By TIOL News Service

AHMEDABAD, DEC 31, 2014: THE appellant is engaged in the manufacture of pharmaceutical products.

They have established representative offices in Russia, Vietnam etc. where they have their branch offices. Exports and sales are made by the appellant directly from India to overseas customers and representative branch offices/ establishments of the appellant abroad do not stock the goods or sell the goods. All the sale proceeds are directly received by the appellant in India from the overseas customers. Appellants' overseas representative office facilitates the export business of the appellant. Appellants' branch offices/establishment office abroad do not earn any Revenue on their own and expenditures incurred by such branch offices are remitted by the appellant from India.

The amount remitted to the branch offices also included salaries paid to the employees working in the branch offices abroad. One of the elements of demand raised by the Revenue is that branch offices situated abroad are providing services to the appellant and all the foreign remittances made by the appellant to its branch offices are taken to be a consideration for providing services to the appellant.

Second ground of raising demand is with respect to reimbursements made by the appellant regarding marketing cost incurred by the distributors appointed by the appellant in the foreign countries. These distributors situated abroad are purchasing goods from the appellant for further sale abroad. Such distributors appointed by appellant abroad pay the sale price to the appellant in India and in addition to sale consideration appellant also pays salaries and marketing cost incurred by such distributors abroad by remitting the same in foreign exchange as actually incurred by the distributors. For this purpose, such distributors situated abroad submits details of expenditures incurred by them periodically which are reimbursed by the appellant after due verification including those services which are availed by the distributors abroad for local consumption.

It is the case of the Revenue that such reimbursements made by the appellant are chargeable to service tax on reverse charge basis as the distributors are providing the services of distribution and marketing of appellants products abroad. Those services from foreign service providers which are directly received by the appellants in India and where payments are directly made to the service providers abroad, service tax is paid by the appellant.

Suffice to say that a Service Tax demand of Rs.18.09 crores was raised and confirmed against the appellant and, therefore, they are before the CESTAT.

The Bench after hearing the lengthy submissions made by both sides observed & held as mentioned below –

++ The following demands of service tax are confirmed against the appellant:-

(i) Rs.97,85,726/-

(ii) Rs.12,01,088/-

Held:

++ The appellant fairly submitted that these services were received and consumed directly by the appellant in India and service tax on these services remained to be inadvertently unpaid. These amounts were promptly paid by the appellant along with the interest and are not being contested on merits as CENVAT credit of these service tax paid is already taken by the appellant. However, it is the case of the appellant that no penalty is imposable upon them for non-payment of these amounts.

(iii) Rs.5,43,49,834/-

It is the case of the appellant that these amounts repatriated to the distributors is representing reimbursement of certain expenses incurred by the distributors/customers for activities like Registrations, Staff related expenses employed by the distributer, cost of promotional expenses (partially or fully) incurred by the distributors etc.

Appellant is holding a view that such reimbursements are nothing but akin to discounts and any expenses so done by the distributors have to be considered as services received and consumed abroad and are not liable to service tax. That such expenses incurred by the distributors were not considered includable in the assessable value u/s 4 of the CEA, 1944 as per Apex Court judgment in the case of Philips India Limited 2002-TIOL-127-SC-CX.

Held:

++ In the case before the Apex Court the issue was only regarding including certain advertisement and free sales services, given by the dealers during the guarantee period, in the assessable value of the finished goods u/s 4 of the CEA, 1944 and not leviability of service tax on the deductions so claimed. Levy of service tax on reverse charge basis is on a different basis than valuation of excisable goods under Section 4 of the Central Excise Act, 1944.

++ A part of the services availed of sales promotion etc. by the distributors abroad will benefit the appellant also. In that situation a part of the service will be deemed to have been received and consumed by the appellant in India because the expenses incurred by the distributors are not made from any discount given by the appellant but are separately reimbursed by the appellant. Service tax demand with respect to reimbursement of expenses incurred by distributors abroad for marketing appellants products will be payable along with interest as these services are availed on behalf of the appellant and later reimbursements made are the suitable considerations for the services so received.

++ As this issue was highly contentious and appellant had a bonafide belief that service tax on such reimbursed expenses was not payable on reverse charge basis, therefore, extended period will not be applicable and demand will have to be restricted to normal period of limitation. Appellant will also be eligible toCENVAT credit for the service tax so paid on reverse charge basis.

(iv) Rs.11,56,32,588/-

On the demand of service tax of Rs.11,56,32,589/- with respect to remittances made by the appellant to branch offices, both sides have relied upon the case law of M/s. British Airways vs. CCE (Adj.) Delhi [2014-TIOL-979-CESTAT-DEL]. It is the case of the appellant that nearly Rs.7 Crore demand is with respect to salary of the employees of the appellant working in the foreign branch offices, treating the branch offices/ establishments as service providers held by Revenue as a separate legal entities under the provisions contained in Section 66A(2) of the Finance Act, 1994.

It was fairly agreed that where local VAT/GST of a foreign country was not paid by the branch offices and billing was directly made by the foreign service providers to the appellant then in such cases service tax on reverse charge basis is required to be paid, which is being paid by the appellant even if the payment of such services availed and consumed in India were routed either through appellants branch office or distributors.

Held:

++ Section 66A(1) 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 cannot provide service to one's own self. If the permanent establishmentof 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 one's 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 be 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 utilisingCENVAT credit admissible as they have paid more than Rs.12,000/- Crores as taxes during the period 2007-08 to 2011-12.

++ In the light of the emerging international concepts on reverse charge mechanisms and the judgment of M/s. British Airways vs. CCE (supra), the foreign branches/ establishments of the appellant have not acted as facilitators but have actually consumed those services abroad for which local VAT/GST of the respective country has been paid. The representative invoices produced by the appellant indicate that local VAT/GST paid is Nil when billing by overseas service providers is directly raised upon the appellant in India on which service tax is paid by the appellant on reverse charge basis. When billing is raised on the branch office for a service consumed abroad then local VAT/GST applicable abroad is paid by the branch offices on such transactions. Therefore, payment of local VAT abroad will be an indicator to decide whether a service is provided and consumed outside India or has been consumed/ received in India. The agreements/ documents available with the appellant have to be accepted for the purpose of determining place of providing and consumption of a service in India, as no foul play can be anticipated in the case of appellant who is paying thousands of crores of rupees as service tax and is also eligible to CENVAT credit of the service tax payable on reverse charge basis.

The Appeal was allowed to the extent indicated hereinabove.

(See 2014-TIOL-2647-CESTAT-AHM)