Show Cause Notice Lacks Reasons In Detail For Denial Of Refund Of ITC To Mcdonald’s India: Delhi High Court

The Delhi High Court has held that the show cause notice lacks reasons in detail for the denial of refund of Input Tax Credit (ITC) to Mcdonald's India.

The bench of Justice Vibhu Bakhru and Justice Amit Mahajan found that there was no basis for the Appellate Authority to have concluded that the petitioner acts as a mediator between joint ventures or franchisees and McDonald’s USA. The Appellate Authority has not considered that the Master License Agreement (MLA), which entitles the petitioner to enter into sub-licenses with franchisees, is a separate agreement.

The petitioner is a company incorporated in India that is a subsidiary of McDonald’s Corporation, USA. The petitioner entered into a service agreement dated January 1, 1996, under which the petitioner agreed to perform certain services.

The petitioner claimed that it is an independent service provider for the services falling within the scope of the service agreement. The petitioner is entitled to consideration on a cost-plus 10% markup basis for the services rendered under the service agreement.

The petitioner claimed that the services rendered by it to McDonald’s USA are ‘zero-rated supplies’ under Section 16 of the Integrated Goods and Services Tax Act, 2017.

The petitioner claimed that it had provided services under the said Service Agreement without payment of Integrated Goods and Services Tax and thus, is entitled to a refund of tax paid on inputs.

The respondent issued a Show Cause Notice dated 14.08.2020 proposing to reject the petitioner’s claim for a refund of ITC as claimed by the petitioner. The petitioner responded to the Show Cause Notice.

The Adjudicating Authority considered the petitioner’s application for refund of ITC and rejected it. The Adjudicating Authority held that the services rendered by the petitioner could not be considered as export of services as the services rendered by the petitioner were intermediary services and therefore, the place of supply of the said service was in India.

The Appellate Authority upheld the decision of the Adjudicating Authority, holding that the services rendered by the petitioner were intermediary services and the place of supply was India. The Appellate Authority held that the services included making periodic visits to existing and prospective suppliers on behalf of McDonald’s USA, and in terms of Section 13(3)(b) of the IGST Act, the supply of services was located in India as it required the personal presence of the recipient of services or the person acting on its behalf. The Appellate Authority held that the provisions of Sections 13(3)(b), 13(5), and 13(8)(b) of the IGST Act covered the petitioner’s case and held that the place of supply of services was in the taxable territory (India). It did not qualify as an export of services under Section 2(6) of the IGST Act.

Section 13(5) of the IGST Act contemplates the supply of services by way of admission to or organization of a cultural, artistic, sporting, scientific, educational, or entertainment event. It also contemplates admission to or the organization of a celebration, conference, fair, exhibition, or similar event. Conducting interviews, making reference checks, or performing any screening services in connection with potential joint venture partners, franchisees, or employees has no connection with the services as contemplated under Section 13(5) of the IGST Act.

The court found that the scope of services as mentioned in the Service Agreement, read in isolation, does not entail procurement or facilitating services from third-party suppliers.

The court noted that the Show Cause Notice dated 14.08.2020 issued by the respondent did not specifically set out any reason in detail for the denial of refund of ITC as claimed by the petitioner. The Show Cause Notice merely stated that “Place of the provision appears to be in India. ITC availed appears to be not admissible as per CGST Act”.

The court set aside the order as well as the order passed by the Adjudicating Authority and remanded the matter to the Adjudicating Authority to consider the petitioner’s case afresh.

Case Title: M/S Mcdonalds India Pvt. Ltd. Versus Additional Commissioner

Citation: 2023 LiveLaw (Del) 479

Date: 18.05.2023

Counsel For Petitioner: Tarun Gulati

Counsel For Respondent: Akshay Amritanshu

Click Here To Read The Order