Delhi High Court: Professional Services Rendered by EY India to Overseas EY Entities Cannot be Considered as ‘Intermediary’

Delhi High Court: Professional Services Rendered by EY India to Overseas EY Entities Cannot be Considered as ‘Intermediary’

The Delhi High Court while adjudicating a petition filed by the Indian Branch Office of M/s Ernst & Young Limited, against the impugned orders passed by the Adjudicating Authority rejecting its refund applications for Input Tax Credit (ITC) observed that, the services provided by E&Y India to overseas EY entities cannot be considered as an ‘intermediary,’ hence the Court directed Adjudicating Authority to process petitioner’s refund application.

In the present case, the assessee, M/s Ernst and Young Limited (India), applied for refund of ITC in respect of the services exported by it in the relevant period.

However, the Adjudicating Authority, the Assistant Commissioner (CGST), had rejected the said refund application on the ground that the assessee was an ‘intermediary.’

It had observed that in terms of Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (hereafter ‘the IGST Act’), the location of supply of intermediary services is the location of the location of the supplier of those services. Therefore, it held that place of service was the assessee’s place of business, i.e., India.

In an appeal filed by the assessee, the Appellate Authority, the Additional Commissioner of CGST, upheld the decision of the Adjudicating Authority.

The assessee/petitioner, Ernest and Young, filed a writ petition before the Delhi High Court challenging the order of the Appellate Authority.

The principal question which was addressed by the Justices Vibhu Bakhru and Amit Mahajan was whether the Service rendered by the petitioner to EY Entities in terms of the service agreement constitutes services as an ‘intermediary.’

The Court on perusal of Section 2(13) of the IGST Act, observed that the definition made it amply clear that an intermediary merely “arranges or facilitates” supply of goods or services or both between two or more persons. Thus, it was obvious that a person who supplies the goods or services is not an intermediary.

While applying the same to the present case, the bench noted that the petitioner does not arrange or facilitate services to EY entities from third parties; it renders services to them.

The Court observed, “in the present case, the petitioner has provided professional services in terms of the service agreements to overseas entities (EY Entities). It had issued the invoices for the said services directly to EY Entities and had received the invoiced consideration from EY Entities, in foreign convertible exchange. As stated hereinbefore, there is no dispute that the professional services were, in fact, rendered by the petitioner.”

The Court was of the view that the Adjudicating Authority had proceeded on the basis that since the assessee, Ernst and Young, had provided services on behalf of E&Y Limited (assessee’s UK based head office), it was an intermediary. Thus, the Court concluded that the said reasoning adopted by the Adjudicating Authority was fundamentally flawed.

The Adjudicating Authority had misunderstood the expression ‘intermediary’ as defined under Section 2(13) of the IGST Act. A person who provides services, as opposed to arranging or facilitating of goods from another supplier, is not an intermediary within the definition of Section 2(13) of the IGST Act, the bench stated.

The Court commented, “the limb of Section 2(13) of the IGST Act reads as “but does not include a person who supplies such goods or services or both or securities on his own account” but this does not control the definition of the term ‘intermediary’; it merely restricts the main definition. The opening lines of Section 2(13) of the IGST Act expressly provides that an intermediary means a broker, agent or any other person who arranges or facilitates supply of goods or services or both or securities between two or more persons.”

In this regard, the bench opined that the last line of the definition merely clarifies that the definition is not to be read in an expansive manner and would not include a person who supplies goods, services or securities on his own account. There may be services, which may entail outsourcing some constituent part to a third party. But that would not be construed as intermediary services, if the service provider provides services to the recipient on his own account as opposed to merely putting the third party directly in touch with the service recipient and arranging for the supply of goods or services, clarified the bench.

The Court thus concluded that since the services were not rendered by Ernst and Young as an intermediary, the place of supply of the services was required to be determined on basis of the location of the recipient of services, in view of Section 13(8) of the IGST Act.

Thus, indisputably, the bench observed that services provided by the petitioner would fall within the scope of the definition of the term ‘export of service’ under Section 2(6) of the IGST Act.

The Court allowed the petition and set aside the orders passed by the Appellate and the Adjudicating Authority. The bench directed the Adjudicating Authority to process the refund application of Ernest and Young.