Rejection of claim of Refund considering services of export as intermediary services by issuing order beyond allegations framed in SCN

Case Title: McDonald’s India Pvt. Ltd. v. Additional Commissioner, CGST Appeals-II

Court: High Court of Delhi

Petition Number: W.P.(C) No. 11430 of 2022

Category of Dispute: Refund – Export of Services / Intermediary Services

Date of Judgement: 18 May 2023

Relevant Sections: Section 2(6), 2(13), 13(3)(b), 13(5), 13(8)(b), and 16 of the IGST Act

Facts of the Case

[Para 1–9]

1. McDonald’s India Pvt. Ltd. (Petitioner), a subsidiary of McDonald’s USA, entered into a Service Agreement dated 01.01.1996 to provide services to its parent on a cost-plus 10% basis.
2. It claimed that these services were “zero-rated supplies” under Section 16 of the IGST Act and sought a refund of ITC on inputs used for providing them.
3. A refund application dated 04.08.2020 for ₹9.26 crores was filed for FY 2018–19, which was followed by a Show Cause Notice dated 14.08.2020 proposing rejection of refund on the grounds that the place of supply was India.
4. The Adjudicating Authority rejected the refund, categorising the services as intermediary services under Section 2(13) of the IGST Act.
5. The appeal before the Appellate Authority was also rejected. The authority concluded that services required the physical presence of the recipient in India under Sections 13(3)(b) and 13(5) and hence were not exports.

Question(s) in Consideration

[Para 13, 25–27]

1. Whether the petitioner was correctly classified as an intermediary for the services rendered to McDonald’s USA under the Service Agreement?
2. Whether the Appellate Authority could expand the scope of adjudication beyond what was set out in the original SCN?
3. Whether Sections 13(3)(b) and 13(5) IGST Act applied to classify the supply as not exported?

Observations of Court

[Para 18–31]

1. The services under the Service Agreement were directly rendered to McDonald’s USA and did not involve third-party facilitation or procurement.
2. The Appellate Authority misconstrued the Service Agreement with the separate Master License Agreement (MLA), which governed royalties and licensing, not service provision.
3. Reliance by Revenue on Section 13(3)(b) and Section 13(5) was misplaced, as the physical presence of McDonald’s USA was not necessary for the performance or consumption of services.
4. The impugned order traveled beyond the scope of the SCN, which did not mention Sections 13(3)(b) or 13(5), thus violating principles of natural justice.
5. Previous High Court decisions in Ernst & Young Ltd. and Ohmi Industries Asia (P) Ltd. were relevant and applicable.

Judgement of the Court

[Para 32–33]

1. The High Court set aside the impugned order and the Order-in-Original.
2. The matter was remanded to the Adjudicating Authority for fresh consideration based on correct legal interpretation and after affording the petitioner due opportunity.

Between Fine Lines

• McDonald’s India provided backend business support services to its parent in the U.S., not intermediary services.
• The court clarified that simply acting on behalf of another entity does not make one an intermediary.
• Physical presence of the foreign service recipient is not needed to classify services as exports.
• The Revenue authorities misapplied provisions and overstepped the scope of the SCN.
• The case reinforces taxpayer protections against arbitrary denial of ITC refunds on export services.

Summary of Referred Cases

Takeaway

“Acting for the Parent Doesn’t Make You an Intermediary”