Delhi High Court rules export consultancy is not intermediary service for GST ITC refunds

Background and procedural posture

The Delhi High Court in Ernst And Young Limited Vs Additional Commissioner examined whether accumulated input tax credit (ITC) arising from export of services could be refunded when the department had characterized such services as “intermediary” supplies. The dispute concerned refund claims for the period December 2017 to March 2020 filed by the Indian Branch Office of M/s Ernst & Young Limited, a company incorporated in the United Kingdom.

The assessee challenged an order-in-appeal dated 15.03.2022 (Order-in-Appeal No. 311-313/2021-22) issued by the Additional Commissioner of CGST Appeal-II, which had upheld three orders-in-original dated 25.01.2020, 09.12.2020 and 21.05.2021 passed by the Assistant Commissioner, CGST, Division Vasant Kunj. Those original orders had rejected refund claims of accumulated ITC on the footing that the assessee was providing “intermediary services,” thus treating the place of supply as India under Section 13(8)(b) of the IGST Act and denying export status to the services.

Although Section 112 of the Central Goods and Services Tax Act, 2017 provides a further statutory appeal to the Goods and Services Tax Appellate Tribunal, the Tribunal had not been constituted. In view of this lack of effective alternate remedy, the High Court exercised its writ jurisdiction and proceeded to examine the matter on merits.

Business model and nature of services

Establishment and pre-GST profile

• The assessee is an Indian Branch Office of Ernst & Young Limited (E&Y Limited), established in India pursuant to Reserve Bank of India (RBI) permission dated 04.04.2008.
• Before GST, the branch was separately registered under the service tax regime for multiple taxable categories such as:
  • “Management or business consultant service”
  • “Rent-a-cab scheme operator service”
  • “Manpower recruitment/supply agency service”
  • “Legal consultancy service”

Group service arrangements

E&Y Limited had entered into arm’s length service agreements with several overseas Ernst & Young group entities (collectively referred to as EY Entities), such as:

• Ernst & Young US LLP (EY US)
• Ernst & Young Services Pty Ltd. Australia (EY Australia)
• Ernst & Young Group Ltd. New Zealand (EY NZ)
• Ernst & Young LLP, UK (EY UK)

Under these arrangements, E&Y Limited, acting through its Indian Branch (the assessee), undertook to render professional consultancy and advisory support to such overseas entities. Consideration for these services was received in convertible foreign exchange.

The material agreements placed on record included, among others:

• Agreement dated 29.09.2009 between E&Y Limited and EY US
• Agreement dated 25.10.2010 between E&Y Limited and EY Australia
• Agreement dated 15.01.2018 between E&Y Limited and EY NZ
• Agreement dated 20.12.2012 between E&Y Limited and EY UK
• Agreement dated 25.09.2018 between E&Y Limited and EY US

While each contract had its own details, the substantive terms were similar across the board. To illustrate the commercial context, the Court referred to the agreement dated 29.09.2009 between E&Y Limited and EY US, under which:

• EY US retained E&Y Limited, acting through its Indian branch, to provide specified professional services in India.
• The services included, among other things:
  • Assurance and business advisory work
  • Technical advice on expatriate tax compliance under United States tax laws, including review of US tax returns and related deliverables
  • Knowledge transfer to other firms servicing EY US in India
  • Technical advice on US business tax compliance, including review and approval of US tax returns
  • Assistance regarding US audit processes in line with relevant accounting standards, including analysis of client financial data

The contracts recorded that:

1. E&Y Limited would discharge services in accordance with applicable professional standards and internal Ernst & Young global requirements.
2. EY US would pay an arm’s length fee, adjustable if found inconsistent with arm’s length principles.
3. EY US had a right to terminate with 30 days’ written notice.
4. EY US would own the intellectual property and rights in all work product (“Works”) generated under the engagement.
5. E&Y Limited was bound by strict confidentiality obligations regarding EY US and its business, subject to limited exceptions.
6. The agreement was subject to the laws of the State of New York.

The Court noted that agreements with other EY Entities were substantially similar in substance.

Services actually rendered and invoicing pattern

Pursuant to these agreements, the assessee directly executed professional assignments for the overseas EY Entities. The invoices issued by the branch described the charges as “Professional Fees for Services,” and payment was received directly from the foreign group entities in convertible foreign currency.

For discharging these engagements, the assessee utilized various inward supplies, such as:

• Chartered accountancy services
• Management and consultancy services
• Hotel accommodation
• Bank charges
• Renting of immovable property

ITC accumulated on such inward supplies was claimed as refundable on the basis that the outbound professional services constituted zero-rated export of services.

ITC refund claims and SCNs

Refund claims for the disputed period

The assessee filed three separate refund applications in respect of accumulated ITC pertaining to export of services for the period December 2017 to March 2020, as summarised below (with altered illustrative names/values for narrative purposes where not legally material):