Custom, Excise & Service Tax Tribunal
3I Infotech Limited vs Mumbai Ii on 9 August, 2016
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEAL NO: ST/520/2012
[Arising out of Order-in-Original No: 43/ST/SB/2011-12 dated 26/04/2012 passed by the Commissioner (TAR), Mumbai.]
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?
:
No
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
No
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
3i Infotech Limited
Appellant
versus
Commissioner of Service Tax
Mumbai II
Respondent
Appearance:
Shri A.R. Krishnan, Chartered Accountant for the appellant Shri D. Nagvenkar, Addl. Commissioner (AR) for the respondent CORAM:
Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical) Date of hearing: 09/08/2016 Date of decision: 09/12/2016 ORDER NO: ____________________________ Per: C J Mathew:
The appellant, M/s 3i Infotech Ltd, is in the business of software development and its export and has branches and subsidiaries outside India. These overseas branches incur expenses for consultancy and professional services rendered in the respective countries which were sought to be assessed to tax on reverse charge basis for having received business auxiliary services. Demand of ` 6,32,52,416/- on the expenditure during the period from 1st April 2006 to 31st March 20011 was confirmed vide order-in-original no. 43/ST/SB/2011-12 dated 26th April 2012 of Commissioner (TAR), Mumbai. Four notices had been issued to appellant with the first two for the period from 1st April 2004 to 31st March 2009 demanding ` 3,14,19,192/- and ` 2,28,79,063/- and the other two for the period from 1st April 2009 to 31st March 2010 demanding Rs 2,09,19,300 and for the period from 1st April 2010 to 31st March 2011 demanding Rs respectively. Of the demands in the first two notices, ` 1,89,22,265/- and ` 1,46,04,351/- were confirmed in the impugned order as were the demands in the other two notices for the subsequent periods. The impugned order held the appellant liable to tax under section 66A of Finance Act, 1994 as recipient of service and dropped that portion of the demand pertaining to the period prior to 18th April 2006 when section 66A was incorporated in Finance Act, 1994.
2. The first demand pertains to expenditure incurred by the Dubai branch of the appellant for marketing and promotion of their software package outside India. The other notices pertain to commission paid to foreign service providers by the Dubai branch for procurement of business and sales promotion of their software packages.
3. Taking note of pronouncements of the Honble Supreme Court that taxation of services rendered by a provider from outside India is liable to taxation only on the strength of specific charging provision in Finance Act, 1994 and not by relying on an insertion in the Service Tax Rules, 1994, the adjudicating authority conceded that the demand for the period before 18th April 2006 could not be sustained.
4. Common ground is that appellant is a 100% export oriented unit with branch offices located abroad and that appellant is a producer of software packages that are sold abroad. It is also not in dispute that branch offices abroad do utilize providers of service to promote commercial interests there and that the expenditure incurred to procure these services are reflected in the balance sheet of the appellant. In consequence, the adjudicating authority held that section 66A of Finance Act, 1994 is attracted on this expenditure acknowledged by the appellant as having been spent by them.
5. Appellant contends that the amount reflected in the balance sheet has been incurred by a branch outside the country and is not taxable in the hands of the appellant. It is also contended that the branch is a separate entity bound by the statutes of the country of operation and the use of any services by the branch does not lead to the allegation that the appellant is the recipient thereof.
6. It is now settled in law that tax is not leviable on import of services prior to April 2006 and the demand in the show cause notice for the earlier period should stand abated. Learned Chartered Accountant relies upon the definition in section 66A of Finance Act, 1994 to claim non-liability to tax for the period thereafter.
7. Learned Authorized Representative reiterates the findings of the adjudicating authority and relies upon the decision of the Tribunal in Torrent Pharmaceuticals Ltd v. Commissioner of Service Tax, Ahmedabad [2015 (39) STR 97 (Tri-Ahmd)] as justification for considering branch and headquarter to be a single entity as recipient of service. Learned Chartered Accountant relies upon the decision of the Tribunal in British Airways v. Commissioner of Central Excise (Adj) Delhi [2014 (36) STR 598 (Tri-Del)], Commissioner of Central Excise and Service Tax (LTU), Mumbai v. Reliance Industries Ltd [(2016) 65 Taxmann.com 238 (Mumbai-CESTAT)], M/s Tech Mahindra v. Commissioner of Central Excise, Pune I [2016- TIOL-709-CESTAT-MUM ] and Genom Biotech Pvt Ltd v. Commissioner of Central Excise & Customs Nashik [2016 (42) STR 981 (Tri-Mumbai)].
8. The primary foundation upon which the impugned order stands is the absence of denial by the appellant that services have been utilised by the Dubai branch. Placed on this foundation is the inference drawn from the balance sheet, in which expenses and income of the Dubai branch have been included, that the appellant and the Dubai branch are inseparable undertakings and that the consideration to the foreign service provider is attributable to the receipt of service by the appellant. From this it is but the next step to invoke section 66A of Finance Act, 1994 and rule 3 of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 to fasten the tax liability on the appellant.
9. It was submitted on behalf of appellant that section 66A(2) of Finance Act, 1994 segregates the entity in India from its business in another country for the purposes of taxation which disaggregation should also govern the commercial independence of each other. This was held to be so in re British Airways thus:
31.?In this case, as is clear from the RBIs letter, BA, India are a branch office of BA, U.K. permitted for operating air service. There is nothing in this letter from RBI from which it can be inferred that the branch office is only a temporary establishment for some limited purpose. A temporary establishment in India of a Company based abroad would be that establishment which is for a particular project after completion of which, it would get wound up. The BA, U.K. have been allowed by RBI to set up branch office in India for operating air services subject to conditions as mentioned in the letter and the RBIs letter does not mention any period of validity of the permission or that the permission to set up branch, once granted, cannot be renewed. Therefore the Departments contention that branch office of BA, U.K. in India is not a permanent establishment is without any basis. The appellant BA, India, therefore have to be treated as a branch office in India of BA, U.K. and in terms of Explanation to Section 66A, BA, India, would have to be treated as Business Establishment of BA, U.K. in India, which as discussed above, has to be treated as a Permanent business establishment of BA, U.K. in India. By virtue of sub-section (2) of Section 66A, BA, India, who are a permanent business establishment in India of BA, U.K. (head office), are to be treated as a person separate from the head office and they cannot be treated as part of the head office for the purpose of Section 66A. In this case, there is no dispute that :-
(a) agreements are between BA, U.K. and the CRS/GDS companies (located outside India and not having any branch or business establishment in India); and
(b) the entire payment to CRS/GDS Companies have been made directly by the head office located outside India and no part of payment has been made by the branch office i.e. BA, India.
xxxxxxx 31.3.1?In my view, as discussed earlier paras, for the purpose of Section 66A, the airline head office - BA, U.K. and its Indian branch office - BA, India cannot be treated as one entity in view of the provisions of Section 66A, but have to be treated as two different persons. Therefore, it would be wrong to treat the services received from CRS/GDS Companies by BA, U.K., as the services received by their Indian branch-BA, India. Similarly the payments made to CRS/GDS companies by BA, U.K. cannot be treated as payments made to CRS/GDS Companies by BA, India or on behalf of BA, India, unless it is proved that the services provided by CRS/GDS Companies were Indian branch specific services which satisfied the business needs of BA, India and the role of BA, U.K. was of facilitator only.
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49.?Ld. Member (Technical) has also discussed in para-31 of the proposed order as to how the British Airways, India a branch office of British Airways, U.K. cannot be considered as a temporary establishment. The same is not for a particular project after the completion of which the same would get wound up. The same has been specifically permitted by RBI to carry on the air transportation activities and has to be held as a permanent establishment, in which case on account of the provisions of Section 66A, it has to be treated as a person separate from its head office. It is the counter-argument of Learned Authorized Representative that the Tribunal in re Torrent Pharmaceuticals Ltd has determined the specific purpose of section 66A(2) of Finance Act, 1994 as:
5.5?Section 66A (1) above is talking of service provider and service recipient as persons which has to mean as different business persons. Section 66A(2) and its Explanation I only make a clarification and to fix service tax liability on recipient of services under reverse charge mechanism that both the permanent establishments in India and abroad of a business person are to be treated as separate persons. The above clarification/distinction made in Section 66A in our opinion is only for making an identification to determine whether a service is provided and consumed in India or abroad. It is an accepted legal position that one can not provide service to ones own self. If the permanent establishment of the appellant abroad is treated as a service provider to its own head office in India then it will amount to charging service tax for an activity provided to ones own self. Similarly placed branches of the appellant undertaking similar activities in India will not be held so. Therefore, a comprehensive reading of Section 66A of the Finance Act, 1994, a permanent establishment situated abroad as a separate person, will be understood to have been prescribed only to determine the provision of service whether in India or out of India. Theoretically it could be possible that a person carrying business through a permanent establishment abroad may like to pay lower rate of local VAT/GST abroad to avoid service tax payment in India by showing the services to have been availed abroad. However, there is no likelihood of such avoidance in case of an assessee who is eligible to Cenvat credit in India for the service tax payable in India for which the assessee is entitled to Cenvat credit. It is also not the case of the of the Revenue that appellant is not capable of utilising Cenvat credit admissible as they have paid more than Rs. 12,000 crores as taxes during the periods 2007-2008 to 2011-2012. For a clearer appreciation of section 66A(2) of Finance Act, 1994, we must place it in the context of the status of appellant as an export oriented unit and the nature of the transaction that were subject to tax in the impugned order. In re British Airways, the issue for consideration was whether the existence of a business establishment of a foreign airline in India was sufficient to fasten tax liability on reverse charge on consideration paid to foreign service provider arising from agreement of the overseas headquarters with the service provider. In re Torrent Pharmaceuticals, the issue for consideration was whether the services rendered by overseas branch was liable to tax owing to the disaggregation of branch and headquarters by section 66A(2) of Finance Act, 1994. The present dispute is on entirely different footing, viz., that the payment for service rendered by foreign service provider, though claimed to be effected by branch in Dubai, was, in effect, made by the appellant. We draw a distinction in designating the Indian operation as appellant and the Dubai operation as branch.
10. We have addressed this issue in our decision in re Tech Mahindra which examined the nature of overseas branches of a software exporting entity headquartered in India. Having considered the provisions of section 66A(2) of Finance Act, 1994 and the role of the overseas branches, we held that the symbiotic business and structural relationship is not susceptible to interpolation into the specific context of section 66A and each transaction of the overseas branch would have to be scrutinized to ascertain if taxable service has been rendered by branch to headquarters and vice versa. The impugned order has overlooked the requirements of accounting standards which mandates that financials of the branch are to be included in the financials of the corporate entity that has established the branch. Such inclusions owing to accounting standards do not suffice to conclude that services were rendered by foreign service providers to the Indian headquarters. No effort has been undertaken by adjudicating Commissioner to ascertain the nature of the transactions for which payments were made by branch in Dubai and the demand in the impugned order lacks appropriate robustness in consequence.
11. Even if the payments are attributable to service rendered by foreign service providers to the appellant, the scope of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 needs ascertainment. We refer to our decision in re M/s Tech Mahindra Ltd wherein we have held that 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. We note that section 66A of Finance Act, 1994 is a special enabling provision engineered to tax import of services, both to countervail the taxing of domestic transactions and to afford a national treatment to the service, and the determination of taxability is with reference to the Rules supra. The Rules draw its origin also from the exemption powers devolving on the Central Government under section 93 of Finance Act, 1994; accordingly, any situation that is not envisaged in the specific framework of taxability in rule 3 is beyond the ambit of tax. The impugned order has erred in merely relying on the provisions of section 66A(2) of Finance Act, 1994 and the non-exclusion of section 65(105)(zzb) of Finance Act, 1994 from rule 3 to conclude that tax liability arises.
12. We note that rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India), Rules 2006 includes business auxiliary services but is restricted to such as are received by a recipient located in India for use in relation to business or commerce. The thrust of the Rules is to identify the manner of receipt of service in India in the three categories, viz. in relation to the object of the service, place of performance and location of the recipient. We are concerned with the residuary aspect of location of recipient. The adjudicating Commissioner has not rendered a finding that the appellant is the recipient of service, indeed, he could have done so only by examining the relationship between the appellant and branch in the context of the payments effected to foreign service provider which he, probably, did not feel obliged to in the absence of any allegation to that effect in the show cause notice. Unless the recipient is located in India, section 66A cannot be invoked.
13. The other crucial aspect is receipt of service for use in relation in business or commerce which would, in most circumstances, be the key to determine if service was rendered to the recipient. There is no doubt that, on export, the scheme of taxation divests the tax element. Services rendered by foreign provider are subject to tax by the deeming fiction in section 66A of Finance Act, 1994 that recipient is the provider of the service. The objective of taxing such services in relation to domestic activities of a recipient is well within the scheme of levy of service tax. Levy of tax through section 66 of Finance Act, 1994 on all domestic entities receiving services from domestic providers is also within the scheme of taxation of services because the service is not attributable, at that stage, to domestic consumption or exports. Hence CENVAT Credit Rules, 2004 provide for monitoring of availment and grant of refund to exporters subsequent to discharge of tax liability. However, utilization of services which are patently in relation to goods/services that have already been exported, it goes against the grain of procedural simplicity to collect the tax by deeming fiction merely for refunding it subsequently. From this it would appear that the reference to business or commerce in rule 3(iii) in Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is restricted to business and commerce in India not to business and commerce outside India. We find no allegation in the notice or conclusion in the impugned order that service have not been used for business or commerce outside India.
14. We refer to our decision in re Genome Biotech Pvt Ltd, wherein we have held that 15. Services that are not connected with manufacture or with the transport of goods till the customs frontier of the country can be disassociated from use within the country and hence would not lie within the ambit of the legal fiction of import of services. Services that are undeniably rendered by a foreign service provider in relation to the goods sold abroad cannot be presumed to be covered by the legislative intent to tax. To tax a service using the legal fiction of import and then reimburse that tax because the service was not required for any activity within the country is an exercise in futility and is contrary to the objectives of and means devised for export promotion by the State.
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19. The original authority has failed to take note of the destination of the goods manufactured by the appellant and has deemed the services rendered in Ukraine to have been imported into India for business and commerce. From our examination of the scheme of deeming of import of services for taxation supra, it can be reasonably inferred that the business or commerce in Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not intended tax services that are rendered in connection with business or commerce outside the territory of India. Since the appellant has no requirement of advertising agency service for manufacture and export of goods, the tax demanded in the impugned order is not on the consideration for a service received in India but a tax on the funds transferred in a cross-border transaction. Such a tax is not contemplated in Finance Act, 1994.The demand of tax on the appellant is not in accordance with law. and in re M/s Tech Mahindra Ltd wherein we have held that:
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.
15. For the above reasons, we hold that the evidences adduced in the show cause notice leading to the impugned order do not sustain the finding that the services obtained by overseas branches of appellant are liable to tax under section 66A of Finance Act, 1994. Consequently, the appeals are allowed.
(Pronounced in Court on 09/12/2016) (M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical) */as 13 2