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Service Tax - Money Transfer from abroad - whether Export or Service rendered in India - Matter referred to Third Member: CESTAT

By TIOL News Service

NEW DELHI, NOV 03, 2011: IN this case, 10 COD applications, 6 stay applications and 42 appeals to be decided. Out of these 42 Appeals 15 are filed by assesses where the main issue is decided against the assessees and 27 by Department where the main issue was decided against the department. The facts and issues involved are common except that the facts and issues relating to M/s Paul Merchants Ltd ('PML') are slightly different from that of others because PML is a main agent to Western Union Network Ltd. ('Western Union') and others are sub-agents to PML or to other main agents of Western Union similarly placed as PML.

PML entered into an agreement with M/s Western Union Network Ltd, Ireland a company engaged in money transfer from persons located in one country to persons located in any country. PML was executing part of the activities, in territory assigned to PML in India, necessary for Western Union to carry out its business. The contract entered into between the two parties deals with remittances from persons abroad to persons located in India as well as remittances from persons located in India to persons located outside India. However it is affirmed by PML that they have not done any business of the latter type because such business requires permissions from RBI which they have not got. So it is asserted that the dispute before the Tribunal is in relation to remittance from persons abroad to persons in India. This statement is not contradicted by Revenue. In this business, the person located abroad approaches any of the offices of the Western Union or its agents and give money to be remitted to a person in India. The office abroad charges the person abroad commission for remitting money to India. They convert the foreign exchange into Indian rupees and pay the recipient in India following a system to ensure the identity of the person to whom the money is delivered. No charges are levied from the recipient of money in India. PML gets their remuneration from Western Union by sharing the commission collected from the person abroad. They also make some profits due to changes in exchange rate between the date of receipt of money abroad and date of delivery of equivalent Indian Rupees in India. However, this profit is subject to the risk of loss if the exchange rate changes adversely for the Western Union and its agents.

PML does some promotional activities like advertising, organizing promotional programs, distributing promotional material etc. The amount incurred by PML for promotional activities was reimbursed by Western Union to the extent of Rs. 1,02,08,980/- during the relevant period. On this amount received service tax amounting to Rs.11,69,838/- is demanded

PML appointed sub-agents within the territories allotted to them to establish a large number of outlets in the area to make it easy for the recipient in India to get the money easily without much travel and hassles. PML compensates these sub-agents by sharing the commission received by them from Western Union which commission itself is received from the person located abroad remitting the money to India.

The crucial question is whether PML should pay service tax amounting to Rs. 3,23,72,254/- on the commission amounting to 28,10,71,565/- received by them in this business during the period 01-07-2003 to 30-06-07. A Show Cause Notice issued by the Directorate General of Anti-evasion alleging that service tax is to be paid on such commission and re-imbursements has been adjudicated by the impugned order confirming tax demand of Rs.3,35,42,092/-against PML with applicable interest. Penalty equal to the duty confirmed was imposed under section 78 of the Finance Act 1994 in addition to penalties under sections 76 and 77 of the Finance Act. Aggrieved by this order PML is before this Tribunal. The SCN and the impugned order classified the service provided by PML as 'Business Auxiliary Service' as defined under section 65(105) (zzb) of Finance Act, 1994.

The Issue whether the service provided by PML was exported?

The Member (T) observed,

Services being intangible, what constitutes export of services is difficult to conceive and define unlike in the case of goods which are tangible. There appears to be difficulty in identifying its direction of movement. But the matter has been receiving attention of world trading community and norms have evolved.

The contrast in the arguments on both sides is as under:

(i) PML argues that it is providing services to Western Union situated abroad with whom PML is having a contract for providing services and PML gets its remuneration from Western Union. Further the ultimate beneficiary of the service is the person situated abroad who approaches the office of Western Union abroad and who pays for the services. So this is a case of Export of Services as laid down in Export of Services Rules, 2005.

(ii) The Revenue contests that the activity of making payment to the recipient in India is the only service which PML is rendering and this service is rendered in India. The receiver of its service is the person receiving the remittance in India. The Revenue argues that no part of the service done by PML is exported. To buttress this argument the Ld. SDR relies on clauses 1, 3,4A and 4B of the contract. However there is no need to reproduce these clauses in this order because there is no contest on the issue that the activities of PML are carried out in India.

There are difficulties in defining what constitutes export of service. Law in this regard has to evolve based on internationally accepted principles. GOI is taking adequate steps in this regard by making clarificatory amendments in laws. The case laws in this regard also are evolving in a consistent direction. The consistent progress in one direction cannot be reversed to support the enthusiasm of Revenue to book one or two cases involving a few crores. If the Revenue has a case that the Rules are not resulting in a desired outcome, the proper course is to amend the rules rather than selectively book cases a few persons canvassing a particular interpretation of rules.

The Appellant succeeds on merits of the issue. The appellant also succeeds on time bar because the Appellants have acted in bonafide manner considering the exemption notifications in force, clarifications issued by CBEC. Further the very fact that the Tribunal in the past have accepted that these services are exported and the Revenue itself has not initiated action against the major entities like Commercial Banks providing such service during the same period, would justify the stand of the assesses that there was no intention on their part to evade service tax.

Accordingly it is held that the amount confirmed in the impugned order is not maintainable and the appeal is allowed by setting aside the impugned order.

The Member (J) did not agree and observed,

LAW OF SERVICE TAX FOLLOWS PRINCIPLE OF EQUIVALENCE AND IS A VALUE ADDED DESTINATION BASED CONSUMPTION TAX: Applying the principle of equivalence as has been laid down by Apex Court, which is inbuilt into the concept of service tax under the Finance Act, 1994, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It follows that service tax being a tax on an activity is also destination based value added tax. There is no ambiguity that taxable service provided in India is meant to be taxed under the provision of Finance Act 1994.

MEANING OF "EXPORT" AND EXISTENCE OF TWO TERMINI IS PREREQUISITE FOR EXPORT OF SERVICE: The Assessees have performed service in India on behalf of their principals to serve the consumers in India. Since the services are destined to be exhausted in India that extinct soon after performance thereof. Post performance intimation by the Assessees to their foreign principal is not material for incidence of levy while the service provided in India on behalf of the foreign principal is material for the levy. Assessees provided taxable service on behalf of their foreign principal and made them liable to service tax u/s 65(19) of the Finance Act, 1994.

No Export : Service may have different aspects. Only that aspect of the activity which is taxable in India gives rise to incidence of levy in India. Accordingly, export of service plea of the Assessees is inconceivable and liable to be rejected when money transfer service is meant by foreign principal to come to an end in India upon delivery thereof on his behalf in India. Material facts of the cases also make it clear that the impugned services were meant to reach the consumers of Indian Territory and to exhaust here upon provision. End users of service being in India, foreign principals intended that money transferred from abroad should be delivered on their behalf in India with out further export of such money to abroad. Intimation of delivery of money in India is not attempted to be taxed in the present cases. Therefore law is not concerned with that to color the money transfer service to be export of service. No money transfer service having moved out of India to a place out side India in terms of representation agreement, plea of export of service is untenable.

MARKET PROMOTION - SUBSERVIENT TO MONEY TRANSFER SERVICE: It may be appreciated that in terms of the agreements, the Assessee Representative and sub-representatives in India made advertisement and publicity to promote money transfer service meant to be provided on behalf of their foreign principal in India. Apparent reimbursements plea in essence and substance as well as in reality were consideration received for the service of market promotion provided in India. Nothing is on record to appreciate that advertisement and promotion were either unproductive or futile and served no useful purpose of providing money transfer service in India which was dominant object of the parties. Thus the receipts made for promotion or marketing of service provided by the foreign principal was in respect of business auxiliary service and that was taxable. Assessees' plea of no taxability claiming that reimbursements is not taxable is devoid of merit and they lose their claim on such count.

GAIN ON FLACTUATION (sic - as in original) OF EXCHANGE RATE: There was grievance that the gain made out of fluctuation of foreign exchange rate should not form part of assessable value. When the money transfer is made from abroad, that is transacted in foreign exchange being an import to India. The difference arising out of fluctuation in exchange rate no doubt germane to the import itself. But case of Revenue could not demonstrate whether that gain in any way is a consideration for providing taxable service. Fluctuation in exchange rate may result in profit or loss to the transaction. If gain is to form part of assessable value, loss is deductible. But such aspect of transaction is beyond the scope Finance Act, 1994 which not a law to tax Profits or gains of business or profession, while such gain is governed by Income Tax Act, 1961. Therefore the assessees shall succeed on this count and the assessable value shall be reduced to that extent of gain in foreign exchange if included in the assessable value.

TIME BAR: So far as bar of limitation is concerned, it is a question of fact. Limitation shall be counted from the date in reverse order when the fact of escapement of levy is attributable to the willful evasion that comes to the notice of Taxing Authority. Facts of each case needs to be tested under touch stone of law. It appears that money transfer service was known to the economy since long. Destination of the service and mutual interest of foreign principal and service provider assessees in India was well known to each other. Interest of both parties was concern of each other. The scope of law relating business auxiliary service cannot be pleaded to be unknown to the parties. When parties fail to seek registration under Finance Act, 1994 they deprive Revenue to know about their modus operandi till Investigation unearths evasion. So also being registered when assessees do not disclose the transactions in the statutory returns and make false declaration therein that keep revenue in dark and deprives it to realize its legitimate dues. Intention to evade plays a vital role to invoke extended period of limitation and also levy of penalty. Therefore each and every case is to be decided on the facts of the respective case, statutory provisions, law laid down in various judicial pronouncements.

So, the matter is referred to a Third Member

Points to be determined.

(i) Are the provisions of Export of Service Rules, 2005 and Circulars issued by CBEC clarifying the scope of the said Rules in conflict with the meaning of the term "export" given by Article 286 (1) (b) of the Constitution of India and the decisions of the Apex Court.

(ii) Are the provisions of Export of Service Rules, 2005 and Circulars issued by CBEC clarifying the scope of the said Rules in conflict with the theory of equivalence in respect of laws as applicable to taxes on goods and taxes on services as decided in the following cases, namely,

(a) Association of Leasing & Financial Services Vs. UOI (2010-TIOL-87-SC-ST-LB)

(b) All India Fedn. of Tax Practitioners Vs. UOI (2007-TIOL-149-SC-ST), (especially para 20 of this decision),

(iii) Whether the issue as to what constitutes export of services is to be determined with reference to provisions in Export of service Rules, 2005 only?

(iv) Whether the money transfer service provided by an intermediary in India acting on behalf of its principal for consideration paid by him, is export of service to the principal? Which is the service to be considered for deciding the factum of export-whether that provided to the principal abroad or that provided to the person receiving money in India who does not pay any consideration for the services rendered by him?

(v) Whether the destination of the impugned service to be determined on the basis of location of the consumer of the service in India or the location of the person abroad who requested for the service to be provided in India and paid for it and other criteria laid down in Export of Service Rules, 2005?

(vi) Whether reimbursements of advertisements and charges towards sales promotion activities are to be taxed?

(vii) Are the demands time barred?

(viii) Whether the amounts paid to sub-representatives is excludible from the value of taxable service

(ix) Whether cum-tax benefit is to be extended in this case

(x) Whether the appellants can claim benefit under Notification 6/2005-ST dated 01-03-2005 for small service providers

(xi) Whether money transfer shall be taxable as banking and Financial service" w.e.f. 01-06-2005 u/s 65 (105) (zm) read with section 65 (12) of Finance Act 1994 or taxable as support of Business or Commerce u/s 65 (105) (zzzq) read with section 65 (104c) of Finance Act, 1994 And Whether such services are export of service in the case of Appellants under the provisions of Export of Service Rules, 2005 and immune from service tax under the provisions of Finance Act, 1994.

(xii) Whether appeals other than Appeal of Paul Merchants Ltd need to be remanded or is to be decided on the basis of majority opinion?

(See 2011-TIOL-1448-CESTAT-DEL in 'Service Tax')


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