Custom, Excise & Service Tax Tribunal
Aker Solutions India Sdn Bhd vs Visakhapatnam-I on 16 February, 2022
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
HYDERABAD
REGIONAL BENCH, COURT NO. I
SERVICE TAX APPEAL NO. 30944 OF 2016
(Arising out of Order-in-Original No. VIZ-EXCUS-002-COM-07/16-17 dated
10.06.2016 passed by the Principal Commissioner, Kakinda Commissionerate,
Visakhapatnam)
M/s Aker Solutions India Sdn. Bhd. ...Appellant
Plot No. 9, APIIC, Vakalapudi Yard,
Thammavaram Village, PO APSP Rural Mandal,
Kakinada-533005.
versus
Principal Commissioner, ...Respondent
Kakinda Commissionerate,
Central Excise Building, Port Area,
Visakhapatnam- 530035
APPEARANCE:
Shri Vipin Kumar Jain and Shri Vishal Aggarwal, Advocates for the
appellant.
Shri Bhanu Kiran, Authorized Representative for the Department
CORAM:
HON'BLE SHRI JUSTICE DILIP GUPTA, PRESIDENT
HON'BLE SHRI P.V. SUBBA RAO, MEMBER (TECHNICAL)
Date of Hearing: 12.01.2022
Date of Decision: 16.02.2022
FINAL ORDER NO. 30029/2022
JUSTICE DILIP GUPTA:
The appellant is the Indian project office (which project office
shall hereinafter be referred to as Aker India) of Aker Solutions India
Sdn. Bhd., a company incorporated in Malaysia (which shall
hereinafter be referred to as Aker Malaysia). Aker Malaysia entered
into a contract on 15.09.2009 with Reliance Industries Limited
(hereinafter referred to as RIL) for inspection, testing, maintenance
and repairs of sub-sea equipments and tools in India. Till 14.04.2014,
the entire service tax liability on the consideration paid by RIL to Aker
Malaysia was discharged by RIL, in terms of clause 5.6 the contract,
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under the reverse charge mechanism. According to the department,
the liability of service tax should not have been discharged by RIL
under the reverse charge mechanism but should have been
discharged by Aker India under the forward charge mechanism.
Accordingly, a show cause notice dated 17.04.2015 was issued to
Aker India for the period from February 2010 to April 2014 proposing
a demand of Rs. 21,56,44,210/- with interest and penalty. This show
cause notice was adjudicated upon by the Principal Commissioner of
Customs, Central Excise and Service Tax Kakinada Commissionerate1
by order dated 10.06.2016. The proposed demand was confirmed
under section 73(2) of the Finance Act 1994 2 with interest under
section 75 of the Finance Act and penalties under sections 78, 77(1)
and 70 of the Finance Act.
2. The contention of the appellant that service tax was payable in
the present case1 by RIL as the service recipient of the services
provided by Aker Malaysia under the reverse charge mechanism and
not by treating the appellant as a service provider was rejected for
the following reasons:
(i) The reverse charge mechanism provisions for the period
prior to 01.07.2012 were not applicable if the foreign
service provider had established a ‗fixed establishment' in
India from which the service was provided; and
(ii) For the period after 01.07.2012, the location of the
service provider, as per the Place of Provision of Service
Rules, 20123 was India, since the Project Office in India
1. the Principal Commissioner
2. the Finance Act
3. the 2012 Rules
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was the establishment most directly concerned with the
provision of service.
3. It is this order dated 10.06.2016 that has been assailed by Aker
India in this appeal.
4. The issue that arises for consideration in this appeal revolves
around the terms of the contract dated 15.09.2009 entered into
between RIL and Aker Malaysia. The contract notices that RIL and the
co-venturer (Niko Limited) had entered into a production sharing
contract with the Government of India on 12.04.2000 to explore and
develop the Contract Area. Following the discovery of oil and gas in
the Contract Area, development activities, including installation of
sub-sea equipments for the purposes of extraction, transporting,
processing and delivery of oil and gas from the Contract Area was
undertaken by RIL and the co-venturer. Aker Malaysia represented to
RIL that it had experience in maintaining and repairing equipments
similar to sub-sea equipments and that it also had sufficient technical
capability and resources. An Agreement was, therefore, executed as
Aker Malaysia agreed to perform the works in accordance with the
terms and conditions of the contract. RIL, in consideration of due
performance and completion of the works agreed to pay Aker
Malaysia the amount in accordance with the terms and conditions
contained in the contract. Services were to be provided under the
contract not only at the project stage but also thereafter on an
ongoing basis (referred to in the contract as ―steady state‖). The said
contract does not require Aker Malaysia to set up an Indian Project
Office and infact, contains no reference to the project office.
5. Exhibit A to the Agreement gives details of the ‗scope of work',
wherein the contractor has been referred to as Aker Malaysia. The
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relevant clauses of the contract relating to scope of work are
reproduced below:
"SCOPE OF WORK
1.0 THE SERVICES
This Contract shall provide Services for inspection, testing,
maintenance and repairs of Subsea Equipment and Company
Owned Tools at Support Base. For this Contractor shall
provide Contractor's Personnel, spares and functional
Support Base.
Further Contractor shall also manage Spares and provide
software back-up for control systems at CRP and FPSO.
1.1 Outline Scope of Work
The Contractor shall carry-out maintenance and repairs of
the Subsea Equipment and Company Owned Tools and
Spares. Life of field maintenance, repair and life cycle costs
are important areas to be addressed during the project phase
and thereafter during contract execution phase, Contractor
shall mitigate the risks in line with the following outline
strategy:
Involvement of Contractor Group personnel:-
Involvement of Contractor Group personnel deployed for
providing technical services for installation and
commissioning under the project and continuity of same for
execution of this Contract is essential. Contractor shall
ensure the continuity of such personnel under this Contract
so that the Services are performed by skilled personnel in
accordance with the Contract requirements.
Comprehensive and Integrated Service:- Contractor shall
develop and provide a comprehensive and integrated service
for the life cycle management and Services in support of the
Subsea Equipment.
Contractor's Services shall focus on obtaining the highest
standards of technical integrity and delivering the most
effective lifecycle solutions ensuring the maximization of the
system availability and maintainability.
1.2.4 Support Base
Contractor shall provide an established, fully equipped and
operational Support Base, suitable for the purposes of
receiving, inspecting, checking SAT, pre-deployment testing,
repairing and maintaining all Subsea Equipment and
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Company Owned Tools during the Contract Period. The
Support Base shall be fully furnished with all utilities,
Contractor's Equipment, Contractor's Materials and any other
necessary tooling required for satisfactory performance of
Services.
Support Base shall be fully staffed and be equipped to
conduct the following activities:
xxxxxxxxxx‖
6. Part I and Part II of Exhibit C to the contract deal with ‗contract
price schedule'. Exhibit H-1 deals with ‗contractors keys personnel'.
Exhibit H-Part III deals with ‗contractors support base'. It provides
that the contractor shall provide RIL a ‗support base' capable of
supporting the operations of the company.
7. The services provided by Aker Malaysia were highly technical in
nature requiring expertise in dealing with very expensive and critical
sub-sea equipments. The contract explicity required Aker Malaysia to
depute its expatriate personnel having minimum experience of ten
years for all senior positions at Kakinada. Accordingly, during the
relevant period, Aker Malaysia deputed several expatriate personnel
from its head office for providing services to RIL. However, since Aker
Malaysia alone was contractually responsible for the provision of
services, all invoices under the aforementioned contract were raised
by Aker Malaysia for services provided for such experts deputed for
executing the contract, by applying agreed Man Day Dollar rates for
the services provided by such personnel and consideration was paid
in foreign exchange by RIL to Aker Malaysia. No part of the said
consideration was paid by RIL to Aker India.
8. After the signing of the maintenance and repair contract and
with a view to provide local support and representational assistance,
Aker Malaysia decided to set up a project office at Mumbai and site
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office at Kakinada, for which purpose it applied for and was granted
permission by the Reserve Bank of India. Necessary certificate from
the Registrar of Companies was obtained on 18.12.2009 and a bank
account was thereafter opened in India in January, 2010.
9. Till 14.04.2014, the entire liability of service tax on the
consideration paid by RIL to Aker Malaysia was discharged by RIL
under the reverse charge mechanism. From 15.04.2014, by which
time human and technical resources present at the Kakinada site
office had acquired sufficient degree of permanence, the contract with
RIL was amended to provide that the project/site office of Aker
Malaysia in India (Aker India) would obtain registration and discharge
the applicable service tax. Accordingly, the site office of Aker
Malaysia obtained registration with the service tax department at
Kakinada and began discharging service tax liability on the
consideration paid by RIL to Aker Malaysia.
10. However, a show cause notice dated 17.04.2015 was issued to
Aker India alleging that it was the Indian ‗business establishment' of
Aker Malaysia and consequently, liable to discharge service tax under
the forward charge mechanism on the consideration received by Aker
Malaysia from RIL. The demand proposed was for the period prior to
15.04.2014, i.e. for the period from February 2010 to 15.04.2014.
The show cause notice for the period till 01.07.2012 invoked the
second proviso to section 66A of the Finance Act alleging that both
Aker Malaysia and Aker India were ―business establishments‖ of the
same entity and that of the said two business establishments, Aker
India was the one directly concerned with the provision of service and
was, therefore, the person liable to pay service tax. For the period
after 01.07.2012, the show cause notice alleged that the location of
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the service provider, as per the 2012 Rules was India as the Indian
business establishment (Aker India) was the one directly concerned
with the provision of service and, therefore, the reverse charge
mechanism provisions were inapplicable. The relevant paragraph of
the show cause notice on this issue is reproduced below:
―14. Therefore, from the above discussions, it appears that
the assessee bas provided the taxable service of Maintenance
and Repair of Subsea Equipment to M/s RIL from 2009-10 to
2014-15 and despite having absolute knowledge of the fact
that they have established a Place of Business in India on
18.12.2009 by starting a Project Office, they have
deliberately withheld this information from the Dept, as the
disclosure of the same would disentitle them from purview of
Section 66A of Finance Act, 1994. Since, the assessee has
established a place of business in India as a project
office and the same is directly concerned with the
provision of service, they would attract the provisions
of the second proviso to Section 66A of Finance Act,
1994 and thereby make themselves liable for payment
of service tax instead of their service receiver i.e. M/s
RIL. Moreover the assessee's arriving at the premise that
they have established a place of business only on 15.04.2014
and obtaining registration thereafter and paying taxes albeit
they have established place of business on 18.12.2009 is self
contradictory. All these facts lead to the conclusion that
they have willfully suppressed the fact of establishment of
place of business from 18.12.2009 to intentionally evade the
payment of service tax, as from the date of establishment of
place of business i.e. from 18.12.2009 onwards, the
assessee were liable for payment of service tax and
not M/s RIL in terms of the second proviso to Section
66A of Finance Act, 1994 read with Rule 2(h)(iii) and
Rule 8 of Place of Provision of Services Rules, 2012.
Since the assesses have willfully suppressed facts with an
intention to evaded payment of tax, the proviso to Section
73(1) of Finance Act, 1994 is liable to be invoked for
recovery of tax not paid. The details of taxable value and tax
thereon are contained in the Annexure to this notice.‖
(emphasis supplied)
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11. The appellant filed a reply dated 14.07.2015 to the aforesaid
show cause notice clearly stating that RIL had paid the service tax on
the consideration paid by it to Aker Malaysia in foreign exchange on
reverse charge mechanism and, therefore, recovery of such service
tax again on the same service was not tenable.
12. The demand proposed in the show cause notice was confirmed
by the Principal Commissioner. It needs to be noted that the Principal
Commissioner did not confirm the allegation made in the show cause
notice that the Indian project office (Aker India) was a ―business
establishment‖ of Aker Malaysia and instead proceeded to hold that
Aker India was a ―fixed establishment‖ of Aker Malaysia located in
India, which was directly concerned with providing services to RIL in
India and, therefore, liable to discharge the service tax liability
considering itself to be the person liable to pay service tax.
13. The discussions and findings in the impugned order are divided
into two parts, namely for the period till 30.06.2012 and for the
period after 01.07.2012. For the period prior to 30.06.2012, the
Principal Commissioner held that the provisions of reverse charge
mechanism contemplated under section 66A of the Finance Act could
not have been resorted to as the service provider had a ‗fixed
establishment' located in India. The view expressed by the Principal
Commissioner is that the provisions of section 66A are not attracted
in a situation where the foreign service provider has a other ‗fixed
establishment' in India. For the period post 01.07.2012, the
Principal Commissioner held that in terms of rule 2(h) of the 2012
Rules, the location of the service provider was the project office in
India as that was the establishment most directly concerned with the
provision of service. The Principal Commissioner further observed
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that in terms of rule 8 of the 2012 Rules, the place of provision of
service was the location of the service recipient (which would be in
India) and on this basis, the Principal Commissioner concluded that
as Aker Malaysia had an office in India and provided service from
India, the onus to discharge service tax liability would be on Aker
India. The relevant portions of the order passed by the Principal
Commissioner are reproduced below:
"27. Prior to 01.07.2012
xxxxxxxxxxxx. Hence, the project office of the
assessee is a fixed establishment in India as far as the
project undertaken and the period covered in the
notice is concerned. Therefore, as the assessees have
fixed establishment located in India they cannot resort
to the provisions of Section 66A of the Finance Act,
1994 which envisage a situation where the business or fixed
location of the service provider is located outside India. Only
in a situation if there is no business or other fixed
establishment in any country and the business is a limited
company or a other corporate body, it belongs wherever it is
legally constituted. This view is also supported by para 26.4
of the Circular No. B1/6/2005-TRU, dated 27 July 2005.
Post 01.07.2012
30. Even after the introduction of negative list regime
the services of maintenance and repair services for
subsea equipment for M/s. Reliance Industries Limited
is a taxable service as the same is not covered by
negative list. As already discussed taxability of the services
undertaken is not disputed by the asseessee. Further, I find
that in the instant case India would be the location of
the service provider in terms of sub- rule b (iii) of Rule
2 (h) of the Place of Provision of Services Rules, 2012
as the project office is the establishment most directly
concerned with the provision of the service.
Further, as per ‗Explanation 4' given under the definition of
service vide Section 65B (44) of the Finance Act, 1944 a
person carrying on a business through a branch or agency or
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representational office in any territory shall be treated as
having an establishment in that territory.
In the present case, M/s. Aker Solutions India Sdn.
Bhd. (ASI) a foreign entity, is carrying on business
through a project office in the territory of India and
hence, in terms of the 'Explanation 4' given above,
M/s. Aker Solutions India Sdn. Bhd. (ASI) shall be
treated as having an establishment in the territory of
India. In this case as the location of the service provider and
the service receiver is in the taxable territory, in terms of
Rule 8 of the Place of Provision of Services Rules, 2012, the
place of provision of service would be the location of the
service recipient (i.e.) India. As the assessee have an Office
in India and provided service from India, the onus to
discharge Service tax liability is on them.
In view of the above discussion, the service providers were
liable for Service Tax under Section 66B of Finance Act,
1994. Accordingly, I hold that the asseessee are liable to pay
Service Tax on the service of 'Maintenance and Repair
services for Subsea Equipment' under taken by them during
the period from 01.07.2012 to June 2014.‖
(emphasis supplied)
14. Shri Vipin Kumar Jain learned counsel for the appellant assisted
by Shri Vishal Aggarwal made the following submissions:
(i) The services were rendered by Aker Malaysia to RIL
and not by Aker India to RIL and so for the pre-2012
period, the provisions of section 66A of the Finance Act
would be attracted and service tax would be payable
under the reverse charge mechanism by RIL and not by
Aker India since Aker Malaysia had its usual place of
residence outside India. For the post-2012 period, the
location of service provider alone was relevant in terms
of section 68(2) of the Finance Act read with the
notification dated 20.06.2012 and not the location from
where services were rendered. Since Aker Malaysia,
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which was the service provider, was located abroad,
service tax was payable under the reverse charge
mechanism by RIL and not by Aker India;
(ii) The definition of ―assessee‖ includes an agent and it is
a settled position in law that if service tax is paid by the
agent, the same cannot be demanded again from the
principal;
(iii) Even if it were to be held that RIL did not pay service
tax as the agent of Aker India, it is a settled position in
law that if service tax is paid by one of the parties to
the transaction, the same cannot be demanded again
from the other party; and
(iv) The extended period of limitation could not have been
invoked since there was no intention to evade tax; on
the contrary, the entire service tax liability was
discharged in cash, instead of by utilising CENVAT
credit in case the stand of the Department is accepted.
15. Shri N. Bhanu Kiran, learned authorised representative
appearing for the Department, however, supported the impugned
order and made the following submissions:
(i) As the services were provided by Aker India from
Kakinada support base to RIL, Aker India would be
liable to pay service tax and RIL was not required to
discharge service tax liability on a reverse charge
mechanism;
(ii) The contention of the appellant that it is not covered by
the first part of clause (a) to sub-section (1) of section
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66A of the Finance Act is not correct for the reason that
the second proviso to sub-section (1) creates an
exception to and restricts the applicability of clause (a)
to the appellants case, since the establishment of the
service provider directly concerned with provision of
service is located in India;
(iii) Further, when Explanation-1 to section 66A (2) and the
second proviso to Sec 66A (1) of the Finance Act are
read together, it is very clear that appellant is a
‗business establishment' in India directly involved in the
performance/provision of service. Hence the second
proviso was rightly applied taking into consideration the
entire facts of the case;
(iv) If the contention of the appellant that it was not liable
to discharge the tax liability since the Head Office
received the consideration is accepted, then the whole
purpose of the proviso/Explanation to section 66A of
the Finance Act would be rendered otiose;
(v) As can be seen from the provisions of rule 2(h) of the
2012 Rules and Explanation-4 to the definition of
‗service' from 01.07.2012, the place from where the
service is actually provided or the place which is
directly concerned or connected with performance of
the service is the only criteria which is relevant for
demanding the tax. Further, as per rules 3, 4 and 8 of
the 2012 Rules, place of supply in the instant case is in
India. Service tax has to be paid by the service
provider, which is the Kakinada office;
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(vi) Mere provision in the contract would not justify
payment of service tax under reverse charge
mechanism since it is the Statue that has to be
examined for the purposes of payment of service tax;
and
(vii) The extended period of limitation was correctly invoked
in the facts and circumstances of the case.
16. It would transpire that the following undisputed factual position
emerges:
(i) Under the Finance Act, Aker Malaysia and Aker India are
deemed to be two different and distinct persons;
(ii) In terms of the contract with RIL, the person obliged to
provide services is Aker Malaysia;
(iii) The said contract does not require Aker Malaysia to set up
Aker India or take assistance from Aker India. The said
contract, in fact, contains no reference to Aker India;
(iv) Aker Malaysia deputed its expatriate employees to India
in terms of the contract. Invoicing for all such services
was done by Aker Malaysia and these invoices were paid
by RIL by remitting payment in foreign exchange into the
bank account of Aker Malaysia located aboard;
(v) Service provided by Aker India were support services
provided to Aker Malaysia, not in terms of the contract,
but in terms of some understanding between Aker
Malaysia and Aker India; and
(vi) The present proceedings do not seek to demand any tax
on such support services provided by Aker India to Aker
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Malaysia. The demand confirmed in the impugned order is
on the services provided by Aker Malaysia to RIL under
the contract dated 15.09.2009.
17. The issues, therefore, that would arise for consideration in this
appeal are:
(i) Whether Aker India (as held in the impugned order) or
RIL(as contended by the appellant) would be the person
chargeable with service tax on the services provided by
RIL in terms of the contract;
(ii) If it is held that Aker India would be the person
chargeable with service tax, then what would be the
consideration with reference to which liability to tax can
be computed. In other words, whether it would be correct
to assume that the amount received by Aker Malaysia is
the amount received by Aker India;
(iii) Even if it is assumed that Aker India was the person liable
to pay tax on the services provided to RIL, then can a
demand on such tax liability be made from Aker India
when the same had already been paid by RIL as the
service recipient; and
(iv) Whether, in view of the revenue neutral situation, the
Principal Commissioner was justified in confirming the
demand of service tax by invoking the extended period
of limitation and also while imposing penalty.
18. The contentions advanced by the learned counsel for the
appellant and the learned authorised representative appearing for the
Department can now be examined.
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Person Chargeable with Service Tax
For the Period Prior to 2012
19. The appellant has contended that since the service provider i.e.
Aker Malaysia was a company incorporated in Malaysia, the usual
place of residence would be outside India and, therefore, the reverse
charge mechanism contemplated under section 66A of the Finance
Act gets attracted. Thus, the service tax liability has to be discharged
by the service recipient i.e. RIL, which liability RIL had discharged in
full. The Department, however, contends that it is the service
provider who should discharge the service tax liability under the
forward charge mechanism.
20. To appreciate this contention, it would be appropriate to
reproduce the provisions of section 66A of the Finance Act and it is as
follows:
"66A. Charge of service tax on services received from
outside India
(1) Where any service specified in clause (105) of section 65
is,
(a) provided or to be provided by a person who has
established a business or has a fixed establishment from
which the service is provided or to be provided or has his
permanent address or usual place of residence, in a
country other than India, and
(b) received by a person (hereinafter referred to as the
recipient) who has his place of business, fixed
establishment, permanent address or usual place of
residence, in India,
such service shall, for the purposes of this section, be
taxable service, and such taxable service shall be treated
as if the recipient had himself provided the service in
India, and accordingly all the provisions of this Chapter
shall apply:
PROVIDED that where the recipient of the service is an
individual and such service received by him is otherwise
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than for the purpose of use in any business or commerce,
the provisions of this sub-section shall not apply:
PROVIDED FURTHER that where the provider of the
service has his business establishment both in that
country and elsewhere, the country, where the
establishment of the provider of service directly concerned
with the provision of service is located, shall be treated as
the country from which the service is provided or to be
provided.
(2) Where a person is carrying on a business through a
permanent establishment in India and through another
permanent establishment in a country other than India,
such permanent establishments shall be treated as
separate persons for the purposes of this section.
Explanation 1.-- A person carrying on a business
through a branch or agency in any country shall be
treated as having a business establishment in that
country.
Explanation 2.--Usual place of residence, in relation
to a body corporate, means the place where it is
incorporated or otherwise legally constituted.
(3) The provisions of this section shall not apply with effect
from such date as the Central Government may, by
notification, appoint.‖
21. A perusal of the aforesaid provisions of section 66A of the
Finance Act would indicate that sub-section (1) has two clauses,
namely (a) and (b). While clause (a) relates to the service provider,
clause (b) deals with service recipient. There is apparently no dispute
with regard to applicability of clause (b) as it is not in dispute that the
service recipient i.e. RIL is located in India and is covered by the said
clause. The dispute is with regard to the application of clause (a)
which deals with the types of service providers governed by the
reverse charge mechanism The said clause (a) covers the following
two types of service providers:
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(i) Persons who have established a business or have a
fixed establishment from which the service is
provided, in a country other than India; and
(ii) Persons who have a permanent address or usual place
of residence in a country other than India.
22. It is important to take note of Explanation 2 to sub-section (2)
of section 66A of the Finance Act. It clarifies that in relation to a body
corporate, the expression ―usual place of residence‖ means the place
where the body corporate is incorporated or otherwise legally
constituted. In the present case, the service provider is Aker Malaysia
as is clear from the contract. Aker Malaysia is a foreign body
corporate incorporated in Malaysia and, therefore, by virtue of
Explanation 2, its ―usual place of residence‖ would be Malaysia. Aker
Malaysia would, therefore, be a type (ii) service provider
contemplated in section 66A(1) (a). In such a situation the provisions
of reverse charge mechanism, on a plain reading of section 66A of
the Finance Act, clearly come into play as a result of which RIL, as a
service recipient, has to discharge the service tax liability.
23. The requirement of identifying the establishment ―from which
the service is provided‖ is a requirement contemplated only in type (i)
service providers under clause (a) of sub-section (1) of section 66A of
the Finance Act. Such a requirement is not contemplated under type
(ii) service providers.
24. Thus, the fact that the service provider i.e. Aker Malaysia had a
fixed establishment in India and further that service was provided
from the said fixed establishment is not a relevant consideration at
all.
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25. The Principal Commissioner, however, in paragraph 27 of the
order noted that the question of examining the country of
incorporation of a service provider arises only in a situation if there is
no business or other fixed establishment in any country. In support of
this finding, the Principal Commissioner relied upon the CBEC Circular
dated 27.07.2005, which is reproduced below:
―26.4 A fixed establishment is an establishment other than
the business establishment. It should have both the technical
and human resources necessary for providing or receiving
services permanently present. A business may have several
fixed establishments including a branch. If there is no
business or other fixed establishment in any country and the
business is a limited company or another corporate body, it
belongs wherever it is legally constituted...‖
26. As noticed above, the Principal Commissioner was required to
examine this issue while examining type (i) service providers and not
type (ii) service providers. The Principal Commissioner has read into
section 66A (1) of the Finance Act, a requirement which is not borne
out from the provisions. The provisions of section 66A of the Finance
Act were required to be examined and the Principal Commissioner
should not have been influenced by the Board Circular, as was
observed by the Supreme Court in Orient Paper Mill vs. Union of
India4
27. For the aforesaid reasons, it is not possible to accept the
contention advanced by the learned authorised representative
appearing for the Department that what has to be seen under section
66A of the Finance Act is the place ―from which the service is
provided‖. This expression ―from which the service is provided‖ is
conspicuously absent in type (ii) service providers in clause (a) of
4. 1978 (2) ELT J 345 (SC)
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sub-section (1) of section 66A of the Finance Act. The legislature has
used different requirements while describing the two types of service
providers covered under clauses (a) and (b) and there is no reason to
ignore this difference.
28. Learned authorised representative appearing for the
Department also placed reliance upon Explanation 1 to sub-section
(2) of section 66A of the Finance Act.
29. A bare perusal of Explanation 1 would indicate that it applies
only to a ―branch‖ or ―agency‖. The project office cannot be equated
with a branch office. The show cause notice also does not allege that
the project office is the branch office of Aker Malaysia. In this
connection it will also be pertinent to refer to the Foreign Exchange
Management (Establishment in India of Branch or Office or other
Place of Business) Regulations, 2000 5 . The expressions ‗branch',
‗liaison office', ‗project office' and ‗site office' have been differently
defined. In such a situation Explanation 1 cannot be relied upon.
30. The learned authorised representative appearing for the
Department also submitted that by virtue of the second proviso to
sub-section (1) of section 66A of the Finance Act, the services
provided to RIL should be regarded as provided by Aker India since,
as between the two establishments of Aker, the one in India (the
Indian project office) was the one ―from which the service is
provided‖.
31. It is clear from the second proviso that it only seeks to provide
guidance for identifying, as between two establishments of type (i)
service providers, the establishment ―from which the service is
5. the 2000 Regulations
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provided‖. Such a requirement, as noticed above, is required to be
examined only if the service provider is a type (i) service provider.
The second proviso would, therefore, have no application if the
service provider is a type (ii) service provider. This apart, even the
Principal Commissioner has not relied upon the second proviso.
32. In this view of the matter, it will not be necessary to examine
whether the Indian project office satisfies the requirements of ―fixed
establishment‖ and whether the service was provided from the said
establishment. It would also not be necessary to examine whether
the said establishment was directly concerned with the provision of
services.
33. Even otherwise, the finding recorded by the Principal
Commissioner that the Indian project office was a ‗fixed
establishment' of Aker Malaysia is not supported by any evidence. A
‗fixed establishment' must have sufficient, technical and human
resources necessary for providing services on a permanent basis. The
Department has not been able to establish that the project office in
India had acquired permanent technical and human resources
necessary to provide the services to RIL. The invoices clearly show
that expatriates had been deputed in India to provide services and in
respect of such expatriates, billing was done as per ‗dollar man day
rates' specified in Exhibit C.
34. Thus, in view of the aforesaid discussion, it clearly emerges
that reverse charge mechanism contemplated in section 66A of the
Finance Act was clearly applicable and the tax liability has, therefore,
correctly been discharged by RIL as the service recipient located in
India. The confirmation of demand against the appellant for the
period prior to 30.06.2021, therefore, cannot be sustained.
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ST/30944/2016
For the Period Post 2012
35. Section 68 of the Finance Act would be relevant for the post
2012 period and it is reproduced below:
―68. Payment of service tax
(1) Every person providing taxable service to any person
shall pay service tax at the rate specified in section 66B in
such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in
respect of such taxable services as may be notified by the
Central Government in the Official Gazette, the service tax
thereon shall be paid by such person and in such manner as
may be prescribed at the rate specified in section 66B and all
the provisions of this Chapter shall apply to such person as if
he is the person liable for paying the service tax in relation to
such service.
PROVIDED that the Central Government may notify the
service and the extent of service tax which shall be payable
by such person and the provisions of this Chapter shall apply
to such person to the extent so specified and the remaining
part of the service tax shall be paid by the service provider.‖
36. Rule2(1)(d)(i)(G) of the Service Tax Rules, 19946 also needs to
be referred to in this connection and it is reproduced below:
―2(1): In these rules, unless the context otherwise requires,-
(d) "person liable for paying service tax", -
(i) in respect of the taxable services notified under sub-
section (2) of section 68 of the Act, means,-
...
(G) in relation to any taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory, the recipient of such service;‖
37. It would also be appropriate to refer to the notification dated 20.06.2012 issued under section 68(2) of the Finance Act. It provides at serial no. 10 that the recipient of the service in respect of any
6. the 1994 Rules 22 ST/30944/2016 taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory would be 100% of the tax liability. Reliance on the 2012 Rules is misplaced as these Rules have been framed under section 66C of the Finance Act for a limited purpose of determining whether or not services are provided within the taxable territory. This would be a factor relevant only for determining the taxability of services. The 2012 Rules have not been framed under section 66B or section 68 (2) of the Finance Act, which are the provisions relevant for determining the person liable to pay tax. There is no dispute regarding the taxability of the services provided in India, as both the appellant and the department agree on this. However, according to the appellant it would be under the reverse charge mechanism, while according to the department it would be under the forward charge mechanism. The 2012 Rules, have no relevance for the purpose of deciding who is the ―person liable to pay such tax‖.
38. Learned counsel for the appellant also contended that the definition of ―the location of the service provider‖ in rule 2 (h) of the 2012 Rules would have no application for the purpose of identifying the person liable to pay tax.
39. Though it may not be necessary to examine this contention in view of the aforesaid findings, but even if the said definition is taken into consideration, the conclusion would be the same. Rule 2 (h) of the 2012 Rules is reproduced below:
(h) "location of the service provider" means-23
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(a) where the service provider has obtained a single registration, whether centralized or otherwise, the premises for which such registration has been obtained;
(b) where the service provider is not covered under sub- clause (a):
(i) the location of his business establishment; or
(ii) where the services are provided from a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or
(iii) where services are provided from more than one establishment, whether business or fixed, the establishment most directly concerned with the provision of the service; and
(iv) in the absence of such places, the usual place of residence of the service provider.
40. The Principal Commissioner has held that the location of the service provider would be India in view of clause (iii) of rule 2(h)(b). According to the Principal Commissioner India was the establishment ‗most directly concerned with the provision of the service'. This conclusion is factually not correct. The contract would show that Aker Malaysia was the only establishment concerned with the provision of service and Aker India had no connection with the provision of services. The true test for determining this issue would be who, amongst the various establishments involved in the execution of a service contract, would be liable to be sued for any breach of the contract. Aker India did not even exist when the contract dated 15.09.2009 was executed between Aker Malaysia and RIL and Aker India was not even a party to the said contract. Service provider is one who is contractually obliged to render services. In this connection it may be useful to refer to the decision of the Delhi High Court in Verizon Communication India Pvt. Ltd. vs. Asstt. Commr., S.T., 24 ST/30944/2016 Delhi-III 7 , wherein it was held that the identity of the service recipient has to be decided with reference to the contract concerned. The Delhi High Court also considered and approved the decision of the Larger Bench of the Tribunal in Paul Merchants Ltd. vs. Commissioner of C. Ex., Chandigarh 8 and the decision of the Tribunal in Vodafone Essar Cellular Ltd. vs. Commissioner of C. Ex., Pune-III 9 . The relevant portion of the judgment of the Delhi High Court is reproduced below:
―2. The question arises in the following background. Verizon India is a company incorporated under the provisions of the Companies Act, 1956 and is registered with the Service Tax Department (‗Department') under the category of ‗Business Support Services'. Verizon India entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon US is a company located outside India, inter alia engaged in the provision of telecommunication services for which it enters into contracts with its customers located globally.
3. Since Verizon US does not have the capacity to provide such services in all geographical areas across the globe, it utilises the services of other Verizon entities including Verizon India to provide connectivity to its customers. It is stated that such connectivity is provided in the form of:
(a) Local Access: where Verizon India
facilitates provision of wire line
telecommunication circuit between two Verizon Business designated locations.
(b) Bandwidth: where Verizon India provides diverse wire line telecommunication circuit of a specified bandwidth at the designated locations.
7. 2018 (8) G.S.T.L. 32 (Del.)
8. 2013 (29) S.T.R. 257 (Tri-Del.)
9. 2013 (31) STR 738 25 ST/30944/2016
(c) MPLS VPN: wherein a virtual private network is established through a private line.
xxxxxxxxxx
5. Verizon India further clarifies that it is not privy to the contracts entered into by Verizon US with its customers in the US. Verizon India maintains that even if the services rendered by it are considered to be telecommunication services, the criteria for determining if there is an export of services under the Export of Service Rules, 2005 (ESR) is the same. Verizon India contends that it satisfied the twin requirement under the ESR for the service rendered by it to Verizon US to be considered to be an export of service viz., the recipient of the service is located outside India and the payment for the service rendered is received by Verizon India in convertible foreign exchange.
xxxxxxxxxxx
45. In any event the Circular dated 3rd January, 2007 would in any event not apply to the services provided by Verizon India to Verizon US. In order to determine who the ‗recipient' of a service is, the agreement under which such service has been agreed to be provided has to be examined. When the Master Supply Agreement between Verizon India and Verizon US is examined, it is plain that the recipient of the service is Verizon US and it is Verizon US that is obliged to pay for the services provided by Verizon India.
46. The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers ‗use' the services provided by Verizon India. Indeed in the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former's subscribers. Yet, the ‗recipient' of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This 26 ST/30944/2016 essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the ‗users' of the services provided by Verizon India but are not its recipients.‖ (emphasis supplied)
41. The Principal Commissioner has placed reliance on Explanation 4 to section 65B (44) of the Finance Act. The relevant portion of this section is reproduced below:
"Section 65B (44): ―service‖ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) xxxxxxxx
(b) xxxxxxxx
(c) xxxxxxxxx
Explanation 1: xxxxxxxxxxx
Explanation 2: xxxxxxxxxxx
Explanation 3: For the purposes of this Chapter;-
(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.
Explanation 4: A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;‖
42. Learned counsel for the appellant has however submitted that Explanation 4 to section 65B (44) of the Finance Act has to be read together with Explanation 3(b) and if so read, the conclusion would be that though a representational office in any other country is an 27 ST/30944/2016 establishment of the person whom the said office represents (by virtue of Explanation 4), such a representational office is considered as a person distinct and separate from the other establishments of the same person located elsewhere [(by virtue of Explanation 3(b)].
43. The aforesaid submission deserves to be accepted as the position that would emerge would be the same as that from the erstwhile section 66A (2), which dealt with different establishments located in different countries as separate persons for the purpose of reverse charge mechanism.
44. In the alternative, even if it is accepted that the identification of the establishment ―most directly concerned with the provision of service‖ has to be made by ascertaining which of the several establishments play a dominant role while rendering services, the establishment most directly concerned with the provision of service would be Aker Malaysia and not Aker India.
45. It needs to be noted that the department has not determined the contribution of the Indian project office either in the course of investigation or in the course of adjudication, but there is no manner of doubt from a perusal of the show cause notice and the order passed by the Principal Commissioner that Aker Malaysia played a dominant role in providing the services. It can be gathered from the show cause notice and the order passed by the Principal Commissioner that Aker Malaysia was the ―business establishment‖ and the project office in India was the ―fixed establishment‖. The Circular dated 27.07.2005, which has been reproduced in paragraph 25 of this order clearly differentiates between the ―business establishment‖ and a ―fixed establishment‖. It provides that a ―business establishment‖ is the main establishment, while the ―fixed 28 ST/30944/2016 establishment‖ is a secondary establishment. Thus, the Head Office at Malaysia should be considered as the main establishment and the project office in India should be considered as a secondary establishment. In this view of the matter, the major role in providing services to RIL was performed by Aker Malaysia and some insignificant services can be said to have been provided by Aker India.
46. The fact that Aker Malaysia starting operating a bank account in India after having obtained registration as required under section 592 of the Companies Act is not relevant for determining whether the services were provided from the Indian establishment or whether the Indian establishment was most directly concerned with the provisions of service to RIL.
47. It is also not possible to accept the contention of the learned authorised representative appearing for the department that since Aker India had obtained service tax registration w.e.f 15.04.2014 and started discharging service tax, Aker India should have also taken registration prior to 15.04.2014 when the project office had come into existence on 18.12.2009 and should have discharged service tax liability. The issue as to whether the appellant was required to pay service tax under the reverse charge mechanism or straight charge mechanism has to be determined on the basis of the provisions prevailing at that time and not what the appellant believed or the Revenue believed. Even according to the Circular dated 25.05.2005 the project offices of foreign companies become ‗fixed establishment' only after necessary human and technical resources for providing services have been acquired on a permanent basis. As seen above, though the project office of Aker Malaysia was set up in India in 29 ST/30944/2016 December 2009 and Aker Malaysia set up human and technical resources at this office over a period of time, it was only in 2014 that the Indian project office acquired sufficient degree of permanence in terms of human and technical resources. It then acquired the status of a ‗fixed establishment' and it appears that it is for this reason that the appellant obtained registration on 15.04.2014.
48. Learned authorised representative appearing for the department also placed reliance upon Exhibit A, Exhibit C, Exhibit H Part I and Exhibit H Part III in connection with the ―support base‖ which Aker Malaysia was obliged to set up at Kakinada under the contract to provide the services to sub-sea equipments of RIL.
49. A complete perusal of the terms of the contract would show that setting up a ‗support base' at Kakinada was not the only or the main element of service that was required to be provided to RIL. Infact Exhibit A talks of 19 deliverables. The contract envisages services required to be provided to RIL, both at the project stage at which stage a support base was required to be set up as well as an ongoing basis when the oil and gas production was to commence. The reference to ‗support base' is to a repair yard where tools, spares, parts and testing equipments have to be kept and maintained. It is not in reference to a ‗project office' or any ‗fixed establishment'. It would not be appropriate to read the word ‗established' as ‗establishment'.
50. The inevitable conclusion that emerges from the above discussion is that RIL, as the service recipient, was required to discharge service tax liability on a reverse charge mechanism on the services provided by Aker Malaysia to RIL.
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51. Such being the position, it is not necessary to examine the other contentions raised by the learned counsel for the appellant to assail the impugned order passed by the Principal Commissioner.
52. The order dated 10.06.2016 passed by the Principal Commissioner is, accordingly, set aside and the appeal is allowed.
(Order Pronounced on 16.02.2022) (JUSTICE DILIP GUPTA) PRESIDENT (P.V. SUBBA RAO) MEMBER (TECHNICAL) JB