2023 Taxo.online 906

Tax Breakthrough or Legal Upset? Delhi High Court’s Surprising Ruling Shakes the Business World!

Introduction:

Xilinx India Technology Services, an Export Oriented Unit (EOU) registered with the Software Technology Parks of India (STPI), primarily focuses on exporting information technology software services to entities located abroad. In this context, the company entered into an Intercompany Service Agreement with its holding company in the USA. This agreement, dated 10-6-2016, outlined the terms for exporting information technology services, with the understanding that Xilinx India would be remunerated on a costs-plus-15%-markup basis.

The revenue authorities decided to reject Xilinx India’s IGST refund application and issued a show cause notice. They asserted that the company did not satisfy the conditions laid down in Section 2(6)(v) of the Integrated Goods & Service Tax Act, 2017 (IGST Act). Specifically, they contended that “the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.”

Why It Happened:

The rejection of Xilinx India’s refund claim stemmed from the revenue authorities’ interpretation of Section 2(6)(v) of the IGST Act and Explanation I to Section 8 of the IGST Act. They considered Xilinx India and its US holding company to be establishments of a single person, thereby concluding that the services provided by Xilinx India to its holding company did not qualify as an export of services within the meaning of Section 2(6) of the IGST Act.

Xilinx India countered this interpretation by asserting its status as an independent company incorporated in India. It argued that its services to its holding company should indeed be recognized as exports of services. Moreover, the company referred to Circular dated 20-9-2021 (Circular No. 161/17/2021-GST) issued by the Central Board of Indirect Taxes & Customs (CBIC), which explicitly clarified that supply of services by a subsidiary/sister concern/group concern of a foreign company incorporated in India to the establishments of the foreign company located outside India should not be barred by condition (v) of Section 2(6) of the IGST Act.

Despite presenting this circular and emphasizing the separate legal entities of Xilinx India and its holding company, the revenue authorities rejected Xilinx India’s refund claim without addressing the circular’s content. They also categorized the company as an intermediary under Section 13 of the IGST Act, referencing Circular dated 18-7-2019.

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