction does not qualify as exports. Thus, the issue that arose for consideration was whether the place of supply of services would be in India or outside India so as to qualify as exports.

 

In this regard, the Court held that the provision of services by Vodafone India to the FTO's qualify as exports. The Court based its decision mainly on the following grounds:

 

o   In terms of the agreement, Vodafone India is rendering services to FTO and receiving consideration from FTO's. As per the definition of recipient under GST laws, any person who pays consideration is the recipient and thus, there is no doubt that FTO is recipient of service;

o   Further, Vodafone India has no idea of the subscribers of FTO and no contract with them either and the invoice for services is also being issued to FTO only;

o   Further, since the said services were supplied to FTO and not to an individual, the provision of section 13(3)(b) is not applicable as it starts with the words "service supplied to an individual".

 

Apart from this, most importantly, the Court while delivering the decision endorsed the principle that "a customer's customer cannot be your customer". The Court held that the customer of Vodafone Idea is the FTO and the subscribers of FTO are the customers of FTO. Therefore, subscribers of FTO will not be the customers of Vodafone Idea and thus the transaction is that of export and eligible for refund.

 

As mentioned above, the issue of denial of export benefit on the ground that the services are consumed in India has a chequered history. In past, the refund claim was always disputed on the ground that the condition of export of services i.e. "used outside India" does not stand fulfilled as the services are consumed in India. Further, this issue remains unresolved even under GST with authorities rejecting refund on the ground of consumption of services is in India and contending that place of supply of services is in India.

 

If one were to look at the decisions in the erstwhile regime then in Paul Merchants Ltd. vs. Commissioner of C. Ex., Chandigarh, 2012-VIL-09-CESTAT-DEL-ST the Tribunal held that the service recipient is the person on whose instructions/orders the service is provided, who is obliged to make the payment from the same and whose need is satisfied by the provision of the service. In this case, the Hon'ble Larger Bench of Tribunal held that, services used in relation to business would be consumed at a place where the business is located. It was further held that since sales promotion activities are in relation to the business of foreign company, the same would be treated as export of service, and hence would not attract service tax. Similarly, in the case of M/s Microsoft Corporation (I) (P) Ltd Vs CST, New Delhi, 2014-VIL-231-CESTAT-DEL-ST-LB it was held that since the sales promotion services are provided by the supplier to the Singapore Recipient company and would be used at Singapore, may be for the purpose of the sale of their product in India, then such sales promotion services by the assessee to the Singapore entity have to be held as export of services.

 

Thereafter, there have been series of decisions where the Tribunal has held similarly and reiterated the position that if it is the foreign entity who pays and uses the services abroad, such transactions should be treated as exports.

 

Similarly, the Hon'ble Delhi High Court in the case of Verizon India Pvt Limited Vs Commissioner of Service Tax, Delhi, 2017-VIL-469-DEL-ST had an occasion to delve on this issue wherein the assessee entered into a service agreement and rendered Business Support Services to Verizon US and claimed export benefits. The Department disputed the claim on the ground that services are provided in India. In this regard, the Hon'ble Court opined that the recipient of the service is Verizon US and is obliged to pay for the same. Merely because the subscribers to the telephone services of Verizon US or its US based customers 'use' the services provided by Verizon India in India, will not change the position that Verizon US is the recipient of service.

 

Further, as contradictory opinion of Tribunal existed on this issue, it was referred to larger bench of Tribunal in ARCELOR Mittal Projects India Pvt. Ltd. v. CST, 2019-VIL-1145-CESTAT-MUM-ST.

 

However, the post this development, the Delhi Bench of Tribunal in Involute Engineering v. CCE Service Tax, 2020-VIL-551-CESTAT-DEL-ST had again reaffirmed the legal position that the services will qualify as exports on the basis of decisions rendered by Bombay High Court in CST v. ATE Enterprises Pvt Ltd., 2017-VIL-668-BOM-ST and CST v. Wartsila, 2018-VIL-791-BOM-ST as well as Verizon (Supra) decision of Delhi High Court.

 

Conclusion

Some of the services (e.g. services of vendor identification, marketing, quality assurance, logistics control etc.) by their inherent nature cannot be delivered at any other place. In such cases, it ought to be appreciated by the Department while adjudicating the refund claims that these services have been sought by an overseas recipient, who is also paying consideration for it. Thus, in such a scenario, export position cannot be disputed by alleging that the place of supply is in India.

 

Further, the reasoning laid down in Vodafone Idea decision (Supra) that the "customer's customer cannot be your customer" is the logical and rational counter argument to the rejection of refunds by Department on ground that services are being performed in India. It should be understood that what is of significance is the contract between the supplier in India and overseas entity and consequential performance of services in India involving overseas customer's customer is immaterial.

 

Thus, the Hon'ble Bombay High Court observations in this context clears the air around this brewing tax controversy and is expected to be appreciated and applied by the Department in proper perspective while adjudicating the refund claims.

 

[Date: 26/08/2022]

 

(The views expressed in this article are strictly personal.)