Custom, Excise & Service Tax Tribunal
Baxter India Pvt Ltd vs Commissioner Of Service Tax-New Delhi on 5 April, 2024
1 ST/1964/2012 &
ST/57925/2013
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
CHANDIGARH
~~~~~
REGIONAL BENCH - COURT NO. 1
Service Tax Appeal No.1964 Of 2012
[Arising out of OIO No.19-22/AKM/CST (Adj.)/2012 dated March 2012 passed by the
Commissioner (Adjudication), Service Tax, Delhi]
M/s Baxter India Private Limited : Appellant
2nd Floor, Tower-C, Building No.8, DLF,
Cyber City, DLF, Phase-II, Gurgaon, Haryana
VERSUS
The Commissioner of Service Tax, Delhi : Respondent
17-B.I.A.E.A. House, M.G. Road,
I.P. Estate, New Delhi-110002
With
Service Tax Appeal No.57925 of 2013
[Arising out of OIO No.30/GB/2013 dated 28.02.2013 passed by the Commissioner
of Service Tax, Delhi]
M/s Baxter India Private Limited : Appellant
2nd Floor, Tower-C, Building No.8, DLF,
Cyber City, DLF, Phase-II, Gurgaon, Haryana
VERSUS
The Commissioner of CGST, Gurugram : Respondent
Plot No.36-37, Sector-32, Gurugram-122001
APPEARANCE:
Ms. Priyanka Rathi and Ms. Shubangi Gupta, Advocates for the Appellant
Shri Anurag Kumar and Shri Aneesh Dewan, Authorised Representatives
for the Respondent
CORAM:
HON'BLE Mr. S. S. GARG, MEMBER (JUDICIAL)
HON'BLE Mr. P. ANJANI KUMAR, MEMBER (TECHNICAL)
FINAL ORDER No.60163-60164/2024
DATE OF HEARING: 15.03.2024
DATE OF DECISION: 05.04.2024
2 ST/1964/2012 &
ST/57925/2013
PER: P. ANJANI KUMAR
Vide these appeals, the appellant, M/s Baxter India Private
Limited, challenges the impugned orders. As the issue involved is
common, both of them have been taken up for consideration together.
2. Brief facts of the case are that the appellant is engaged in providing
taxable services under the category of "Business Auxiliary Services",
"Maintenance and Repair Services", "Intellectual Property Rights
Services", "Management Consultants", "Consulting Engineering
Services", "Sponsorship and Franchise Services" and "Transportation
of Goods Service". On conducting an investigation, it appeared to the
Department that the appellants are not discharging service tax and
certain reimbursements made to the foreign entities for the services
received under Reverse Charge Mechanism. Five show-cause notices
were issued which culminated in the issue of the impugned orders.
3. Ms. Priyanka Rathi, assisted by Ms. Shubangi Gupta, learned
Counsels for the appellants, submits that there are five issues
discussed in the impugned orders.
3.1. Regarding the allegation of non-payment of service tax on
services provided by the Appellant to M/s Baxter Singapore and the
misclassification thereof, she submits that irrespective of the
classification of services, the services qualify as exports as these
services were provided to M/s Baxter Singapore which is located
outside of India and the consideration for such services was also
received in foreign convertible currency; even otherwise, the services
provided by the Appellant merit classification under "Business
3 ST/1964/2012 &
ST/57925/2013
Auxiliary Services" being in the nature of promotion and marketing
services;Service tax is a destination based consumption tax and hence
exports cannot be taxed in view of the Circular No. 56/5/2003 dated
April 25, 2003;even if the services are held to be management
consultancy services, then also the services will qualify as export of
services. She relies on Anglo American Services (India) Pvt. Ltd. Vs
Commissioner of Service Tax, Delhi, 2019 (22) GSTL 415 (Tri. - Del)
and submits that the nature of service is similar to the services
provided by the Appellant. The Tribunal held that the services qualify
as export of services and hence, are outside the ambit of service tax.
3.2. Regarding the allegation of non-payment of service tax on mark
up on transfer price income charged by the appellants from Baxter
World Trade Corporation, i.e., BWT, Corporation, she submits that the
services provided by the Appellant qualify as export of
services.Learned Counsel takes us through the conditions required to
be satisfied to qualify as exports during the relevant period and
submits that the services provided by the Appellant are "Business
Support Services" and fall under Category III [Rule 3(1)(iii)] of the
Export of Service Rules, 2005; the important criteria to qualify as
exports is that the recipient must be located outside of India and place
of performance of the services is immaterial; the services rendered
by the Company are used outside India by the overseas company who
are benefitted by the same and hence qualify as export of services; all
the conditions have been met and therefore, the services provided by
the Appellant qualify as exports and the consideration received from
4 ST/1964/2012 &
ST/57925/2013
the service recipient (cost + mark-up) is outside the ambit of service
tax. She also relies on the following:
Circular No. 111/05/2009-ST February 24, 2009
Commissioner of Central Excise & Service Tax v.
Glaxo SmithKline Pvt. Ltd. (2024) 15 Centax 307
(Tri Chand.)
Arcelor Mittal Stainless India Pvt. Ltd. v. CST. 2023-
VIL-516-CESTAT-MUM-ST
B.G. India Energy Pvt. Ltd. v. Commissioner of
Central Excise, Delhi, 2019 (24) GSTL 430 (Tri. -
Del.)
3.3. Regarding the classification of services received from M/s Baxter
USA to the Appellant and Non-payment of service tax on royalty paid
by M/s Baxter India to Baxter, USA for such receipt of service, she
submits that the Appellant was granted non-exclusive right of Baxter
USA's patent, trademarks, knowhow and proprietary software to
manufacture and sell certain healthcare products vide the license
agreement dated Such services were classified as 'Intellectual
property services by the Appellant;however, the Department has
erroneously classified them as 'Franchise Service'; the services are not
classifiable as 'franchise service' as there is no grant of
representational rights by the franchisor to franchisee, which is
compulsorily required to be categorized under franchise services'. She
relies on Reckitt Benckiser (India) Pvt. Ltd. v. CCE, 2021 (46) GSTL 41
(Tri. - Chan.).
3.4. Regarding the allegation of non-payment of service taxon
networking charges and technical services received by the Appellant,
she submits that service tax on services received by the Appellant
from overseas entity is not payable prior to April 18, 2006 inasmuch
as the relevant charging section for tax on import of service under
5 ST/1964/2012 &
ST/57925/2013
reverse charge mechanism, i.e., Section 66A of the Act, came into
effect only from April 18, 2006. She relies on Indian National Ship
Owners Association v. Union of India, 2009 (13) STR 235(Bom.)
maintained by the Hon'ble Supreme Court in 2010 (17) S.T.R. J57
(S.C.) and CST Delhi v. Sojitz Corporation, 2022 (65) GSTL 130 (SC).
3.5. Regarding the allegation of non-payment of servicetax on
reimbursements made by the Appellant for certain services received,
she submits that the reimbursements are not includible in the taxable
value and hence the reimbursements made by the Appellant to its
overseas company for certain services is not liable to be taxed under
the Finance Act, 1994. She submits, without prejudice to the above,
that the Appellant has reimbursed the overseas company for certain
testing of products and certain conferences attended by doctors; these
are performance-based services, which are performed outside of India
and such expenses are incurred by the Appellant in course of its
business thus, no service tax is payable on such services. She relies
on Intercontinental Consultants & Technocrats Pvt. Ltd. v. Union of
India 2013 (29) STR 9 (Del.) reaffirmed by the Hon'ble Supreme Court
2018 (10) GSTL 401 (S.C.)
4. Shri Anurag Kumar, assisted by Shri Aneesh Dewan, learned
Authorized Representatives for the Department, takes us through the
scope of the services as per the agreement and submits that the
services provided by the appellants to the overseas entities or in
collection, assimilation, compilation and provision of information/
advice to M/s Baxter, Singapore; the services are advisory in nature
and no way connected with market development, assistance in the
6 ST/1964/2012 &
ST/57925/2013
product handling and promotion/ publicity of the products; this
activity falls in the ambit of services as "Management Consultant".
Regarding the markup transfer price income, learned Authorized
Representative submits that the appellants are charging consideration
on cost plus markup; as the services are rendered in India, the same
cannot be treated as export.
5. Learned Authorized Representative submits, on the demand
related to „Franchise Service‟, that as per the License Agreement
dated 27.10.2003, the appellants were given non-exclusive rights on
patents, trademarks, know-how and proprietary software to
manufacture and sell healthcare products; the same is correctly
classified under „Franchise Services‟. Regarding the demand on
networking charges and technical services, he submits that the
appellants have received the same from M/s Baxter Healthcare
Corporation, U.S.A for a consideration and therefore, liable to pay
service tax on Reverse Charge Mechanism basis. He further submits
that the Adjudicating Authority holds that the appellants have not
contested the liability under this category and the demand under
"Management Consultancy Services". Regarding the demand of
service tax on various reimbursements/ payments made by the
appellants, learned Authorized Representative submits that the
argument of the appellants is not substantiated and has been rightly
denied by the Adjudicating Authority.
6. Heard both sides and perused the records of the case. The
instant case requires us to consider as to whether:
7 ST/1964/2012 &
ST/57925/2013
the services provided to Baxter Healthcare Far East Pte. Ltd.
(Baxter Singapore), merit classification under the category of
Management Consultant's Services or under"Business Auxiliary
Services".
Mark-up on transfer price income, charged by Baxter India from
Baxter World Trade Corporation (BWT), qualifies as 'export
consideration
Royalty paid by Baxter India to Baxter Healthcare Inc., USA is
classifiable under the taxable category of 'Franchise Services' or
under 'Intellectual Property Services'.
the appellants are liable to discharge service tax on networking
charges and technical services procured by Baxter India from
overseas entities.
the appellants are liable to discharge service tax liability on the
reimbursements/payments of various expenses, made by Baxter
India to overseas entities.
the appellants are liable to discharge service tax on markup
income reimbursements i.e. total consideration received by
them for provision of services to Baxter World Trade Corporation
(BWT) or the same qualifies as export of services under Export
of Service Rules, 2005.
7. On going through the records of the case, we find that demands
of Rs.64,09,313/- (only demand in Appeal No. ST/57925/2013) and
Rs.42,99,058/- (among other demands in respect of Appeal No.
ST/1964/2012) was raised, on the markup on transfer price income
received by the appellants, from their overseas entities. Learned
8 ST/1964/2012 &
ST/57925/2013
Counsel for the appellants submits that the appellants were rendering
various "Business Support Services" in terms of the Agreement dated
April 01, 2006; the services were in the nature of Training and
Performance Services, System Data Entry, Human Resource System
Support, Payment Processing, Employees Stock Purchase Plan etc.
and these services were exported. On going through the agreement,
we find that it is entered into between the appellant and Baxter World
Trade Corporation; as per the Agreement, the appellant shall provide
BWT in the following services:
1.1. Training and Performance System Data Entry
1.1.1. User set-up for training systems
1.1.2. Archiving and maintenance of data for performance
management too
1.1.3. Preparation of reports as requested
1.2. Reporting
1.2.1. Queries and reports from PeopleSoft based on user
requests
1.2.2. Human Resource data auditing
1.3. Human Resources Systems Support
1.3.1. PeopleSoft job record data entry
1.3.2. PeopleSoft position record data entry
1.3.3. Job requisition data entry for new hires and internal
candidates in online tool
1.3.2. PeopleSoft position record data entry
(Brassring)
1.3.4. Support mailbox maintenance and 'ticket' creation for
issues raised by Human Resources, employees or managers
9 ST/1964/2012 &
ST/57925/2013
1.3.5. System Password resets for (Talent Management,
WeComply, and PeopleSoft Self-Service systems)
1.3.6. Audit and reconciliation of payroll data
1.4. Employee Stock Purchase Plan
1.4.1. Stock balancing, auditing, and clerical activities
1.4.2. Mailbox maintenance and 'ticket' creation for stock
related issues
7.1. On going through the above agreement, it is clear that the
appellant is rendering services to their overseas entities. Though, the
services are performed in India, the beneficiary of the services is
abroad and the payment for the same is coming to the appellants
along with the reimbursed expenses; therefore, in view of the Circular
No.111/05/2009-ST dated February 04, 2009, the services qualify to
be export of services in view of the Export of Service Rules as the
service is used outside India. We find that the Tribunal has held
similarly in the case of CCE & ST Vs Glaxo SmithKline Pvt. Ltd. (supra)
and Arcelor Mittal Stainless India Pvt. Ltd. (supra).
8. Coming to the classification of services rendered by the
appellant to M/s Baxter, Singapore, we find that the same are
rendered in terms of Agreement dated February 25, 1997; we find
that the scope of the services are as follows:
3.1.
(a) information on all the applicable and relevant policies of
the Government of India from time to time;
(b) annual estimates of market development over a five-year
period;
10 ST/1964/2012 &
ST/57925/2013
(c) advice on the relevance and contents of promotional and
publicity material addressed at the Indian market,
(d) advice and inputs to Baxter Singapore as may be required
from time to time on such matters as may be within the
technical, legal and resourcecapabilities of BIPL;
(e) arrange discussions which may be necessary or desirable
with customers in the Territory
(f) up-to-date information concerning health, safety and
environmental Information and product handling Instructions
Including advice on the legal requirements for product handling
and transportation within the Territory,
(g) giving assistance and guidance, on legal requirements in
connection with the performance by Baxter Singapore of its
contracts;
(h) advice about administrative and fiscal matters such as
changes in customs regulations and foreign exchange controls;
(i) advice in respect of payment method, credit terms and the
availability of foreign exchange in the Territory and of political
risks in the Territory;
(j) provide information on banks suitable for letters of credit or
for documentary collection, based on reputation and financial
strength which shall be updated when significant changes occur
and at least annually.
8.1. The Department opines that the above activity falls under
Management Consultancy Service whereas it is the contention of the
appellants that it falls under Business Support Services and that as
11 ST/1964/2012 &
ST/57925/2013
long as the export of services is not disputed, the classification of the
services does not matter as held in Anglo American Services (India)
Pvt. Ltd. (supra). We find that the activity of the appellants as seen
from the Agreement is not in the nature of Management Consultancy
Services; though, at some places, the word "Advice" is used; on going
through the terms of the Agreement, it will be clear that this is in the
nature of giving or passing on of information rather than giving a
management advice. We find that the appellants are providing various
information which is available in India to M/s Baxter, Singapore. We
find that the contentions of the appellants are correct. Moreover, as
contended by the appellant, classification of service does not matter
as long as they are exported. We find that there is no such averment
on the part of the Revenue that the services are not exported.
9. We find that the Department would like to tax the amounts paid,
towards royalty, by the appellant to M/s Baxter, U.S.A under
„Franchise Services‟ whereas, the appellants contended the same is
„Intellectual Property Services‟ as there is no grant of representational
rights by M/s Baxter, U.S.A to the appellant. We find that the
definition of „Intellectual Property Service‟ and „Franchise Service‟ are
defined as under:
(i) Section 65(55b): "Intellectual property
service" means:
(a) transferring temporarily; or
(b) permitting the use or enjoyment of,
any intellectual property right;"
(ii) Section 65(47): "franchise" means an
agreement by which the franchisee is granted
representational right to sell or manufacture goods
12 ST/1964/2012 &
ST/57925/2013
or to provide service or undertake any process
identified with franchisor, whether or not a trade
mark, service mark, trade name or logo or any such
symbol, as the case may be, is involved."
9.1. On going through the terms of Agreement dated 27.10.2003, we
find that the same is titled „License Agreement‟ provides that:
(i) 2.1. The Licensor (M/s Baxter, U.S.A) grants to the
licensee, subject to the limitation and restrictions herein
contained, a non-exclusive license under the Patents Rights to
make, use, distribute and sell the licensed products in the
Territory. This license specifically excludes the rights to grant
sub-licenses under the Patents Rights unless authorized by the
licensor.
---
(ii) 2.3. The Licensor hereby grants to the Licensee, subject to the limitations and restriction herein contained, a non-
exclusive to the use of know-how Rights and the Software Copyright Rights in the manufacture and supply of the Licensed Products in the Territory. This license specifically excludes the right to grant sub-licenses under the know-how Rights or Software Copyright Rights, unless authorized by the Licensor.
9.2. It is clear from the Agreement that it is a license to use the „Intellectual Property Rights‟ but not a „Franchise Agreement‟. We find that there is no mention of grant of Representational Right so as to fall under the category of „Franchise‟.Therefore, we are of the considered opinion that the Department has not made out any on this issue also. We find that the facts of this case are similar to the case of 13 ST/1964/2012 & ST/57925/2013 Reckitt Benckiser (India) Ltd. (supra) wherein this Bench has held as follows:
47. The Commissioner committed an error in holding that the service received by the Appellant would fall under „franchisee‟ service. The Commissioner completely overlooked that in a franchisee agreement, what was required to be examined was whether any "representational right"
was granted to sell or manufacture goods or to provide service or to undertake any process identified with the franchisor. It is only because the Appellant was engaged in the manufacture and sale of products identified with the franchisor that the Commissioner concluded that the agreement was a franchisee agreement, without considering whether any „representational right‟ was granted.
10. Regarding the allegation of non-payment of service tax on networking charges and technical services, the appellant submits that service tax on the Reverse Charge Mechanism is not payable prior to 18.04.2006. We find that the submission is acceptable as per the ratio of the judgment in Indian National Ship Owner‟s Association and CST Delhi v. Sojitz Corporation (both supra). Similarly, the appellant‟s plea on the non-payment of service tax on reimbursement made by the appellant for certain receipt of services is acceptable. The appellant submits that these services are performance-based services and are performed outside India; the expenditure incurred by them in holding medical conferences abroad and attended by Indian doctors is reimbursed by their overseas entities. We find that learned Commissioner takes a long-drawn argument that the doctors after attending the conference come back to India and products whose quality has been tested abroad by the doctors are sold in India and therefore the same should form part of the assessable value. We are not in agreement with this conclusion for the reason that service tax is
14 ST/1964/2012 & ST/57925/2013 not on expenses but is on that portion of the expenses which are paid for the services received. The ratio of the case of Intercontinental Consultants & Technocrats (supra) is solely applicable. Hon‟ble High Court of Delhi held as follows:
18. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66.
This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider "for such service". Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of Section 67 which enables the determination of the value of the taxable service "in such manner as may be prescribed" is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider "in the course of providing taxable service". What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes 15 ST/1964/2012 & ST/57925/2013 far beyond the charging provisions and cannot be upheld. It is no answer to say that under sub- section (4) of Section 94 of the Act, every rule framed by the Central Government shall be laid before each House of Parliament and that the House has the power to modify the rule. As pointed out by the Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427: -
"The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act."
Thus Section 94(4) does not add any greater force to the Rules than what they ordinarily have as species of subordinate legislation.
11. In view of the above, we find that the appellants have a strong case in their favour on all the issues, under which demands were raised and confirmed against them by the Adjudicating Authority. The impugned order is not sustainable for the reasons as discussed above and accordingly, is liable to be set aside. We do so and allow both the appeals.
(Order pronounced in the open court on 05/04/2024) (S. S. GARG) MEMBER (JUDICIAL) (P. ANJANI KUMAR) MEMBER (TECHNICAL) PK