Custom, Excise & Service Tax Tribunal
C. P. Gurnani vs Pune I on 16 September, 2016
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEAL NO: ST/86066 to 86069/2015
[Arising out of Order-in-Original No: PUN-SVTAX-000-COM-005-14-15 dated 11/02/2015 passed by the Principal Commissioner of Service Tax, Pune I]
For approval and signature:
Honble Shri M V Ravindran, Member (Judicial)
Honble Shri C J Mathew, Member (Technical)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
:
Yes
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
Yes
3.
Whether Their Lordships wish to see the fair copy of the Order?
:
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
:
Yes
Milind Kulkarni
Vishwanath Kini
M/s Tech Mahindra Ltd
C. P. Gurnani
Appellants
versus
Commissioner of Central Excise
Pune I
Respondent
Appearance:
Shri V Sridharan, Sr. Advocate with Shri Sandeep Sachdeva and Ms. Niyati Jigyasi, Advocates and Shri Vinay Jain, CA for the appellant
Shri V.K. Singh, Special Counsel for the respondent
CORAM:
Honble Shri M V Ravindran, Member (Judicial)
Honble Shri C J Mathew, Member (Technical)
Date of hearing: 16/09/2015
Date of decision: 15/03/2016
ORDER NO: ____________________________
Per: C J Mathew:
The appellant-assessee, M/s Tech Mahindra Ltd, is in the business of developing software for overseas customers, particularly mobile operators, and, admittedly, renders information technology service taxable as per section 65 (105) (zzzze) of Finance Act, 1994; however, being an exporter, they are exempt from tax. These services are rendered through on-site and offshore operations and, for the former, engineers are deputed from India.
2. The appellant has established a network of branches and subsidiary companies at different locations outside the country. On the value of services rendered by subsidiaries to the parent company, appellant has been discharging service tax liability under the reverse charge mechanism prescribed in section 66A of Finance Act, 1994.
3. The said section specifies that taxable services enumerated in section 65(105) are chargeable to tax when received from outside the country and that liability devolves on the domestic entity as though it had rendered the service to itself. Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 identifies the manner of receipt of services that render it taxable, prescribes the requirement for registration by the recipient under section 69 of Finance Act, 1994 and circumscribes the applicability of CENVAT credit to such transactions.
4. The branches of the appellant act as salary disbursers of the staff deputed from India to client locations besides carrying out other assigned activities. The salaries so disbursed, as well as other expenses of the running the branch, are met from the coffers of the appellant. Payments made by customers are also received in branches and transmitted to the head office after netting the expenses incurred by the branch.
5. Convinced that the payments made to the branches were in the nature of consideration for taxable services rendered by the branch to the head office and that M/s Tech Mahindra Ltd was liable to tax on reverse charge basis for having been recipient of business auxiliary services rendered by the branches to the head office, proceedings were initiated by Revenue.
6. Business auxiliary service has been rendered taxable with effect from 1st July 2003 by insertion of sub-section (zzb) in section 65 (105) of Finance Act, 1994 and by defining the service in section 65 (19) of Finance Act, 1994.
7. Following scrutiny of payments made by the appellant to its branches abroad and quantification as ` 5773,87,34,076/- for the period between 16th May 2008 and 31st July 2013, notice was issued on 24th October 2013 for recovery of Rs 637,66,00,962 as tax besides interest and for imposition of penalties under section 77 and 78 on M/s Tech Mahindra Ltd, its Chairman and a few other key functionaries.
8. Commissioner of Central Excise, Pune vide order-in-original no. PUN-SVTAX-000-COM-005-14-15 dated 11th February 2015 confirmed the demand and interest besides imposing penalties under section 77 and 78 of Finance Act, 1994 on M/s Tech Mahindra Ltd and on Shri Milind Kulkarni, Shri Viswanath Kini and Shri CP Gurnani. M/s Mahindra Tech Ltd and the individuals on whom penalty was imposed are in appeal before the Tribunal against that order.
9. The primary planks of the confirmation of demand in the impugned order are that the appellant and its branches are different persons, that the purpose and activities of the branches are for rendering service to the head office in India, that the payments made to the branches are not reimbursements but are taxable consideration for taxable service and that there has been suppression of facts by the appellant.
10. On behalf the appellant, Learned Senior Counsel argues
> that the adjudicating authority erred in holding that the branches and the head office are independent entities by incorrect interpretation of section 66A of Finance Act, 1994;
> that the head office is not a permanent establishment and section 66A(2) of Finance Act, 1994, which is intended to tax service rendered by a permanent establishment to another permanent establishment, has been incorrectly invoked;
> that tax liability will arise only for services received in India which the adjudicating authority failed to establish;
> that, without there being a client relationship, business auxiliary service cannot be said to have been rendered;
> that reimbursements are not consideration and is not rendering service;
> that overseas branches did not charge any consideration for any service;
> that the Tribunal in re Torrent Pharmaceuticals Ltd [2014-TIOL-2647-CESTAT-AHM] has held that branches are not service providers within the meaning of section 66A of Finance Act, 1994;
> that salaries, sub-contracting costs and expenditure on services that were rendered outside the country cannot be taxed under section 66A of Finance Act, 1994;
> that activities taxed overseas cannot be taxed under Finance Act, 1994;
> that services rendered in connection with authorized operations in special economic zones are not includible as consideration for rendering of taxable services;
> that the entire demand is revenue neutral as CENVAT credit could be taken and refund claimed;
> that there was no scope for invoking section 73 (3) of Finance Act, 1994;
> that penalty under section 78 and 78A of Finance Act, 1994 are not liable to be invoked;
> that circulars of Central Board of Excise & Customs designate head office to be business establishment and nexus between consideration and recipient of service is essential for crystallising tax liability;
> amount paid to employees is in pursuit of employment contract;
> that expenditure for the branch in the United Kingdom was Rs 3282 crores while that of other branches was Rs 569 crores; with the client in the United Kingdom, M/s British Telecom, having paid VAT in that country and likewise in other countries, tax was not leviable under Finance Act, 1994;
> that it was not just revenue-neutral but special case of revenue-neutrality;
> that regular information was being furnished to service tax authorities and the books had been subject to service tax audits
11. Learned Special Counsel appearing for respondent-Commissioner drew attention to section 65 (105)(zzb) and section 65B(51) of Finance Act, 1994, to section 66A of Finance Act, 1994 read with Rule 3(iii) (c) of Taxation of Services (Provided from outside India and Received in India) Rules, 2006 and Explanation 3(b) and 4 of section 65B(44) of Finance Act, 1994 besides countering the contention of appellant on revenue neutrality and invoking of penal provisions. We are of the opinion that no purpose will be served by further elaboration of the two rival submissions at this stage in view of our considered findings on the issues raised and held by the lower authority. We also note that the decisions relied upon by both sides are the same and these will be examined at the appropriate stage of our findings.
12. At the core of the dispute are four issues, viz., the status of overseas branches vis-`-vis the head office and the limitation thereof, the jurisdiction to classify the services under section 65(105) of Finance Act, 1994, the receipt of business auxiliary service by the assesse-appellant from its branches and the inclusion of reimbursable expenses for computation of gross receipts under section 67 of Finance Act. All of these are to be required to be answered to sustain the confirmation of demand by the adjudicating authority.
13. That the branch and head office are distinct entities for the purpose of taxation cannot be a matter of dispute. The law relating to taxation of service, an indirect, destination-based tax, is constitutionally restricted to India. In the scheme of Chapter V of Finance Act, 1994, the incidence of tax on services is to be borne by the recipient of service and levy is enforced on the provider of service. As the tax can be collected only from a service-provider within the jurisdiction, undertakings beyond the territory are beyond the ambit of the statute irrespective of the nature of the structural form or the linkage - organic or contractual. In such a taxing law, an entity that is beyond the jurisdiction of the statute has an existence independent of the taxable entity. A branch is, therefore, an entity distinguishable, for purposes of Finance Act, 1994, from its head office.
14. Consequently, an entity that is not subject to a domestic taxing statute is not amenable, by any stretch of argument, to scrutiny for conformity with the provisions of that statute. Activities of the overseas entity cannot be subject to ascertainment of classification of services in section 65(105) of Finance Act, 1994. More so, as tax authorities are bereft of wherewithal to scrutinize the activities of such an entity and there is, indeed, no cause to embark upon such a venture either. Undoubtedly, such entities are subject to tax in the territory in which they operate. We notice that decisions of this Tribunal in Torrent Pharmaceuticals Ltd v Commissioner of Service Tax Ahmedabad [2015 (39) STR 97 (TriAhmd)] and KPIT Cummins Infosystems Ltd v Commissioner of Central Excise, Pune-I [2014 (33) STR105 (Tri-Mumbai)] have considered the subjection to tax by another State for deciding on exclusion from tax levied by the laws of India. A note of caution must be recorded here: this acknowledgement of evidentiary value is not intended to be construed as a condition sufficient for exemption. As the Tribunal expressed in re Torrent Pharmaceuticals Ltd:
5.8 . Therefore, payment of VAT abroad will be an indicator to decide whether service is provided and consumed outside India or has been consumed/received in India. The agreements/documents available with the appellant have to be accepted for the purpose of determining place of providing and consumption of service in India
That it is to be taken as an indicator arises from the absence of cross-border tax facilitation that extends availment of credit beyond the tax frontiers of the country. For these reasons, it is neither feasible nor necessary to delve into the activities of the overseas entity except where the tax liability of the assessee is sought to be mitigated on grounds of discharge of tax abroad. Correspondingly, the refund of any tax abroad is not necessarily detrimental to the assesse without a clear understanding of the tax laws under which refund was sanctioned. The principles and procedures of the tax statute in India should not be presumed to apply to the overseas tax law for crystallising tax liability in relation to activity that has been undertaken by the overseas entity.
15. However, that does not foreclose the jurisdiction over or preclude necessity of examining an overseas activity from the point of view of the recipient of service. Section 66A of the Finance Act, 1994 has been specifically enacted to tax services received by an assessee as though the assessee has provided the service to itself. And in providing the framework for such tax shifting, various organizational forms may have to be disaggregated accordingly, a branch in another country is deemed to be an establishment distinct for the purposes of ascertaining the receipt of service. Therefore, notwithstanding the identifiability of all the essential factors relevant to charge of tax, viz., supplier, customer, supply and place of provision, tax becomes leviable to the extent that receipt of service in India is established. The business auxiliary service that the impugned order has found to have been rendered by the branch office of the appellant-assessee has to cross this hurdle.
16. Section 66A of Finance Ac, 1994 taxes all taxable services received by a person who
has his place of business, fixed establishment, permanent address or usual place of residence in India
from
a person who has established 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
Revenue has alleged that Explanation 1 in sub-section (2) having designated branches as business establishment overseas and section 66(2) mandating that
(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.
tax liability devolves on the appellant-assessee.
17. Tax-shifting arises from the nature of the levy. It is now well-settled that service tax is a destination-based indirect tax; its incidence is borne by the recipient of the service though mechanics of the collection are entrusted to the provider of the service. As a provider who is not within the tax jurisdiction of this country cannot be subject to such entrustment reverse charge is resorted to. Furthermore, akin to the import of goods, equivalence requires that the tax be collected as though it was a domestic transaction with responsibility devolving on the taxable entity in the country.
18. A commercial organization establishes its subordinate formations to further the commercial activity that the principal body is engaged in. Commercial feasibility mandates that such branches exist to render services or to facilitate placement of goods. Therefore, to posit that the overseas branches render services does not require genius of a high order. At the same time, reasonable intelligence suffices to identify the recipient of the service and the nature of the service rendered.
19. The appellant-assessee has established branches for furthering its commercial objectives. The benefit of assigned activities of the branch will, undoubtedly, accrue to the appellant. There is no dispute that it is the appellant-assessee who enters into contractual agreements with overseas customers for supply of information technology services which have off-shore components rendered directly to the overseas entity by the appellant-assessee. On-site activity is undertaken by deputing employees working at the site of the customer. These employees are, without doubt, on the rolls of the appellant-assessee which, save for the specific and limited role of section 66A(2), encompasses the branches within its corporate structure. As section 66A (2) is limited to being a charging section in a specific context, it is not elastic enough to govern the corporate intercourse and commercial indivisibility of a headquarters and its branches. Therefore, any service rendered to the other contracting party by branch as a branch of the service provider would not be within the scope of section 66A. Merely because there is a branch and that branch has, in some way, contributed to the activities of the appellant-assessee in discharging its contractual obligations, the definition of business auxiliary service in section 65(19) of Finance Act, 1994 may not apply. That is where the impugned order has erred in not reading section 65(105) along with section 66A and Rules framed for the purpose of charging tax on services received from abroad. Unless both are applied together, the jurisdiction to tax would be in question.
20. It would be worthwhile to look at the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
2. Taxable services provided from outside India and received in India.- Subject to section 66A of the Act, the taxable services provided from outside India and received in India shall, in relation to taxable services,-
(i) specified in sub-clauses ****** as are provided or to be provided in relation to an immovable property situated in India;
(ii) specified in sub-clauses ****** of clause (105) of section 65 of the Act, be such services as are performed in India:
Provided that where such taxable service is partly performed in India, it shall be treated as performed in India and the value of such taxable service shall be determined under section 67 of the Act and the rules made thereunder;
(iii) specified in clause (105) of section 65 of the Act, but excluding,-
(a) sub-clauses (zzzo) and (zzzv);
(b) those specified in clause (i) of this rule except when the provision of taxable services specified in clauses (d), (zzzc), and (zzzr) does not relate to immovable property; and
(c) those specified in clause (ii) of this rule,
be such services as are received by a recipient located in India for use in relation to business or commerce.
And the successor Place of Provision of Services Rules, 2012
RULE 3.?Place of provision generally. The place of provision of a service shall be the location of the recipient of service :
Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service.
RULE 4.?Place of provision of performance based services. The place of provision of following services shall be the location where the services are actually performed, namely :-
(a) services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service :
Provided that when such services are provided from a remote location by way of electronic means the place of provision shall be the location where goods are situated at the time of provision of service :
[Provided further that this clause shall not apply in the case of a service provided in respect of goods that are temporarily imported into India for repairs and are exported after the repairs without being put to any use in the taxable territory, other than that which is required for such repair;]
(b) services provided to an individual, represented either as the recipient of service or a person acting on behalf of the recipient, which require the physical presence of the receiver or the person acting on behalf of the receiver, with the provider for the provision of the service.
******
RULE 8.?Place of provision of services where provider and recipient are located in taxable territory. Place of provision of a service, where the location of the provider of service as well as that of the recipient of service is in the taxable territory, shall be the location of the recipient of service.
RULE 9.?Place of provision of specified services. The place of provision of following services shall be the location of the service provider :-
(a) Services provided by a banking company, or a financial institution, a non-banking financial company, to account holders;
(b) Online information and database access or retrieval services;
(c) Intermediary services;
(d)? Service consisting of hiring of all means of transport other than,-
(i)? aircrafts, and
(ii)? vessels except yachts, upto a period of one month.
21. From the above, it is apparent that mere identification of a service and the legal fiction of separate establishment is not sufficient to tax the activities of the branch. The very existence of a branch presupposes some kind of activity that benefits the primary establishment in India and the organizational structure inherently prescribes allocation of financial resources by the primary establishment to the branch to enable undertaking of the prescribed activity. The books of accounts and statutory filings do not distinguish one from the other. The application of Finance Act, 1994 to such a business structure within India does not provide for a deemed segregation. Such a legal fiction in relation to overseas activities should, therefore, have a reason.
22. Section 66A of Finance Act, 1994 does not prescribe promulgation of any Rule for its administration. The two sets of Rules extracted supra are framed under the general provision in section 94 of Finance Act, 1994. Moreover, the Rules draw upon section 93 of Finance Act, 1994 in a manner akin to Export of Service Rules, 2005. It is noticed that the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 also mirrors the Export of Service Rules, 2005. That, however, cannot be taken as intent to tax the inflow of service merely because of a corresponding exemption accorded to the outflow of services. Reference to section 93 as an authority for prescribing the Rules would make it appear that the purpose of the said two sets Rules is to exclude from tax such services that do not fall within the three classifications predicating the import of service. The residuary provision in the Rules of 2006 make it clearly that such services have to be received by a recipient located in India for use in relation to business or commerce. The provisions of the successor Rules are no different.
23. The catena of judgments cited for both sides, viz., British Airways v Commissioner of Central Excise (Adjn) [2014-TIOL-979-CESTAT-Del], Torrent Pharmaceuticals ltd v Commissioner of Service Tax [2015 (19) STR 97 (Tri-Ahmd)] and Infosys Ltd v Commissioner of Service Tax [2014-TIOL-409-CESTTAT-Bang] does support the proposition that a service is taxable under section 66A of Finance Act, 1994 only when such service is rendered in India. The question that arises then in the context of the present dispute is whether the branch renders a service is rendered in India within the meaning of the above statutory provisions. A forced disaggregation merely for the purpose of tax when similar domestic structures are not taxed and when commercial soundness calls for establishment of branches would be clearly inequitable.
24. Hence, the legislative intent of this legal fiction may have to be ascertained. In doing so, the goals of the appellant as an exporter cannot be far from our mind.
25. Section 66A requires taxing of taxable services rendered by an overseas branch to its head office and the two sets of Rules limit tax demand only to the extent that these services are received in India in relation to business or commerce. A plain reading would make it apparent that the services referred to must be for pursuit of business or commerce in India. The two sets of Rules provide for availment of CENVAT credit of the tax paid by the Indian entity on reverse charge basis. As an exporter, the Indian entity is entitled to claim refund of taxes lying unutilized in CENVAT credit account. There is no dispute that the activities of the branch are in connection with the export activity of the appellant-assessee. That the legislature would prescribe the collection of a tax merely for the purpose of refunding it subsequently does not pass the test of reason. More so, as there is no inference of any monitorial aspect in undertaking such an exercise. An exporter who operates through branches is clearly not the target of the legal fiction of branches being distinct from head office. The proposition that the intent of section 66A in taxing the activity rendered by an overseas branch to its headquarters in India is limited to the local commercial or business activities of the head office is thereby confirmed. Consequently, mere existence as a branch for the overall promotion of the objectives of the primary establishment in India which is essentially an exporter of services does not render the transfer of financial resources to the branch taxable under section 66A.
26. The legal fiction of service rendered by overseas branch to its primary headquarters would appear to be intended to prevent escapement from tax by resort to branches specifically to take advantage of the principle of mutuality. When a service to be rendered in India by the primary establishment is deliberately routed through an overseas branch or when a service that would otherwise be contracted from an overseas entity is, instead, sourced through an overseas branch, this legal fiction will come into play. The transaction of the appellant-assessee and the branches which is under dispute before us being related to exports is unambiguously not intended to be taxed as it has nothing to do with business or commerce in India.
27. We do not need to examine whether the flow of funds from the head office to the branch is consideration or reimbursement as the test of services having been received in India fails. Nevertheless, we do so. A branch, by its very nature, cannot survive without resources assigned by the head office. The business of the appellant-assessee is such that credibility in the eyes of its overseas clients lies in the name and style of the appellant-assessee. It cannot be substituted by any other entity. The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business. The economic survival of the branch is entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office. The transfer of funds by gross outflow or by netted inflow is, therefore, nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 whether before 2012 or after.
28. In view of our findings above, the demand of tax in the impugned order is without authority of law and does not survive. The penalties imposed on the assessee-appellant and the principal officers are also set aside. All appeals are, consequently, allowed.
(Pronounced in Court on 15/03/2016) (M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical) */as 21