By TIOL News Service

NEW DELHI , MAR 28, 2014: THE appellant are a company registered in India and are subsidiary of M/s GAP International Sourcing, Inc., U.S.A. who are a prominent retailer in U.S.A. and other countries. The appellant entered into a service support agreement with M/s GAP , U.S.A. for rendering various services relating to procurement of goods, recommending fabrics to be used for manufacture of garments, recommending vendors from which fabrics, yarn, zippers, buttons, snap fasteners etc. can be procured, reporting the status of manufacture of products by the chosen vendors, analyzing the reports of the samples sent by the vendors, giving recommendation about the product integrity, inspecting export consignments and issuing inspection certificates, screening the vendors suitability in terms of child labour norms and pollution control norms and recommending the teams to be engaged in logistic work like transportation, clearing and forwarding etc. for export of the purchased products out of India.

The department was of the view that the services being rendered by the appellant are Business Auxiliary Service covered by Section 65 (105) ( zzb ) readwith Section 65 (19) of the Finance Act, 1994. However, the Department was of the view that since the service has been rendered in India and is not export of service in terms of Export of Service Rules, 2005, the appellant would be liable to pay service tax in respect of the same. There is no dispute that the appellant for providing the above mentioned services to M/s GAP , U.S.A. received the remuneration from them in convertible foreign exchange. The dispute is only on the point as to whether the services provided by the appellant are export of service or not. After issue of show cause, the Jurisdictional Commissioner confirmed the service tax demand of Rs. 5,66,98,112/- alongwith education cess and also the interest thereon under Section 75 of the Finance Act, 1994 and beside this, imposed penalty of Rs. 5,66,98,112/- on the appellant under Section 78 and also the penalty of Rs. 1,000/- under Section 77.

Against this order of the Commissioner, the present appeal has been filed before the Tribunal.

The Tribunal observed, "The only point of dispute is as to whether the services are taxable in India or the same are export of service outside India in terms of Service Rules, 2005 and for this reason are not taxable in India. Though the services have been performed in India, these services being Business Auxiliary Services are in respect of the business of the appellants principal located abroad. The services being provided by the appellant are obviously meant for and are used by M/s GAP , U.S.A. for their business. The services being provided by the appellant are covered by Clause (iii) of Rule 3 (1) of Export Service Tax Rules, 2005, as these services are in relation to business or commerce and in terms of this clause, readwith sub-rule (2) of Rule 3, these services would be treated as exported out of India if the recipient is located outside India and the same have been delivered outside India and used India and payment for the same has been received by the service provided in convertible foreign exchange. There is no dispute that the payment for these services has been received in convertible foreign exchange and the payment has been made by M/s GAP , U.S.A. located abroad, not having any establishment or branch in India."

The department's contention, however, is that the conditions of delivery outside India and "use outside India" are not satisfied, as the services have been performed in India and the same are not capable of being used in territory other than the place where the same have been provided. According to the department most of the time, the provision and use of the services is happening simultaneously and it would be too naive to even conceive that services of merchandising, product integrity, vendor compliance, quality assurance, fabric sourcing and logistic support etc. provided in India can even be used remotely in a territory other than where the same have been provided. It has been pleaded that if M/s GAP , U.S.A. were even to try using these services in a place other than India, it will not be physically possible. It has also been pleaded that routing of payment for a service cannot determine the place of consumption.

The Tribunal found the the arguments of the department to be absurd as the DR has not mentioned as to who is the consumer of the services in India , if the services, in question, provided in India by the appellant have not been used and consumed by their principal in U.S.A. When the appellant identify the vendors for their principal abroad on the basis of the quality of their products, their manufacturing infrastructure, compliance with child labour laws and pollution control norms and also provide the services of inspection of the export consignments, besides identifying the logistic service providers for smooth transportation of the goods purchased to the port for their export, the user and beneficiary of all these services is their principal abroad. It would be absurd to say that the recipient and user of these services are the persons in India and not M/s GAP , U.S.A. for whom all these services provided by the appellant are meant, who have used these services for their business and have made payment for these service in convertible foreign exchange.

The Tribunal referred to two Supreme Court cases of All India Federation of Tax Practitioners reported in 2007-TIOL-149-SC-ST and Association of Leasing and Financial Service Companies reported in 2010 TIOL-87-SC-ST- LB . The important points emphasized in these judgments are that service tax, though levied on commercial activities, is a destination based consumption tax . Therefore when the service provided by a person in India is consumed and used by a person abroad, it is treated as export and is not taxed in India as the destination of the service provided and its use is outside India. In a reverse case, when the service provided by a person from outside India, is consumed and used by a person in India, it is taxed in India under reverse charge mechanism of Section 66A of the Finance Act, 1994. Thus the scheme of levy of service tax according to which-

(a) when the service provider and service receiver, both, are in India, service tax is charged in India from the service provider;

(b) when service provider is in India and service recipient is located abroad, no service tax is charged from the service provider, and

(c) when service provider is abroad, not having any establishment or branch in India, and the service recipient is in India, service tax is charged from the service recipient under reverse charge mechanism;

is in accordance with the principle laid down by the Apex court in the above cases that service tax is a destination based tax on consumption. In this regard, service tax is similar to other indirect taxes like central excise and customs duties, as central excise duties or import duties paid on the goods are refunded as drawback or export rebate on export of the goods out of India. Since unlike goods, where a person may purchase and receive some goods, store them and thereafter sell the goods to some other person who may consume those goods to satisfy his need, in case of service, receipt and consumption takes place simultaneously, the person receiving the service is also the person consuming the same or using the same. Though Rule 3 (2) of Export of Service Rules during period till 01/3/07 used the word - 'delivery of service outside India', in view of intangible nature of services, these words should be construed as receipt of service outside India, which, is the same as consumption outside India or "use outside India". Thus, in context of service, the receipt, consumption and delivery of the service is the same and accordingly the place of consumption and, hence, the place of taxation, would be the same as the place of receipt of service.

Though the term recipient in respect of a service is not defined in the Finance Act, 1994 or in the rules made thereunder, the gap has to be filled by construction and on the analogy of the transaction of sale of goods, the service recipient in a transaction of the provision of service, has to be treated as the person-

(a) on whose instructions the service has been provided and who is obliged to make payment for the provision of service; and

(b) whose need is satisfied by the provision of service - it may be his personal need or the need of his business or need to meet some obligation to some person.

Since service is normally an activity performed by a person A for some other person B for some consideration and this activity by A may affect some other persons C, D and E in some manner, good or bad, the persons C, D and E are the person affected by the service, they cannot be treated as service recipient the service recipient would be B who has paid for the service and whose need has been satisfied by the provision of service. The only situation where in respect of some service provided by A which was ordered and paid for by B, a person C who has benefited from the service, can be treated as service recipient, when B has acted purely as an agent of C. Therefore in respect of services covered by Rule 3 (1) (iii) of the Export of Service Rules, 2005, which are the service in relation to business or commerce, the same provided by a person in India for use in relation to business or commerce would be treated received outside India and hence, exported, if-

(i) the services have been provided on the instruction of a person located outside India for use in his business;

(ii) payment for those services has been made by him in convertible foreign exchange and it is he who has used the service to satisfy the need of his business.

It would be absolutely wrong to say that the services like advertisement, publicity, marketing etc. provided by a person in India on the instructions of a corporation located outside India for use in its business and the payment for which has been made by that corporation located outside India, have been received/consumed in India, just because the same have been performed in India.

The Tribunal further observed,

Thus the Export of Service Rules, 2005 and Taxation of Service (provided from outside India and received in India) Rules, 2006, readwith Section 66A of the Finance Act, 1994 are fully in accordance with the law laid down by the Apex Court in case of All India Federation of Tax Practitioners (supra) and Association of Leasing and Financial Service Companies (supra) that service tax is a value added tax, which, in turn, is a destination based consumption tax in the sense that it is not a charge on business but is a charge on the consumer. Therefore what constitutes export of service has to be decided strictly in accordance with the provisions of Export of Service Rules, 2005.

In this case, M/s GAP , U.S.A. do not have any branch or project or business establishment in India. The service in relation to procurement of goods being provided by the appellant are entirely meant for M/s GAP , U.S.A. and the service in question, - business auxiliary service, covered by Rule 3 (1) (iii) of the Export of Service Rules, 2005 have obviously been used by M/s GAP , U.S.A. in relation to their business located abroad. Therefore these services have to be treated as delivered outside India and used outside India and since payment for the service has been received in convertible foreign exchange, the same would have to be treated as exported out of India. The impugned order passed by the commission is an absurd order contrary to the provisions of Export of Service Rules, 2005.

In any case, the issue involved in this case is identical to the issue involved in the case of Paul Merchant Ltd. and Ors . vs . CCE reported in 2012-TIOL-1877-CESTAT-DEL which stands decided in favour of the appellant.

The impugned order is set aside. The appeal is allowed.

(See 2014-TIOL-465-CESTAT-DEL)