Case Summary — McDonald’s India Pvt. Ltd. v. Additional Commissioner, CGST Appeals-II, Delhi & Anr., Delhi High Court, W.P.(C) 11430/2022, Decided on 18.05.2023 (Issue: Refund of ITC on Zero-Rated Services – Intermediary Classification)

Case Details

• Case Title: M/s McDonald’s India Pvt. Ltd. v. Additional Commissioner, CGST Appeals-II, Delhi & Anr.

• Court: Delhi High Court

• Petition No.: W.P.(C) 11430/2022

• Date of Judgment: 18.05.2023

• Relevant Statutory Provisions:

  • IGST Act: Sections 2(6), 2(13), 13(3)(b), 13(5), 16

  • CGST Act: Provisions relating to refund of unutilised ITC (Section 54)

• Category: Refund – Zero Rated Supply – Intermediary vs Independent Service Provider

Facts of the Case (Paras 1–9)

The petitioner, an Indian subsidiary of McDonald’s USA, had two distinct agreements with its holding company—(i) a Master License Agreement (MLA) involving franchise and royalty obligations, and (ii) a Service Agreement (01.01.1996) under which the petitioner rendered independent research, development, system-adaptation, training, and supplier-evaluation services on a cost-plus 10% mark-up basis.

For FY 2018–19, McDonald’s India treated these services as zero-rated exports under Section 16 of the IGST Act and sought refund of accumulated ITC. A Show Cause Notice dated 14.08.2020 merely stated that “place of provision appears to be India; ITC appears inadmissible.” The Adjudicating Authority (Order-in-Original 31.08.2020) rejected the refund, classifying the services as intermediary services. The Appellate Authority upheld the rejection and further invoked Sections 13(3)(b) and 13(5) IGST Act, alleging presence-based supply and event-related services.

Questions / Issues for Determination (Paras 13, 20–21, 28–31)

1. Whether the services rendered under the Service Agreement constitute “intermediary services” under Section 2(13) of the IGST Act.

2. Whether the refund authorities travelled beyond the Show Cause Notice by introducing new grounds (Sections 13(3)(b), 13(5)) at the appellate stage.

3. Whether place of supply was incorrectly determined as India despite the recipient being McDonald’s USA and the services being provided on a principal-to-principal basis.

Court’s Observations (Paras 19–31)

• The Service Agreement, read independently, does not involve any facilitation or arrangement of third-party supplies (Para 19).

• Merely performing services on behalf of another entity does not make the provider an intermediary; this principle stands covered by Ernst & Young Ltd. and Ohmi Industries Asia (Para 24).

• To classify a service as intermediary, the adjudicating authority must identify principal supplier, recipient, and the facilitated supply (Para 25). No such exercise was done.

• The Appellate Authority misconstrued the MLA and Service Agreement, treating franchise-related obligations as part of the service arrangement (Para 27).

• The Show Cause Notice did not contain any allegation regarding Sections 13(3)(b) or 13(5); hence new grounds could not be imported suo motu at appeal stage (Para 28).

• Section 13(3)(b) (physical presence-based services) was inapplicable as McDonald’s USA was not physically present in India, nor was its presence required (Para 30).

• Section 13(5) (event-related services) was completely irrelevant to the activities covered under the Service Agreement (Para 31).

Judgment / Verdict (Para 32–33)

The High Court set aside both the Order-in-Original and the Appellate Order, holding that the authorities:

• failed to conduct a proper intermediary analysis;

• conflated two separate agreements;

• relied on grounds beyond the Show Cause Notice;

• misapplied Sections 13(3)(b) and 13(5) of the IGST Act.

The matter was remanded to the Adjudicating Authority for fresh consideration strictly in accordance with the Court’s observations.

Summary of Cases Relied Upon

“Between Fine Lines” — Trade / Industry Takeaways

The judgment underscores that refund rejection cannot be sustained on vague SCNs, and authorities cannot convert independent, cost-plus service arrangements into intermediary services without identifying three-party supply dynamics. Businesses providing back-end, research, support or system-development services to foreign affiliates can take comfort that such services continue to qualify as exports unless they demonstrably facilitate third-party supply.

Disclaimer – “The above summary is for academic purpose only; not formal legal opinion. Seek professional opinion before application. Author or publisher or website shall not be responsible for any usage in any form.”