Karnataka High Court
M/S Xiaomi Technology India Private ... vs State Of Karnataka on 22 August, 2024
Author: S.R.Krishna Kumar
Bench: S.R.Krishna Kumar
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NC: 2024:KHC:33916
WP No. 15740 of 2023
C/W WP No. 11311 of 2023
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 22ND DAY OF AUGUST, 2024
BEFORE
THE HON'BLE MR JUSTICE S.R.KRISHNA KUMAR
WRIT PETITION NO.15740 OF 2023 (T-RES)
C/W
WRIT PETITION NO.11311 OF 2023 (T-RES)
BETWEEN:
M/S XIAOMI TECHNOLOGY INDIA PRIVATE LIMITED
ORCHID, BLOCK-E, EMBASSY TECH VILLAGE,
GROUND FLOOR TO 4TH FLOOR,
SARJAPUR OUTER RING ROAD,
DEVARABEESANAHALLI, VARTHUR HOBLI,
BANGALORE - 560 103.
REP. BY SHRI SAMEER B S RAO,
DIRECTOR,
PURSUANT TO SUB-SECTION (2)
OF SECTION 7 OF THE COMPANIES ACT,
2013 AND RILE 8 OF THE COMPANIES
(INCORPORATION) RULES, 2014
AND ALSO AT:
XIAMO TECHNOLOGY INDIA PVT.LTD.,
Digitally
signed by BLOCK-E, EMBASSY TECH VILLAGE
Vandana S DEVARABEESANAHLLI, MALATHAHALLI
Location: MALATHAHALLI RING ROAD
HIGH BENGALURU - 560 013.
COURT OF ...PETITIONER
KARNATAKA (COMMON)
(BY SRI. G.SHIVADASS, SENIOR COUNSEL FOR
SRI. SYED PEERAN AND
MISS. MEGHANA LAL., ADVOCATES)
AND:
1. STATE OF KARNATAKA
THROUGH ITS PRINCIPAL SECRETARY,
FINANCE DEPARTMENT, VIDHANA SOUDHA
BENGALURU - 560 001.
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NC: 2024:KHC:33916
WP No. 15740 of 2023
C/W WP No. 11311 of 2023
2. THE JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS) 4
TTMC, BMTC BUILDING, SHANTHINAGAR
BANGALORE - 560 027.
3. THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES
LGSTO-015, 2ND FLOOR, VTK-2,
RAJENDRA NAGAR, KORAMANGALA
BANGALORE - 560 047.
...RESPONDENTS
(COMMON)
(BY SRI. HEMA KUMAR, AGA;
SRI. VIKRAM HUILGOL, SENIOR COUNSEL AS AMICUS CURIAE)
W.P.NO.15740/2023 IS FILED UNDER ARTICLE 226 OF THE
CONSTITUTION OF INDIA PRAYING FOR DIRECTION UNDER ARTICLE
226 OF THE CONSTITUTION TO QUASH THE IMPUGNED ORDER IN
APPEAL DT: 29.05.2023 PASSED BY THE R-2 AT ANNX-A REJECTING
REFUND OF RS.106,17,11,427/- AND RS.110,70,94,987/- FOR THE PERIOD
OCTOBER 2019 TO DEVEMBER 2019 AND JANUARY 2020 TO JUNE 2020
RESPECTIVELY AND ETC.,
W.P.NO.11311/2023 IS FILED UNDER ARTICLE 226 OF THE
CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED ORDER
GST AP NO.388/2021-22 DTD 20.12.2022 PASSED BY R-2 AT ANNX-A
REJECTING REFUND OF RS.145,09,13,633 FOR THE PERIOD JUNE 2019
TO SEPTEMBER 2019.
THESE PETITIONS, COMING ON FOR DICTATING ORDERS, THIS
DAY, ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR JUSTICE S.R.KRISHNA KUMAR
ORAL ORDER
In W.P.No.15740/2023, petitioner seeks the following reliefs:
"a) Issue a writ in the nature of certiorari or any other appropriate writ or order or direction under Article 226 of the Constitution quashing the impugned Order in-Appeal dated 29.05.2023 passed by Respondent No.2 at Annexure-A, rejecting refund of Rs.106,17,11,427/- and Rs.110,70,94,987/- for the period October 2019 to -3- NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 December 2019 and January 2020 to June 2020 respectively;
b) Hold that the services provided by the Petitioner to Xioami HK under the Reward Agreement dated 31.03.2019 vide Annexure-C qualifies as 'export of service' under Section 2(6) of the IGST Act, 2017;
c) Hold that the Petitioner is not an 'intermediary' in terms of Section 2(13) of the IGST Act, 2017;
d) Order for sanction of refund of
Rs.106,17,11,427/- and Rs.110,70,94,987/- being the
accumulated input tax credit relating to the export of services to Xiaomi HK during the period October 2019 to December 2019 and January 2020 to June 2020 respectively with interest;
e) Pass such further order(s) and other reliefs as the nature and circumstances of the case may require."
In W.P.No.11311/2023, petitioner seeks for the following reliefs:
"a) issue a writ in the nature of Certiorari or any other appropriate writ or order or direction under Article 226 of the Constitution quashing the impugned Order GST.AP.No.388/2021-22 dated 20.12.2022 passed by Respondent No.2 at Annexure-A, rejecting refund of Rs.145,09,13,633/- for the period June 2019 to September 2019;-4-
NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023
b) Hold that the services provided by the Petitioner to Xioami HK under the Reward Agreement dated 31.03.2019 qualifies as 'export of service' under Section 2(6) of the IGST Act, 2017;
c) Hold that the Petitioner is not an 'intermediary' in terms of Section 2(13) of the IGST Act and does not meet the requirements of an intermediary that are laid down in the CBIC Circular dated 20.09.2021;
d) Order for sanction of refund of Rs.145,09,13,633/- being the accumulated input tax credit relating to the export of services to Xiaomi HK during the period June 2019 to September 2019 with interest;
e) Pass such further order(s) and other reliefs as the nature and circumstances of the case may require."
2. Heard learned Senior Counsel for the petitioner and learned AGA for the respondents and perused the material on record. I have also heard Sri. Vikram Huilgol, learned Senior Counsel appointed as Amicus Curiae to assist this Court in the matter.
3. A perusal of the material on record will indicate that on 06.11.2021, 18.01.2022 and 16.06.2021, the petitioner filed refund claim applications for the period from October 2019 to December 2019, January 2020 to June 2020 and June 2019 to September -5- NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 2019 respectively. In pursuance of the same, Show Cause Notices dated 07.12.2021, 15.03.2022 and 16.07.2021 respectively were issued by respondent No.3 to the petitioner proposing to reject the refund. Petitioner responded to the aforesaid Show Cause Notices by submitting a reply dated 21.01.2022, 15.04.2022 and 29.07.2021 respectively, which were followed by the orders at Annexure-J dated 31.05.2022, Annexure-P dated 02.06.2022 (in W.P.No.15740/2023) and Annexure - H dated 13.08.2021 (in W.P.No.11311/2023) respectively passed by respondent No.3 rejecting the claim for refund of Rs.106,17,11,427/-, Rs.110,70,94,987/- (in W.P.No.15740/2023) and Rs.145,09,13,633/- (in W.P.No.11311/2023) made by the petitioner. Aggrieved by the aforesaid impugned orders at Annexures - J, P and H dated 31.05.2022, 02.06.2022 and 13.08.2021, petitioner preferred appeals before the respondent No.2, who proceeded to dismiss the appeals vide impugned orders dated 29.05.2023 and 20.12.2022 respectively. Aggrieved by said impugned orders dated 31.05.2022, 02.06.2022 and 13.08.2021 passed by respondent No.3 and the impugned orders at Annexure-
A dated 29.05.2023 and 20.12.2022 respectively passed by -6- NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 respondent No.2 - Appellate Authority, petitioner is before this Court by way of the present petitions.
4. In addition to reiterating the various contentions urged in the petitions and referring to the material on record, learned Senior Counsel for the petitioner submits that both respondent No.3 - Original Authority as well as respondent No.2 - Appellate Authority have committed a grave and serious error of law and fact in rejecting the refund claims of the petitioner and not considered the various contentions urged by the petitioner before respondent Nos.3 and 2 respectively. It is submitted that both before respondent No.3 as well as before respondent No.2, the petitioner had urged several contentions and made various submissions, which have not been considered by the respective respondents.
Learned counsel would elaborate his submissions and reiterate the written submissions / synopsis, which are extracted as hereunder:
1. The Petitioner is a private limited company engaged in the sale of Xiaomi branded products, including mobile phones, which are procured from third party contract manufacturers on payment of taxes.
Such third-party manufacturers in turn procures the raw materials for manufacture of such Xiaomi branded products from Xiaomi HK Limited ('Xiaomi HK'). The Petitioner on procurement, sells these Xiaomi branded products onwards to sellers on payment of applicable taxes.
-7-NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 Brief Facts
2. In terms of the business arrangement between the Petitioner and Xiaomi HK, the Petitioner is obligated to generate revenue growth and increase market penetration of Xiaomi products in India. The said arrangement between the parties was formalized by way of the Reward Agreement dated 31.03.2019 for the plan period 01.04.2018 to 31.03.2019 which continued by way of the Reward Agreement for the plan period 01.04.2019 to 30.03.2020. In terms of the Reward Agreements, the Petitioner was required to undertake various steps to achieve specified targets including retention of market leader position in smart phones etc. As consideration for their efforts, the Petitioner was entitled to receive monetary rewards from Xiaomi HK.
3. On achieving the desired results during the plan period, the Petitioner notified Xiaomi HK the quantum of smart phones sold by way of written reports. The reward eligible to be received by the Petitioner was computed by Xiaomi HK in terms of the rates set out in the Reward Agreement. Accordingly, the Petitioner raised periodical invoices towards receipt of such rewards which were received in tranches post June, 2019.
4. Considering that the Petitioner had engaged in performing activities to ensure market growth of Xiaomi products in India, to fulfill their obligation in terms of the Reward Agreement, the transaction was treated as export of services to Xiaomi HK as per Section 2(6) of the IGST Act, 2017, with the reward received being consideration for such export of service.
5. Accordingly, in terms of Section 54 of the CGST Act, 2017 read with Rule 89(4) of the CGST Rules, 2017, the Petitioner filed refund claims towards refund of unutilized input tax credit relating to export of services for the period June 2019 to September 2019 and October 2019 to June 2020.
6. The refund claims of the Petitioner were rejected by the Department and the appeals filed against such rejection was also -8- NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 dismissed by Respondent No. 2 vide the impugned orders dated 20.12.2022 and 29.05.2023. The grounds of rejection were that a) that the services rendered by the Petitioner are in respect of making goods of Xiaomi HK available in India and thus, the place of supply shall be India in terms of Section 13(3)(a) of the IGST Act, 2017 and b) that the reward being incidental and conditional to achievement of sales target, cannot be considered as consideration for export of any service.
7. The details of the refund claims and impugned orders rejecting such refund claims are tabulated as below for ease of reference:
Date of the Refund
Sl. Impugned Writ
Period refund rejected
No. Order Petition
claim (in Rs.)
1. June 2019 16.06.2021 Order dated 145,09,13,633 WP No.
to 20.12.2022 11311/2023
September
2019
2. October 06.11.2021 Order dated 106,17,11,427 WP No.
2019 to 29.05.2023 15740/2023
December
2019
3. January 18.01.2022 110,70,94,987
2020 to
June 2020
Submissions
A. The Petitioner has supplied services to Xiaomi HK under the Reward Agreement
8. The Petitioner submits that in accordance with Section 7(1A) read with Entry 5 (e) of Schedule II of the CGST Act, 2017, the activity of 'agreeing to the obligation to inter alia do an act for a consideration' is in the nature of supply of service under the CGST Act, 2017. From a plain reading of the provision, it follows that a mere existence of an obligation to do an act for consideration is enough to cover a transaction within the ambit of the said entry. If an assessee receives payment for agreeing to such obligation, the same shall amount to supply of service liable to GST.
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9. It is submitted that in terms of the Reward Agreement, the Petitioner is required to undertake activities to promote Xiaomi branded products in India, thereby, increasing the market share of Xiaomi products, in exchange for a consideration by way of rewards. On achieving the desired results, the Petitioner notifies Xiaomi HK of the same and provides reports of their bestselling smart-phones, basis which the consideration, i.e. the reward is computed. Thus, in the present case, the Petitioner agreeing to the obligation to undertake necessary steps to penetrate into the Indian market is in the nature of supply of services in terms of Section 7(1A) read with entry 5 (e) of Schedule II of the CGST Act, 2017.
10. Reliance is placed on Circular No. 178/10/2022-GST dated 03.08.2022, which states that there should exist a necessary and clear nexus between the supply and the consideration. It is submitted that in the present case, the supply, i.e. the obligation to undertaken activities to achieve the target and the consideration, i.e. the monetary reward are clearly related as is evident from the clauses of the Reward Agreement, which states that the reward only becomes payable on the Petitioner achieving certain specified targets.
11. The Circular dated 178/10/2022-GST also clarifies that there should exist an express or implied promise by the recipient of money to agree to doing something in return for the money paid to him. Such arrangement or agreement can take the form of an independent stand- alone contract or may form part of another contract.
12. In the present case, it is submitted that the Petitioner has made supplies to Xiaomi HK under the Reward Agreements for the plan period 01.04.2018 to 31.03.2019 and 01.04.2019 to 30.03.2020. It is evident that the Petitioner shared an understanding with Xiaomi HK since the inception of the plan period April 2018 to March 2019 that the outstanding performance of the Petitioner's smart phones in the Indian market would make the Petitioner eligible for certain rewards. The same was conceptualized vide the Reward Agreement dated 31.03.2019.
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023
13. It is also submitted that the Reward Agreement dated 31.03.2019 continued to exist well past the mentioned Plan Period of April 2018 to March 2019, as is evident from the Clause 9.1 of the Reward Agreement, which states that the said agreement shall continue to be in force until terminated by either of the parties. Since the said Reward Agreement has not been terminated by either the Petitioner or Xiaomi HK, the same shall continue to operate, during the disputed period.
14. Therefore, the existence of the above Reward Agreements make it amply clear that the Petitioner has agreed to undertake activities to ensure market penetration of Xiaomi branded products in India for the indicated rewards. Thus, it is submitted that the obligation to do an act expressly captured by way of the Reward Agreements undisputedly exists herein.
15. The said Circular has further stated that a payment which is merely an event in the course of performance of the agreement, and does not represent the 'object' of the contract cannot be considered as consideration. The Petitioner submits that in the present case, the reward or incentive is payable to the Petitioner in the event that the conditions laid down under Para 2.3 of the Agreement are met by the Petitioner by performance of their actions.
16. Therefore, it is submitted that the present transaction, being the Petitioner agreeing to the obligation to undertake necessary steps to penetrate into the Indian market is a supply under GST in terms with Section 7(1A) read with Schedule II of the CGST Act, 2017 and the Department's contention that there does not exist any supply in the first place is flawed and unsustainable.
B. The supplies made under the Reward Agreement are in the nature of export from the Petitioner to Xiaomi HK
17. The Petitioner also submits that the present supply is export of service in terms of Section 2(6) of the IGST Act, 2017 as the conditions laid down therein are being fulfilled as mentioned below:
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023
(a) the service provider, i.e. the Petitioner is located in India;
(b) the recipient of service, i.e. Xiaomi HK is located outside India;
(c) the payment of such service has been received by the Petitioner in convertible foreign exchange;
(d) the Petitioner and Xiaomi HK are not establishments of distinct persons as per Explanation of Section 8 of the IGST Act, 2017; and
(e) the place of supply of service is outside India in terms of default rule under Section 13 (2) of the IGST Act.
18. The Petitioner also submits that the case of the Department in the impugned orders that the transaction is not that of export as the place of supply is India in terms of Section 13 (3)(a) and 13 (8)(b) of the IGST Act is wholly sustainable. The finding that service requires the goods to be physically made available in India and thus, the place of supply of service is India is incorrect. It is submitted that Xiaomi HK does not supply any goods as a recipient of service, to the Petitioner for performing services on such goods. The eventual import of the goods is merely incidental to the performance of the service. As regards, Section 13 (8)(b), the Petitioner does not qualify as an intermediary in terms the definition contained in Section 2(13) of the IGST Act.
19. Therefore, in accordance with the provisions of the IGST Act, 2017, the Petitioner agreeing to the obligation to generate revenue growth and increase market penetration of Xiaomi products in India, is in the nature of export of service by the Petitioner to Xiaomi HK and thus, the refund claimed by the Petitioner for the indicated periods deserve to be allowed and the impugned orders, passed on incorrect understanding of the law are liable to be quashed.
"1. The Petitioner is in receipt of the Written Submissions dated 22.06.2024 submitted by the Respondents and is hereby filing their brief submissions rebutting the allegations raised therein. The submissions herein may be read as part and parcel of
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 the Writ Petition, along with its annexures and the brief synopsis dated 25.04.2024 filed before this Court.
2. The Respondents vide the Written Submissions has made the following submissions:
(a) That the transaction in question appears to be a subterfuge, designed to claim input tax credit basis the following grounds: (Para 4) • That the Agreement for the plan period 2018 to 2019 was entered into on the very last day of the plan period, i.e. 31.03.2019; that the Agreement has been entered into as an afterthought and the target was already achieved before it was set;
• That the targets have been altered for each plan period revealing the self-serving nature of the Agreement;
• That Agreement for the plan period 2019-2020 was undated and has been inferred to be entered into at the end of the plan period as well.
(b) That in any case, the transaction is not a supply in terms of Section 7 of the CGST Act, 2017: (Para 5) • That an agreement to receive consideration, on the happening of a contingent and uncertain event cannot be termed as an 'obligation', more so when the happening of such event is dependent primarily on market forces; that the entry is to be read to mean 'the obligation of a definite act';
• That consideration, i.e. the monetary rewards do not have a nexus with the promotional activity to be carried out, but on the contingent event of meeting a target; that therefore, there is no reciprocity between performing promotional activities and receipt of consideration.
3. Thus, the only contention taken by the Department in the present case is that there is no supply being made by the Petitioner to Xiaomi HK in terms of the Agreement. It is pertinent to note that the Ld. AGA has not disputed that once the presence of the supply is established, the transaction will qualify as export of service under Section 2(6) of the IGST Act, 2017 and consequently, the benefit of refund on zero-rated
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 supplies in terms of Section 16 of the IGST Act, 2017 shall be allowed to the Petitioner.
4. At the outset, the Petitioner herein vehemently denies the allegations made in Para 4 of the Dept. Written Submissions, which have been blanketly made on assumptions, with no legal or factual backing whatsoever. It is submitted that the Agreements are not a 'subterfuge' or 'sham' to claim input tax credit, as is evident from the submissions infra.
4.1. To understand the nature of the Agreement, it is pertinent that the scheme of the Reward Agreement be examined in light of the global business arrangement between the Petitioner, Xiaomi Hong Kong (Xiaomi HK) and the third-party manufacturers of the mobile phones. Xiaomi HK in the present situation is supplier of raw materials to manufacture Xiaomi branded mobile phones. The said raw materials are supplied to third-party manufacturers who undertake the manufacturing of the Xiaomi branded mobile phones as contract manufacturers. The manufactured products are procured by the Petitioner from such manufacturers and thereafter, ultimately sold in the Indian market, on payment of applicable taxes. This has been in vogue since July 2015.
4.2. On viewing the transactions from a holistic perspective, it becomes apparent that an increased market penetration of Xiaomi brand in India, would lead to an increase in the sale of the mobile phones. With higher sales, the procurement from the third-party manufacturers would also increase to cater to the demand. The said manufacturers in-turn would procure more raw materials from Xiaomi HK, leading to an increase in their revenue as well. It therefore, made more business sense for the Petitioner to ensure that there is continuous growth in the sales of the phones and to undertake concerted efforts to achieve that.
4.3. In the said background, it is submitted that the Petitioner was undertaking promotional activities which positively benefitted all the parties in the process. The increased procurement of mobile phones from the contract manufacturers and subsequent supply by the Petitioner to
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 the customers also resulted in increased revenue for the exchequer by way of payment of GST on such supplies.
4.4. From the above, it is evident that the Petitioner shared an understanding with Xiaomi HK and was under an obligation, since the inception of the plan period 2018 to 2019, to increase the sales of mobile phones in the Indian market in exchange for certain rewards. For meeting such obligations, the Petitioner took various steps and promotional activities in India. This understanding or arrangement was merely crystallized vide the Agreement dated 31.03.2019 with the Petitioner being the service recipient and Xiaomi HK being the service receiver, as defined in the Section 2(105) and (93) of the CGST Act, 2017.
4.5. This agreement while defining the Effective date to mean 01.04.2018, sets out that their agreement would continue to be in force unless terminated by either party in accordance with Clause 9.1 of the Agreement.
4.6. In this background, the allegation of the Respondent that the agreement dated 31.3.2019 is a subterfuge is without any basis.
4.7. For the same reason, in respect of the Agreement for the plan period 2019 to 2020, it is submitted that even though the said Agreement is undated, it does not take away the fact that the same is a valid and enforceable agreement which has been duly signed by the parties. The same has not been disputed by the Department as well. Merely because the Agreement is undated, it does not follow that the Petitioner only came to the understanding with Xiaomi HK at a later date, as a written agreement alone is not a manner in which understanding can be reached between the parties, more so when the similar understanding was prevalent for the past period also. Since the Agreement dated 31.03.2019 has not been terminated by either - the Petitioner or Xiaomi HK, the same shall continue to operate, even during the plan period 2019 to 2020. Thus, the Agreement for the plan period 2019 to 2020 being undated is of no consequence.
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 4.8. It has also been alleged that the Petitioner has altered the targets for each of the plan period of the Petitioner, which is indicative of the self- serving nature of the Agreement. This allegation also has no legs to stand on. Once the Xiaomi brand is established in India, it is perfectly reasonable and acceptable for Xiaomi HK to amend the targets to encourage the Petitioner to retain the market-leader position already attained by the Petitioner in the previous plan period.
4.9. It is significant to note that the veracity and genuineness of the Agreements was never doubted by the Respondent authorities in the appeal / adjudication proceedings and the allegations of subterfuge has been made for the first time before this Court that too on mere assumptions and presumptions. It is settled law that an order passed by a statutory authority must be judged by the reasons so mentioned in the order and cannot be supplemented by fresh reasons and grounds which are not arising out of such order. In this background, it is submitted that the Department's attempt to supplement their case with fresh reasons at this juncture deserves to be rejected.
5. As regards the allegations at Para 5 of the Written Submissions, it is submitted as under:
5.1 The Ld. AGA has advanced a contention that the agreement to receive consideration on happening of an uncertain and contingent event cannot be termed as an 'obligation' more so when the event is primarily dependent on market forces.
5.2 It is submitted that the present case is not a transaction where the Petitioner has no role to play and has simply agreed to receive money from Xiaomi HK on the happening of a contingent event. As is evident from the Agreement, the Petitioner has to undertake and has indeed undertaken extensive marketing activities to ensure that the obligation to reach the targets specified in the Agreement are duly met by the Petitioner. As-such the obligation in the Agreement is to undertake
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 activities that enable the Petitioner to reach the specified targets, the fulfillment of which entitles the Petitioner to consideration in form of rewards. This cannot be equated and considered as a situation where the Petitioner is merely receiving amounts from Xiaomi HK for happening of a contingent event, the Petitioner had no influence upon. Thus, on these facts, the contention of the ld. AGA is entirely misconceived and does not advance the case of the department any further. In any case, even assuming that the present agreement is that of consideration becoming payable simply on the happening of a contingent and uncertain event, it is submitted, the same remains an enforceable contract in terms of Section 32 of the Contract Act, which provides that contracts based on an uncertain future event happening can be enforced once the said event happens. Thus, in the said background, it is submitted that merely because there exists a degree of uncertainty as to whether or not the Petitioner shall reach the indicated targets or not, it does not follow that the transaction is excluded from the ambit of 'supply' altogether.
5.3 It is submitted that if the completion of the obligation to do an act is to be criteria, then the entry 'agreeing to the obligation... to do an act...' would have been differently worded, somewhat like 'completion of the obligation.. to do an act...'. The risk that would have flowed from the above wordings would have been that an assessee could have argued in a typical case that the targets have not been met, say 1.495 times, instead of 1.5 times and therefore, there has not been a supply as contemplated under the Act.
5.4 This is precisely the reason why the taxable event is at an earlier stage of mere entering into an agreement and having an obligation to do an act. What is required to be therefore seen is whether there is an obligation to do an activity and whether there is a consideration for the existence of the obligation. The targets being met or not met is not relevant once the consideration is to be paid on the entering of the agreement having an obligation.
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 5.5 It has also been alleged that the consideration paid does not have a nexus with the promotional activities carried out by the Petitioner.
5.6 The Petitioner submits that in terms of the Agreement, the Petitioner has agreed to undertake the obligation to reach the specified targets. Once the said targets are achieved, the Petitioner becomes eligible for the reward. It is submitted that the parties can always fashion a contract in such a manner that the consideration is paid only upon fulfillment of certain targets and not on mere performance, as is the case in the present fact seven though the taxable event has occurred once there is an agreement with an obligation to do an activity.
5.7 In terms of Circular No. 178/10/2022-GST dated 03.08.2022 issued to clarify the scope of Entry 5(e) of Schedule II of the CGST Act, 2017, the promise to do an act may be express or implied. Thus, as long as there exists an implied promise by the recipient of money to agree to do something in return for the money paid to him, the transaction shall be a valid supply, irrespective of the presence of the Agreement or not. Since the Petitioner has agreed to the obligation of increasing Xiaomi HK's growth in the Indian market in exchange of the rewards, the said pre-condition is met and thus, the transaction amounts to a supply of service and the amount paid has a nexus with the 'supply' so as to represent consideration for the said supply. In fact this clarifies that the agreement can be on a standalone basis or form part of another contract and such a contract can be implied or expressed. All that is required is that the existence of an agreement having an obligation to do an activity and payment of an amount in pursuance of the agreement.
6. Thus, the submissions made vide the Written Submissions dated 22.06.2024 ought to be disregarded and the Hon'ble High Court may be pleased to allow the writ petitions with consequential relief.
1. The Petitioner is filing the present written submissions in furtherance of the hearing in the matter on 07.08.2024. The said Additional Written Submissions may be read as part and parcel of the
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 Writ Petition along with the annexures, the brief synopsis dated 25.04.2024 and the rebuttals to the Respondent's written submissions dated 08.08.2024.
2. The Petitioner and Xiaomi Hong Kong have an interconnected business relationship governed by multiple agreements including the following:
Distributorship Agreement dated 26.09.2018: The Petitioner is obligated to distribute and sell Xiaomi Hong Kong's products in India. This creates an ongoing commercial relationship, where the Petitioner undertakes significant responsibilities, including marketing and promoting of Xiaomi products.
Brand Licensing Agreement dated 18.05.2016: The brand licensing agreement dated 18.05.2016indicated the shareholding of Xiaomi Hong Kong in the Petitioner. This itself reflects that the financial interests of Xiaomi Hong Kong are aligned with the success of the Petitioner, including its sales performance.
3. In light of the above agreements, Xiaomi Hong Kong wished to encourage the Petitioner's growth as any growth of the company in which it has investments would be in its own interest.
4. In this background, it was agreed that the Petitioner would generate revenue growth and increase market penetration of Xiaomi products in India. In return for this promise, Xiaomi Hong Kong promised to pay a monetary reward to the Petitioner if certain sales targets were met.
5. In order to effectuate the above understanding between the Petitioner and Xiaomi Hong Kong, they entered into a Sales Reward Agreement (SRA) dated 31.03.2019. The recitals of the contract at clause C provided that the objective was to increase Xiaomi's growth in India. Clause 2.1 of the SRA provided that in addition, the objective of the SRA was to generate revenue growth and increase market penetration of Xiaomi products. Further, as per clauses 2.2 and 2.3 of the SRA, if the Petitioner achieved certain sales targets, Xiaomi Hong Kong was required to make payment of monetary rewards.
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 Relevant clauses of the Distributorship Agreement and SRA Distributorship Agreement "1.Definitions and Interpretations "Good Industry Practices" means that the obligations under this Agreement will be performed with the standard of skill, care, knowledge, reliability, professionalism and foresight which would reasonably be expected from a Person to achieve the transactions as envisaged under this Agreement."
"8. RIGHTS AND OBLIGATIONS 8.4 The Purchaser shall at all times perform its obligations under this Agreement, including in relation to the import, storage, distribution and sale of the Products, honestly and diligently, in compliance with Applicable Laws and Good Industry Practice."
Brand License Agreement THIS BRAND LICENSE AGREEMENT (Agreement) is made on 18 May 2016 (Execution Date).
BETWEEN:
Xiaomi Technology Company Limited (erstwhile known as Beijing Xiaomi Technology Co Ltd and the curTent official corporate name being Xiaomi Inc). a company incorporated under the laws of China whose principal office is at Floor g, Rainbow City Shopping Mall I of China Resources, NO. 68, Qinghe Middle Street, Haidian District, Beijing, China (the Licensor);
AND (2)Xiaomi Technology India Private Limited, a company incorporated under the Companies Act, 2013 and having its registered office at 8' Floor, Tower-l, Umiya Busincss Bay, Marathahalli -
Sarjapur, Outer Ring Road, Bangalore - S60103, Karnataka, India (the Licensee);
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 AND (3)Xiaomi Singapore Pte. Limited, a company incorporated in Singapore having its registered office at 81 Highgate Crescent, Singapore $98858 (the Xiaomi Singapore).
AND (4) Xiaomi Hong Kong H.K Limited, a company incorporated in Singapore having its registered office at Flat C, 21/F, CMA Building, 64, Connaught Road, Central 1K, Hong Kong (the Xiaomi H.K).
Xiaomi Singapore and Xiaomi H.K are hereinafter referred to as the investors.
Each Party hereto shall be individually referred as 'Party and collectively as 'Parties'. The terms 'Licensor, 'Licensee' and 'Investors' shall, unless repugnant lo the context, mean and include their respective successors and permitted assigns.
WHEREAS ...
(B) The Investors are the Affiliates (indirect subsidiaries) of the Licensor. The Investors are the shareholders of the Licensee and have made 100% foreign investments in the Licensee. The Licensor has authorized the Investors to make investments in the Licensee and to undertake single brand retail trading of the Products sold under the Brand in India through the Licensee.
1.1. The following words and expressions shall have the following meanings:
...
Execution Date means the date of the execution of this Agreement as stated in the beginning Agreement;
License effective date means 7 October 2014
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2. Grant Of License 2.1 The Licensor, in consideration of the mutual covenants herein, hereby grants to the Licensee, who hereby accepts a non-exclusive, non- transferable, royally-free, and sub-licensable license (License) to use the Brand within the Territory for the purposes of the Business Use. The License shall be effective from the License Effective Date.
3. Conditions of Use 3.1 The License has been granted to the Licensee only in respect of Use of the Brand for the purpose of Business Use.
4. Consideration It is expressly agreed between the Parties that the Licensee's use (subject to conditions laid down in Clause 3 of the agreement) of the Brand within the Territory for the purpose of the Business Use is deemed to be a sufficient consideration for the purpose of this Agreement and therefore the License shall be on a royalty-free basis
9. Indemnity Each party agrees to indemnify, defend and hold harmless the other Party and its Affiliates and their respective officers, directors, employees, agents, representatives, successors, and assigns from all claims, demands, suits, proceedings, damages, costs, expenses, liabilities (including, without limitation, reasonable legal fees) or causes of action (collectively, Losses) brought against or incurred by such other Party as a result of the breach by the indemnifying Party of any of the (i) obligations, representations, warranties or covenants under this Agreement; (i) infringement of third party intellectual property rights by the indemnifying Party;(ii) wilful or negligent acts of the indemnifying Party; and (iv) any damages for bodily injury (and death) and damage to property caused by the indemnifying Party.
11. Consequences Of Termination
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 On expiry or termination of this Agreement for any reason, all rights, obligations and licenses of the Parties hereunder shall cease, except the Licensor's liability for any charges, payments or expenses due to the Licensor which accrued prior to the termination date shall not be extinguished by termination, and such amounts (ifnot otherwise due on an earlier date) shall be immediately due and payable on the termination date.
Sales Reward Agreement (SRA) "WHEREAS:
C. And whereas in order to encourage Xiaomi's growth in India, Xiaomi HK wishes to incentivize Xiaomi India in accordance with the terms set forth therein.
2.1 Objectives of the Reward Scheme • Generate revenue growth and increasing market penetration of Xiaomi products 2.2. Plan Administration:
...
• Eligibility: Xiaomi India will be eligible to receive monetary reward from Xiaomi HK if all the below targets are achieved by Xiaomi India -
a. Xiaomi India continues to hold/ retain the position of market leader in smart phones b. The volumes of smart phones sold by Xiaomi India is at least 1.5 times the total volume sold in the previous financial year; c. The revenue from sale of smart phones by Xiaomi India is at least 1.5 times the total sold in the previous financial year.
2.3 Reward Plan Components and Determination:
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 As a direct inducement to encourage Xiaomi's growth in India, Xiaomi HK will reward as set forth below:
a) Xiaomi India will be required to provide a report on the five (5) highest selling smart phones which has helped Xiaomi India capture the market share in India;
b) For such five (5) top selling smart phones, Xiaomi HK will, at its discretion, give a reward at a certain USD rate per dovice for the identified devices sold in India during the plan period.
9.2 Termination 9.2.1 This Agreement may be terminated by either Party upon the occurrence of any of the following (whichever is earliest):
9.2.2. This Agreement may be terminated by either Party, without assigning any reasons, by giving a prior written notice of two (2) months to the other Party. Notwithstanding the foregoing, the Parties may, by mutual written consent, agree to dispense with the notice requirement and terminate the Agreement immediately.
14.7 Specific Performance Xiaomi India agrees that damages may not be an adequate remedy and that Xiaomi HK shall be entitled to an injunction, restraining order, right for recovery, suit for specific performance or such other equitable relief as a court of competent jurisdiction may deem necessary or appropriale to restrain Xiaomi India from committing any violation or enforce the performance of the covenants, representations, and obligations contained in this Agreement.
'Obligation' as an implied term
6. It is submitted that a close perusal of these contractual terms reveals that not only was Xiaomi Hong Kong under an obligation to make payment of monetary rewards to the Petitioner if the sales targets were met, but the Petitioner was also under a corresponding obligation to increase its market
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 share in India by increasing penetration of Xiaomi products.The latter is forthcoming from clause 2.1.
7. While it is true that the SRA does not stipulate an express obligation on the Petitioner to increase its market share or increase penetration of Xiaomi products, it is submitted that the same is nothing but an implied term of the agreement between the parties. The question of when an implied term or condition can be read into an agreement has been considered by the Supreme Court in Nabha Power Limited v. Punjab State Power Corporation, (2018) 11 SCC 508.
8. In Nabha Power,supra the Supreme Court held that in order for an implied term or condition to be read into an agreement, a penta-test had to be satisfied, that is, the same had to be (1) reasonable and equitable, (2) necessary to give business efficacy to the contract, (3) it should go without saying, (4) capable of clear expression and (5) must not contradict any express term of the contract.
9. It is submitted that in the present case, each of the aforesaid five requirements are satisfied. The implied term that the Petitioner has an obligation to increase its market share and increase sales of its products goes without saying in an agreement, where the counter party is incentivising such a result by providing monetary rewards. Such a term also does not contradict any express contractual provision especially when the object of the SRA is to increase Xiaomi's growth in India as forthcoming from the recitals of the agreement. Besides being capable of clear expression and reasonable and equitable, the implied term is crucial to provide business efficacy to the contract.
10. When both the parties wish to see an increase in the sale of Xiaomi's products to incentivise which Xiaomi Hong Kong is also willing to pay monetary award on meeting certain sales targets, nothing could give more business efficacy to the agreement than a term obligating the Petitioner to increase its market share and sales.
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11. The Petitioner submits that it could not have been the intention of the parties that the agreement was a mere matter of making payments if sales targets are met, but not to require any party to actually make reasonable efforts to ensure that such sales targets are met in the first place. Therefore, it is submitted that there can be no doubt that the SRA had an implied term casting an obligation on the Petitioner to increase its market share and product sales.
12. The fact that the Petitioner had such an obligation to increase its market share and its product sales, is also forthcoming from the prior Distributorship agreement between the Petitioner and Xiaomi Hong Kong, which in Clause 8.4 required the Petitioner to diligently and honestly execute its distributorship responsibilities in compliance with good industry practice.
13. In light of the above, it could be safely said that the Petitioner was required to make best efforts to promote Xiaomi Hong Kong's products in the Indian market. This included engaging in marketing activities, expanding market reach, and increasing sales, all of which were essential services rendered to Xiaomi Hong Kong. Such an obligation on the part of the Petitioner was not dependent on achieving the target but was a continuous duty to promote and sell Xiaomi Hong Kong's products.
14. In contract law, the obligation to use "best efforts" is a well-recognized concept. Even if the SRA did not guarantee a particular outcome in terms of sales targets or market share, there was an underlying expectation that translated into an obligation for the Petitioner to do everything reasonably possible to achieve the desired result.
15. Further, besides the Distributorship agreement between the Petitioner and Xiaomi Hong Kong, the Brand Licensing agreement also has a bearing on the construction of the SRA. The shareholding of Xiaomi Hong Kong in the Petitioner itself reflects that the financial interests of Xiaomi Hong Kong are aligned with the success of the Petitioner. This necessarily meant that any increase in the Petitioner's market share or product sales could only be to Xiaomi Hong Kong's benefit. Therefore, it is submitted that the preceding agreements executed between the parties and the surrounding facts and circumstances would also unambiguously convey that the SRA indeed
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 contained an obligation on Xiaomi India to increase its product sales and market share.
Obligation of 'best efforts' creates a legally enforceable right
16. Once it is accepted that the Petitioner indeed had a contractual obligation to increase its market share and product sales on a best effort or reasonable effort basis, Xiaomi Hong Kong had a corresponding right to enforce such an obligation. The principle that best efforts obligations can be enforced by the counter party has been well recognized under common law.
17. In Jet2.com Limited v. Blackpool Airport Limited, [2011] EWHC 1529, the English Court of Appeal was called upon to adjudicate a claim made by the appellant airline against the respondent airport on the strength of a "best endeavours" clause. The clause required the airport to use their best endeavours to facilitate and promote the growth of low-cost services of the appellant airline. The contract was for a period of fifteen years. After four years, the respondent airport discontinued hosting the appellant airline's flights after normal working hours which increased the cost of operations of the appellant airline. Aggrieved, the appellant airline sued the respondent claiming damages. The trial court held in favour of the appellant and granted damages but refused certain declaratory reliefs. The court of appeal by a majority upheld the trial court's decision toaward damages by holding that keeping the airport open beyond normal working hours was a reasonable expectation as part of the best endeavours clause and could be rightly enforced. The relevant portions of the judgement are extracted below:
"The content of an obligation to use best endeavours to promote another person's business is not so uncertain as to be incapable of giving rise to a legally binding obligation, although it may be difficult to determine in any given case whether there has been a breach of it." (Emphasis supplied)
18. Therefore, failure to use best endeavours does give rise to claim for legally enforcing such an obligation. Thus, it is submitted that as rightly held by the court, the fact that it may be difficult to determine a breach thereof, does not prevent it from being a legally enforceable obligation.
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19. In another decision of the English Court of Appeal in IBM United Kingdome Limited v. Roackware Glass Limited, 1980 FSR 335, one of the parties was required to use best endeavours to obtain a planning permission. Once the application was rejected, the party failed to appeal the decision. The court held that such failure to appeal the decision constituted a failure to use best endeavours which gave rise to a claim for damages for enforcing such obligation.
20. In light of the above, it is clear that best effort obligations are contractually enforceable before a court of law. At this stage, it is pertinent to note that the fact that the Petitioner and Xiaomi Hong Kong are related parties and that either party may not enforce any claim against the other matters little. That may be a practical result due to the close relationship between the parties to the agreement. However, the non-enforcement of claims as a matter of expediency between two parties does not change the nature of the obligation or make the corresponding right any the less enforceable.
21. The fact that both the parties have a right to enforce their respective rights (the Petitioner's right to receive payments on achieving sales targets and Xiaomi Hong Kong's right to enjoy the Petitioner's best efforts to increase product sales and market share) also explains the detailed contractual remedies provided in the SRA.
22. It is pertinent to note that Clause 9.2 of the SRA confers a right on either party to terminate the agreement both with and without cause. Clause 11 provides for dispute resolution by way of arbitration. Most importantly, Clause 14.7 provides that Xiaomi Hong Kong shall have a right to obtain an injunction, restraining order or even specific performance or other equitable relief to enforce compliance of the agreement.
23. The question of Xiaomi Hong Kong obtaining such reliefs would not have arisen if there was no corresponding right in Xiaomi Hong Kong to require the Petitioner to comply with its obligation to increase product sales and market share. Therefore, these clauses of the agreement also reiterate the fact that the Petitioner has an obligation and Xiaomi Hong Kong, a corresponding right.
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24. It is thus submitted that from the submissions supra, it is evident that in terms of the SRA, the Petitioner had an obligation in law to make best efforts to promote Xiaomi products in India, failure to do which shall create a legally enforceable right against the Petitioner by Xiaomi Hong Kong. Therefore, the Petitioner has clearly agreed to an obligation to undertake promotion of Xiaomi products and undertake ancillary activities, to ensure the market penetration of Xiaomi products in India in exchange of consideration, i.e. the monetary rewards. Thus, the transaction is a supply in terms of Section 7 read with Entry 5(e) of Schedule II of the CGST Act, 2017.
25. Once it is established that the transaction is a supply under the CGST Act, 2017, it is submitted that the same shall amount to 'export of service' in terms of Section 2(6) of the IGST Act, 2017. In view of the above, it is humbly prayed that the impugned order be set aside and the Writ Petition be allowed with directions to the Respondents to sanction the refund to the Petitioner.
5. It is submitted that non-consideration of the aforesaid contentions urged by the petitioner would vitiate the impugned orders and the same deserve to be set aside. In support of his submissions, learned Senior counsel placed reliance upon the relevant provisions of the CGST and IGST and Circulars, which reads as under:
RELEVANT PROVISIONS
1. Section 2(5) of the CGST Act, 2017
2. Section 7 of the CGST Act, 2017
3. Schedule II of the CGST Act, 2017
4. Section 2(6) of the IGST Act, 2017
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5. Section 2(13) of the IGST Act, 2017
6. Section 8 of the IGST Act, 2017
7. Section 13 of the IGST Act, 2017
8. Rule 4 of the Place of Provisions of Service Rule, 2012 CIRCULARS AND EDUCATION GUIDE
1. Circular No.178/10/2022-GST dated 03.08.2022
2. Circular No.161/17/2021-GST dated 20.09.2021
3. Circular No.159/15/2021-GST dated 20.09.2021
4. Relevant portion of the Taxation of Services : An Education Guide
6. Per contra, learned AGA would reiterate the various contentions urged in the statement of objections and submits that there is no merit in the petitions and that the same are liable to be dismissed. In support thereof, learned AGA would elaborate his submissions and reiterate the written submissions which are extracted as hereunder:
1. Writ Petition No. 15740 of 2023 has been filed by the Petitioner, assailing the Order-in-Appeal dated 29.05.2023, issued in Form GST APL-04, passed in GST Appeal Nos. 102 & 116/22-23, by the Joint Commissioner of Commercial Taxes (Appeals)-4, Respondent No. 2 herein, upholding, the Orders dated 31.05.2022 and 02.06.2022, passed by the Assistant Commissioner of Commercial Taxes, LGSTO-015, Respondent No. 3 herein, rejecting refund of Rs. 106,17,11,427/- and Rs. 110,70,94,987/-
claimed under Section 54 of the Central Goods and Services Tax Act, 2017 ("CGST Act") r/w Rule 89(4) of the Central Goods and Services
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 Tax Rules, 2017 ("CGST Rules"), for the period between October, 2019 and June, 2020.
1.1. Similarly, Writ Petition No. 11311 of 2023 has been filed, calling into question Order-in-Appeal dated 20.12.2022, passed by Respondent No. 2 in GST Appeal No. 388/2021-22, upholding the rejection by Respondent No. 3 of the refund claimed by the Petitioner, to the tune of Rs. 145,09,13,633/-, for the period between June, 2019 and September, 2019.
2. The pertinent details regarding the structure of the transaction that forms the subject matter of controversy in these petitions, are as under:
2.1. The Petitioner is a private limited company registered under the provisions of the Karnataka Goods and Services Tax Act, 2017 ("KGST Act"), engaged in the sale of Xiaomi products, such as mobile phones/smart phones etc. The said products are only sold by the Petitioner, upon procuring the same from within India, from third party manufacturers licensed by Xiaomi HK. 2.2. The Petitioner and Xiaomi HK entered into Reward Agreements for various plan periods, per which, the Petitioner was required to undertake certain activities to foster Xiaomi's revenue growth and market penetration in India. In terms of the agreements, the Petitioner would become eligible to receive monetary rewards from Xiaomi HK if the market performance of Xiaomi was as per the benchmark stipulated for each plan period, in the respective agreement. A tabulated statement has been presented hereinbelow, with details as to the 'targets' prescribed for each of the plan periods in question, under different agreements:
Sl. Date of the
Plan Period 'Target'
No. Agreement
1. 31.03.2019 01.04.2018- As per Clause 2.2. of the Reward
31.03.2019 Agreement, monetary reward
would be payable if:
"a. Xiaomi India continues to
hold/retains the position of
market leader in smart phones
b. The volume of smart phones
sold by Xiaomi India is
atleast1.5 times the total
volume sold in the previous
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WP No. 15740 of 2023
C/W WP No. 11311 of 2023
financial year; and
c. The revenue from sale of
smart phones by Xiaomi India is
atleast1.5 times the total
volume sold in the previous
financial year."
2. Date not 01.04.2019- As per Clause 2.2. of the Reward
indicated 31.03.2020 Agreement, monetary reward
would be payable if:
"a. Xiaomi India continues to
hold/retains the position of
market leader in smart phones
and other mutually agreed
products
b. The volumes of smart
phones and other mutually
agreed products sold by Xiaomi
India is atleast equal to or
more than the total volume
sold in the previous financial
year; and
c. The revenue from sale of
smart phones and other
mutually agreed products sold
by Xiaomi India is atleast equal
to or more than the total
volume sold in the previous
financial year."
2.3. In order to avail the monetary incentive, the Petitioner was required to provide a report to Xiaomi HK indicating the five highest selling smart phones which have enabled Xiaomi to capture the market share in India. Upon submission of such report, Xiaomi HK, would, at its discretion, give a monetary reward at a certain USD rate per device, for the devices sold in India during the relevant plan period. [Clause 2.3 of the Reward Agreement] The amounts so received as monetary reward, by the Petitioner, for achieving the 'targets' prescribed from time to time, form the subject matter of controversy in the present petitions.
3. The basis for the Petitioner's claim for refund is three-pronged:
First, that the Petitioner is providing services which amount to 'supply' of service, under Section 7 of the CGST Act, to Xiaomi HK;
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 Second, that the transaction in question qualifies as 'export of service' as provided under Section 2(6) of the IGST Act; Third, that therefore, the Petitioner is eligible to receive refund of the ITC, as the supply would qualify as a zero-rated supply under GST laws.
3.1. It is the Petitioner's case that under the Reward Agreements, the Petitioner has agreed to undertake sales-related activities to promote Xiaomi products in the Indian market, thereby increasing the market share of Xiaomi in India, in exchange for a consideration styled as the monetary reward. That, the transaction qualifies as a supply wherein the service supplied is covered within the entry 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for consideration' as included in Schedule II to the CGST Act, and the consideration is the monetary reward received.
3.2. The Petitioner has placed reliance on the CBDT Circular No. 178/10/2022-GST dated 03.08.2022, to contend that so long as there is reasonable nexus between the supply (i.e. agreement to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act) and the consideration, the transaction would qualify as 'supply'.
4. Against the aforesaid backdrop and having regard to the contentions urged on behalf of the Petitioners, it is submitted on behalf of the Respondents that, prima-facie, the transaction in question appears to be a subterfuge, designed to claim refund of ITC. The real (sham) nature of the transaction in question becomes readily apparent upon careful consideration of the following details:
4.1. At the outset, it is to be noticed that the agreement which purportedly prescribes 'targets' for the plan period between 01.04.2018 and 31.03.2019, was entered into on the very last day of the said plan period, i.e., on 31.03.2019. This fact would point towards the inference that the 'target' already having been met, an agreement has been entered into as an afterthought with the sole object of availing refund of unutilized ITC. There arises no question of Xiaomi HK offering an 'inducement' to the Petitioner herein, as consideration for the Petitioner's endeavors to enhance Xiaomi's market share in India, given that the agreement was entered into at
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 the end of the plan period, when the 'targets' stipulated therein had already been achieved; In other words, the 'target' had already been achieved, before it was set.
4.2. It also deserves to be noticed that the 'targets' are altered for each plan period, as highlighted in the tabulated statement presented hereinabove. Such a design would also reveal the self-serving nature of the agreement.
4.3. It is further pertinently highlighted that the Reward Agreement in respect of the plan period between 01.04.2019 and 31.03.2020, is an undated agreement, perhaps, also entered into at the end of the plan period, or at any subsequent time, having already met the 'target' stipulated therein.
5. Without prejudice to the aforesaid and in any event, it is submitted on the merits of the matter that the transaction in question would not qualify as a "supply" as defined under Section 7 of the CGST Act. The Petitioner herein has sought to canvass that the transaction qualifies as a supply wherein the service supplied is covered within the entry 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act for consideration' as included in Schedule II to the CGST Act, and the consideration is the monetary reward received. However, this argument cannot be countenanced for the following reasons:
5.1. An agreement to receive consideration, on the happening of a contingent and uncertain event, cannot be termed as an 'obligation', more so when the happening of such event is dependent, not on the act of the Petitioner alone, but primarily on market forces. No person can be said to be 'obligated' in respect of an uncertain/contingent event. An obligation to do an act, must be read to mean 'an obligation to do a definite act', and not a contingency. If such a view is not adopted, it would lead to an absurdity in law.
5.2. It is next submitted that receipt of 'Consideration', as defined under Section 2(31) of the CGST Act, is a sine-qua-non for any transaction to qualify as 'supply' as defined under Section 7 of the CGST Act.
Further, the consideration must have a reasonable nexus with the obligation in order for the transaction to qualify as 'supply', vide CBDT Circular No. 178/10/2022-GST dated 03.08.2022. However,
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NC: 2024:KHC:33916 WP No. 15740 of 2023 C/W WP No. 11311 of 2023 in the instant case, the monetary reward (stated to be the 'consideration') has a nexus, not with the promotional activity to be carried out the Petitioner, but to the happening of a continent event, i.e., meeting the 'target'. The monetary reward is given only if the target is met, and not on mere performance of promotional activities by the Petitioner. While the performance of promotional activities by the Petitioner may be said to be an 'obligation', the same is not met with consideration, hence, no supply- there is no reciprocity between performing promotional activities and receipt of consideration. Consideration is paid only when Xiaomi, by virtue of the operation of market forces, retains/enhances its market position- an occurrence which the Petitioner cannot undertake to perform.
In light of the submissions made hereinabove, it is prayed that this Hon'ble Court may be pleased to hold that the transaction in question would not qualify as a "supply" as defined under Section 7 of the CGST Act.
In fine, and for the reasons stated hereinabove, the claim of the Petitioner for refund under Section 54 of the CGST Act r/w Rule 89(4) of the CGST Rules, is unsustainable in law.
7. So also, learned Senior Counsel - Sri. Vikram Huilgol, who was appointed as amicus curiae would fairly submit that various contentions and submissions made on behalf of the petitioner as well as the respondents - State have not been considered by respondent No.2 - Appellate Authority and since the same require to be addressed in detail, the matters have to be remitted back to the Appellate Authority for reconsideration afresh in accordance with law.
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8. A perusal of the material on record including the various contentions and written submissions of both sides are sufficient to come to the conclusion that the various factual and legal contentions and submissions made by both sides have not been addressed correctly or properly by respondent No.2 -
Appellate Authority while passing the impugned orders at Annexure
- A dated 29.05.2023 and 20.12.2022.
9. Under these circumstances, in order to provide one more opportunity to both sides to put-forth their respective claims and contentions before respondent No.2 - Appellate Authority, without expressing any opinion on the merits / demerits of the rival contentions, I deem it just and appropriate to set aside the impugned orders at Annexure - A dated 29.05.2023 and 20.12.2022 respectively and remit the matters back to respondent No.2 for reconsideration of the appeals afresh in accordance with law within a stipulated time frame.
10. In the result, I pass the following:
ORDER
(i) Both W.P.No.11311/2023 and W.P.No.15740/2023 are hereby allowed.
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WP No. 15740 of 2023
C/W WP No. 11311 of 2023
(ii) The impugned order at Annexure - A dated
29.05.2023 in W.P.No.15740/2023 and impugned order at
Annexure - A dated 20.12.2022 in W.P.No.11311/2023 both
passed by respondent No.2 - Appellate Authority are hereby set aside.
(iii) Both matters are remitted back to respondent No.2 -
Appellate Authority for reconsideration of both the appeals afresh in accordance with law.
(iv) Petitioner undertakes to appear before respondent No.2 on 02.09.2024 in both the appeals without awaiting further notice from respondent No.2.
(v) Liberty is reserved in favour of the petitioner to file pleadings / additional pleadings, documents, notifications, circulars, judgments, etc., which shall be considered by respondent No.2, who shall hear both sides and provide sufficient and reasonable opportunity and hear them and pass appropriate orders in accordance with law, within a period of eight weeks from 02.09.2024.
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(vi) All rival contentions on all aspects of the matter are kept open and no opinion is expressed on the same.
(vii) The valuable assistance rendered by Sri. Vikram Huilgol, learned Senior Counsel who was appointed as Amicus Curiae to assist this Court in these matters is placed on record.
Sd/-
(S.R.KRISHNA KUMAR) JUDGE SV / Srl.