By TIOL News Service

NEW DELHI, DEC 18, 2012: IN  this case, 10 COD applications, 6 stay applications and 42 appeals have been decided. Out of these 42 Appeals 15 are filed by assessees 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?

There was difference between the two Members of the Division Bench and the matter was referred to a Third Member. The Following questions were referred to the Third Member. (His answers are given in red.)

(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.

The term "export" has not been defined either in Article 286 (1)(b) or in any of the article of the Constitution of India. Though the Apex Court's judgments in the case of the State of Kerala vs. The Cochin Coal Company Ltd. [(1961) 2 STC 1 SC] and Burmah Shell Oil Storage & Distribution Co. of India vs. Commercial Tax Officer & Others reported in (1960) 11 STC 764 (SC) explain the meaning of the term "export", the ratio of these judgments which are with regard to export of goods, is not relevant for determining what constitutes the export of services. There is no question of Export of Service Rules, 2005, being in conflict with Article 286 (1) (b) of the Constitution of India.

(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),

The principle of equivalence between the taxation of goods and taxation of service had been laid down by the Apex Court in the case of Association of Leasing & Financial Service Companies vs. Union of India (supra) and All India Federation of Tax Practitioners vs. Union of India (supra) in the context of constitutional validity of levy of service tax on certain services. This principle does not imply that service tax should be levied and collected in exactly the same manner as the levy and collection of tax on goods or that export of service should be understood in exactly the same manner in which the export of goods is understood. In fact the question as to what constitutes the export or import of service was neither raised nor discussed in the abovementioned judgments of the Apex Court. As discussed in this order, the Export of Service Rules, 2005 are in accordance with the Apex Court's ruling in the above mentioned judgments that service tax is a value added tax, which in turn is a destination based consumption tax in the sense that it is levied on commercial activities, and it is not a charge on the business but a charge on the consumers. There is nothing in Export of Service Rules, 2005 which can be said to be contrary to the principle that a service not consumed in India is not be taxed in India.

(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?

What constitutes export of service is to be determined strictly with reference to the provisions of Export of Service Rules, 2005. Not doing so and leaving this question to be determined by individual tax payers or tax collectors for each service, based on their deductive ability would result only in total confusion and chaos.

(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?

Money transfer service is being provided by the Western Union from abroad to their clients who approached their offices or the offices of their Agents for remitting money from to friends/relatives in India. The service being provided by the agents and sub agents is delivery of money to the intended beneficiaries of the customers of WU abroad and this service is "business auxiliary service", being provided to Western Union. It is Western Union who is the recipient and consumer of this service provided by their Agents and sub-agents, not the persons, receiving money in India.

(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?

The consumer of the service provided by the Agents and sub-agents of WU in India is the Western Union, located abroad who use this service for their money transfer business not the persons receiving money in India. Since the service provided is Business Auxiliary Service classifiable under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 2005, and has been provided in has been received and used abroad, relation to business of Western Union located abroad, and the payment for the service has been received in India in convertible foreign currency, the same has to be treated as export of service. It is the person who requested for the service is liable to make payment for the same and whose need is satisfied by the provision of service who has to be treated as recipient of the service, not the person or persons affected by the performance of the service. Thus, when the person on whose instructions the services in question had been provided by the agents/sub-agents in India, who is liable to make payment for these services and who used the service for his business, is located abroad, the destination of the services in question has to be treated abroad. The destination has to be decided on the basis of the place of consumption, not the place of performance of Service.

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

Reimbursement of advertisement and sales promotion activities received from WU is not taxable as the same are for the services provided to WU, which are export of service.

(vii) Are the demands time barred?

The question of time bar is not relevant when the main question has been answered in favour of the Agents & sub-agent.

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

Not relevant when the main question has been answered in favour of the Agents and sub-agents.

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

Not relevant when the main question has been answered in favour of the Agents and sub-agents.

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

When the services provided by the sub-agents have been held to be export of service and hence not liable for service tax, the question of their eligibility for exemption under Notification No. 6/2005-ST is irrelevant and has not been gone into.

(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.

The services provided by the Agents and sub-agents throughout during the period of dispute are classifiable as "Business Auxiliary Service" under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994 and the same have been exported in terms of the provisions of Rule 3(1) (iii) read with Rule 3(2) of the Export of Service Rules 2005 and hence no service tax is payable

(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?

There is no need to remand the cases of sub-agents. The same must be decided on the basis of the majority opinion.

And that is the majority opinion.

(See 2012-TIOL-1877-CESTAT-DEL)