The Bombay High Court in the case of SUNDYNE PUMPS AND COMPRESSORS INDIA PVT LTD (FORMERLY KNOWN AS HMD SEAL/LESS PUMPS INDUSTRIAL PVT LTD) VERSUS THE UNION OF INDIA THE REVENUE SECRETARY MINISTRY OF FINANCE, DEPARTMENT OF REVENUE, NEW DELHI & ORS. Vide WRIT PETITION NO. 15228 OF 2023 dated 16.06.2025, addressed that corporate structure i.e. subsidiary-holding/related party does not override contractual independence, and provide clarity on when an Indian entity may be deemed to be “establishment of a distinct person” under GST.

The Court quashed the orders denying refund of unutilized Input Tax Credit (ITC) under Section 54 of the CGST Act, holding that the engineering and design services exported by the petitioner to its foreign group/sister company qualified as “export of services” under Section 2(6) of the IGST Act. The Court also directed that the refund be granted with statutory interest under Section 56.

Facts of the Case: The Petitioner in this case was engaged in supplying engineering, consulting, office support, and repair/maintenance services exclusively to its group entities located outside India. The Petitioner filed refund claims for quarter 2 and 3 for F.Y. 2021-22 u/s 54(3) read with Rule 89(4) of CGST Rules, citing zero-rated supply under Section 16 of the IGST Act.

The refund claims for Q2 and Q3 FY 2021–22 were rejected by the adjudicating authority and upheld by the appellate authority, holding that “The foreign group companies receiving services through the petitioner’s Indian office amounts to agency or mere establishment of a distinct person, hence not an export of services”.

Petitioner’s Contention: The Petitioner argued that the recipient entities are distinct legal persons, incorporated and governed by foreign laws. All previous refunds for identical transactions were allowed, and those orders have attained finality. Further, the Petitioner is not an establishment of the foreign entities under the Explanation to Section 8. Thus, the services qualify as exports under IGST Act Section 2(6), fulfilling all five conditions.

Hence, rejection of refund on mere group relationship or related-party status is incorrect unless the establishment test under Section 8 Explanation is satisfied.

Department’s contention: The department asserted that the petitioner is an “agent” of the foreign company (group entity), and therefore the foreign recipient is carrying on business through an establishment in India, violating clause (v) of Section 2(6) of the IGST Act.

The department noted commercial coordination or contractual obligations such as mark-up pricing, SOPs, related party, and shared branding of the petitioner. The department on the basis of fixed profit margin or mark-up mechanism, Reimbursement of expenses, Control of financials, Manner of execution of work, Group relationship and related party nature stated that the petitioner to be an agent. Hence, the petitioner was not an independent service provider but functioned as an agent or representational office of the foreign group company.

Therefore, the supplies were not considered exports, and hence, not zero-rated, denying refund eligibility under Section 54(3) of the CGST Act.

Issue: Whether the Petitioner and its foreign group companies constitute “establishments of a distinct person” under Explanation 1 to Section 8, thereby disqualifying the services from being treated as exports, and hence, making them ineligible for refund of ITC.

Held that: The Court observed as under:

A. Supply Qualifies as Export of Services u/s 2(6) of the IGST Act

The Court noted that only clause (v) of Section 2(6) regarding “distinct persons” has been disputed by the department. The Court noted that clause (v) bars export status where the supplier and recipient are “merely establishments of a distinct person” under Explanation 1 to Section 8. Such a bar applies only when, Indian office is a branch, agency, or rep office of a foreign company (not separately incorporated), or a foreign office is not incorporated in the host country and is merely a representative/extension. The Clause is not applicable where the entities are separately incorporated and transacting on principal-to-principal basis.

B. Section 15 CGST Act – Related Party Argument

The Court held the Revenue’s reliance on Section 15 to treat the Petitioner and the foreign recipient as “related persons” and thus disqualify the supply as export was wholly misconceived. The Court relied upon the CBIC Circular No. 161/17/2021-GST dated 20.09.2021 was referred to, which explicitly clarifies that services supplied to related persons outside India may still qualify as exports, provided other conditions are met.

The Court also cited the Delhi High Court’s decision in Xilinx India Technology Services (P.) Ltd., which held that a subsidiary providing services to its foreign holding company is eligible for export benefits where services are rendered independently.

C. “Agent” Relationship; Services on Principal-to-Principal Basis

The Court noted that the agreement between the parties expressly disclaimed any agency relationship. The petitioner provided services using its own infrastructure, manpower, and resources. The foreign recipient had no control over the petitioner’s operations, negating the Revenue’s assertion that the petitioner acted “on behalf of” the foreign company. This fails the statutory test under Section 2(5) of CGST Act, which requires the supplier to act “on behalf of another”.

Further, states that “Merely because consideration is fixed and includes a markup, it does not become a commission”. It recognizes the cost-plus pricing at 110% as standard commercial practice, especially in inter-company transactions. Aligned with transfer pricing norms, thus not indicative of “agency”.

Also, the Court addresses the misinterpretation by tax authorities, that if a foreign entity can audit or inspect books, it “controls” the Indian entity. It was clarified that audit access is standard in cost-plus arrangements, the purpose is verification of cost base, not operational control.

Hence, condition (v) of Section 2(6) of the IGST Act (which bars supply between establishments of the same person from qualifying as exports) is not violated. This clears the way for refund eligibility under Section 54(3) and rebuts the denial premised on “deemed establishment” through agency.

D. Consistency & Finality of earlier refund order

The Court held that refunds had already been granted for earlier tax periods on identical facts and agreements, which had attained finality. The Revenue’s reversal of stance was held to be arbitrary and inconsistent. Thus, Court applied the doctrine of consistency and finality, barring the Department from taking a contrary view for subsequent years when facts remained unchanged.

The Court held that a group company incorporated in India is not the same as a foreign parent/subsidiary under clause (v) of Section 2(6). The Related party transactions, when conducted on a principal-to-principal basis, can still qualify as export of services, provided they meet the statutory conditions. Further, held that the petitioner satisfied all five conditions of Section 2(6), IGST Act. The Petitioner was not an agency or a mere establishment of the foreign company, and services rendered were thus held to be “export of services” and entitled to zero-rated treatment. Further, refund of unutilized ITC under Section 54 CGST Act was directed to be granted with interest under Section 56.

Related Legal Provisions

A, Section 2(6)(v) of IGST Act:

“Export of service means the supply of any service when –

(i) …

(ii)….

(iii) …

(iv) …

(v) the supplier and recipient are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.”

B. Explanation 1 to Section 8:

Establishments of a person in India and outside India are treated as distinct persons.

C. Section 2(5) of CGST Act:

“Agent” includes a person who carries on the business of the principal.