Services rendered to holding company under an agreement does not make the service provider an intermediary

The Hon'ble Delhi High Court in M/s McDonalds India Pvt Ltd. v. Additional Commissioner, CGST Appeals – II, Delhi & Anr. [W.P.C No. 11430 of 2022 dated May 18, 2023] has set aside the order denying refund oftax paid on inputs, on the ground that, the assessee was providing services to its holding company, as against the allegation that the assessee was acting as mediator between the holding company and franchisees in India. Held that, no additional grounds for rejecting the assessee's claim for refund could be raised suo motu by the Appellate Authority, in an appeal preferred by the assessee.

Facts

M/s. McDonald's India Pvt. Ltd. ("the Petitioner") is a subsidiary of McDonald's Corporation, USA("the foreign counterpart"). The Petitioner and foreign counterpart entered into 2 agreements namely, Master License Agreement ("MLA") and Service Agreement. As per MLA the petitioner has non-exclusive rights to certain intellectual property of the foreign counterpart including the right to sub-license and by exercising such right the Petitioner had entered into franchisee agreements with various parties in India. 

As per Service Agreement, the Petitioner is bound to perform the certain activities viz, conduct research on subjects including consumer attitudes, demographics, marketing and advertising strategy, investigate the timing and location of Restaurant openings and other strategic matters etc.

The Petitioner filed refund of tax paid on inputsfor the period April 2018 to March 2019 by claiming services rendered under the Service Agreement as 'zero-rated supplies' as per Section 16 of the Integrated Goods and Services Tax Act, 2017 ("the IGST Act"). 

However, the Adjudicating Authority issued a Show Cause Notice dated August 14, 2020 ("the SCN"), proposing to reject the refund of tax paid on inputs amounting to INR 9,26,34,542/-.

The Petitioner filed the reply to the SCN vide letter dated August 27, 2020. The Adjudicating Authority considered the reply but rejected the refund claim of the Petitioner vide an Order dated August 31, 2020 ("the Order in Original").

Being aggrieved, the Petitioner filed an appeal before the Appellate Authority, which rejected the refund claim of the Petitioner vide Order dated February 14, 2022 ("the Impugned Order"). Consequently, this petition has been filed.

Issue

Whether the Petitioner is an intermediary within the meaning of Section 2(13) of the IGST Act in respect of services given under the Service Agreement?

Held:

The Hon'ble Delhi High CourtW.P.(C) No. 11430/2022held as under:

• Observed that, the Appellate Authority presumed that the Petitioner was acting as a mediator between prospective joint ventures and franchisees, where the main supplies were made by the foreign counterpart and ancillary supplies were provided by the Petitioner. 
• Further observed that, the Appellate Authority failed to consider the fact that the MLA, which granted the Petitioner the right to enter into sub-licenses with franchisees, was a separate agreement. 
• Stated that, it is essential that the principal service, the supplier of such services and the service purchaser are identified to ascertain whether the services performed by the Petitioner are those of a facilitator or one that arranges such services, which have not been analysed in Order-in-Original.
• Noted that, as per service agreement the service recipient is the foreign counterpart and the Petitioner is the service provider. There are no basis for the Appellate Authority to have concluded that the Petitioner acts as a mediator between joint ventures/ franchisees and the foreign counterpart. Thus, the Appellate Authority was wrong in considering the service provided by the Petitioner as intermediary services.
• Opined that, no additional grounds for rejecting the Petitioner's claim for refund could be raised suo motu by the Appellate Authority, in an appeal preferred by the Petitioner.
• Further observed that, the services provided by the Petitionerhad no connection with the services as contemplated under Section 13(5) of the IGST Act.    
• Set aside the Impugned Order and the Order in Original
• Remanded the matter back to the Adjudicating Authority to consider the Petitioner's case afresh.

Relevant Provision

Section 2(13) of the IGST Act

"(13) "intermediary" means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;"

Section 13(5) of the IGST Act

"13. Place of supply of services where location of supplier or location of recipient is outside India. –

(5) The place of supply of services supplied by way of admission to, or organisation of a cultural, artistic, sporting, scientific, educational or entertainment event, or a celebration, conference, fair, exhibition or similar events, and of services ancillary to such admission or organisation, shall be the place where the event is actually held."