By CA Surekha S Ahuja
In GST law, Input Tax Credit is not defeated by cross-border group structures; it is defeated only when the Indian entity abandons its role as a supplier and reduces itself to a facilitator.
Introduction: Why This Issue Needed a Guiding Framework
The classification of cross-border services rendered by Indian entities to overseas recipients has become one of the most contentious areas under GST. At stake is not merely taxability, but the very survival of accumulated Input Tax Credit (ITC).
If the service qualifies as an export of services, it is zero-rated under section 16 of the IGST Act, and refund of unutilised ITC becomes a statutory right.
If the same service is branded as an intermediary service, the place of supply shifts to India, GST becomes payable, and ITC refund is denied.
For years, tax authorities have attempted to stretch the intermediary definition—often relying on words such as assist, support, coordinate, or group entity. High Courts have now decisively intervened and drawn a clear, legally enforceable line.
This post distils that line into a guiding framework, anchored in statute, economics, and binding judicial precedent.
Statutory Architecture: Rule vs Exception
Export of Services — Section 2(6), IGST Act
Export of services is a complete code. Once its five conditions are satisfied, the supply:
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Qualifies as export
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Becomes zero-rated under section 16
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Triggers refund entitlement under section 54
Intermediary — Section 2(13), IGST Act
The definition is narrow and exclusionary. Critically, it excludes:
“a person who supplies such services on his own account”
Courts have repeatedly held that this exclusion governs the entire analysis. Intermediary is not the starting point; it is the exception that must be strictly proved.
Judicial Method: How Courts Actually Decide ITC Allowability
Across decisions such as Infodesk India (Gujarat HC), Genpact India (P&H HC), Ernst & Young (Delhi HC) and OHMI Industries (Delhi HC), courts apply a substance-driven test, not a semantic one.
They ask four fundamental questions:
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Who supplies the service?
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Who bears the operational and tax risk?
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Who controls pricing and earns profit?
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Is any third-party supply being arranged or facilitated?
The answers to these questions determine ITC entitlement.
When ITC Refund Is ALLOWABLE — The Judicially Accepted Conditions
Services Are Supplied on Own Account
Guiding reasoning:
A person supplying services on own account supplies the main service itself, not a facilitation layer.
Courts have consistently held that once services are performed, owned, and delivered by the Indian entity, the exclusion in section 2(13) applies automatically.
Practical indicators:
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Defined scope of work
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Deliverables owned by the Indian entity
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Performance responsibility lies with the Indian entity
Judicial support:
Ernst & Young and Genpact clearly recognise that backend, professional, and operational services supplied directly are exports when rendered on own account.
Contract Is Principal-to-Principal
Guiding reasoning:
An intermediary relationship cannot exist without three distinct parties. A purely bipartite agreement legally undermines any intermediary allegation.
In Infodesk, the Gujarat High Court categorically held that in the absence of a third-party supply being arranged, intermediary classification is unsustainable.
Practical indicators:
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Agreement only between Indian entity and foreign recipient
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No authority to bind third parties
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No customer contracting on behalf of another
Consideration Includes a Profit Element
Guiding reasoning:
Profit is the economic signature of independence.
Agents earn commission. Principals earn margin.
A cost-plus model with mark-up demonstrates:
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Independent pricing logic
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Entrepreneurial character
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Absence of agency behaviour
Courts have treated profit element as strong economic evidence against intermediary classification.
Indian Entity Bears Operational and Tax Risks
Guiding reasoning:
Risk allocation distinguishes a supplier from a conduit.
Where the Indian entity bears:
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Manpower costs
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Compliance obligations
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Tax exposure
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Delivery risk
it functions as an independent service provider, not as a facilitator.
In Infodesk, contractual clauses placing all costs and taxes on the Indian subsidiary were decisive.
No Third-Party Supply Is Arranged or Facilitated
Guiding reasoning:
Intermediary status arises only when the supplier arranges or facilitates a supply between two others.
Courts have consistently rejected the notion that:
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Internal coordination
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Support functions
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Group-level assistance
amount to facilitation.
Key test:
If no third-party contract comes into existence because of the Indian entity’s role, intermediary classification fails.
Outcome (Authoritative Position)
✔ Supply qualifies as export of services
✔ Zero-rated under section 16
✔ Refund of unutilised ITC under section 54 is a matter of right
When ITC Refund Is NOT ALLOWABLE — The Judicially Recognised Triggers
Supplier Merely Arranges or Facilitates a Supply
Where the Indian entity:
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Brings buyer and seller together
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Enables execution of another’s supply
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Does not itself deliver the main service
courts have upheld intermediary classification.
Remuneration Is Commission-Based
Commission or transaction-linked consideration indicates:
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Lack of pricing autonomy
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Absence of entrepreneurial risk
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Agency character
Courts treat this as a classic intermediary marker.
Risk and Pricing Controlled by Foreign Principal
If the Indian entity:
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Has no pricing discretion
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Bears no performance risk
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Acts entirely on instructions
it lacks the economic substance of a principal supplier.
Indian Entity Acts Merely as a Conduit
Where services flow through the Indian entity without substantive value addition, ITC accumulation cannot be refunded, as the supply is not on own account.
Outcome
✖ Place of supply shifts to India
✖ Supply becomes taxable
✖ Refund of accumulated ITC is legally barred
Why This Distinction Is Substantive, Not Cosmetic
Courts have unequivocally rejected:
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Literal reading of agreement language
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Over-reliance on words like assist or support
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Presumption of intermediary merely due to group structure
Instead, they apply a combined legal–economic–functional test.
Once principal supply is established, ITC refund is not discretionary—it is statutory.
Closure: The Settled Legal Compass
The judicial position is now clear and consistent:
Intermediary is a narrow exception. Export of services is the governing rule.
Where an Indian entity supplies services independently, earns profit, bears risk, and does not arrange third-party supplies, denial of ITC refund is not merely incorrect—it is unsustainable in law.
This post is intended to serve as a guiding reference—for structuring contracts, defending refund claims, and ensuring GST positions are aligned with judicial reality.
In GST, substance decides ITC—and substance now has strong judicial protection.
