By TIOL News Service

MUMBAI, JULY 12, 2017: THE appellantare providers of 'BAS', 'BSS', 'consulting engineers service', 'commercial training and coaching service', 'information technology software service' etc.

As most of the recipients of their services are located outside the country, their business structure encompasses branch offices in Japan, Singapore and South Africa as well as permanent establishment at a number of other locations.

The branch offices enter into contracts with overseas customers and receive payments for services rendered; in turn, these offices also consume services offered by providers located in those countries. Branches have independent status and operate under the laws applicable in those countries. The establishments service the personnel who are posted abroad for long-term projects; the operational costs of these establishments are met by remittances from the headquarters of the appellant.

Proceedings were initiated against the appellant for non-payment of tax on services allegedly received by them from the branches as well as the services availed by the permanent establishment for which payment has been made by the headquarter of the appellant.

The appellants were discharging tax liability u/s 66A of Finance Act, 1994 on consideration paid for services obtained from overseas providers but not for services that were availed by overseas branches / payment establishments. Nonetheless, the expenses so incurred were reflected in the financial statements of the appellant.

Service Tax demands were issued and confirmed by the adjudicating authority along with penalties excepting an amount of Rs.52,27,682/-.

The period covered for demand is from January 2012 to December 2012 and involves the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and Place of Provision of Service Rules, 2012 (w.e.f 01.07.2012).

Incidentally, in the matter of the Stay application filed by the appellant against the o-in-o dated 29.11.2013, also covered under the instant appeal, the CESTAT had while granting stay from recovery of the dues held -

We reported this order as 2014-TIOL-1529-CESTAT-MUM .

Be that as it may, in the present set of appeals, the appellant drew the attention of the Bench to the decision of the Tribunal in MilindKulkarni & Others v. Commissioner of Central Excise, Pune - I - 2016-TIOL-709-CESTAT-MUM as being rendered in identical circumstances.

In the referred case, the CESTAT had held -

On the request made by the AR to contest that decision, the Bench observed -

"We find ourselves unable to concede to this request stance as we observe that the facts in the cited decision are identical to the facts in the present dispute and we should not, in all fairness, sit in judgement on our own orders."

Nonetheless, after evaluating the applicability of the cited decision, the CESTAT inter alia observed -

++ Unless it is also established that the service has been provided to the person in India, a monetary transfer is not sufficient to invoke section 66A of Finance Act, 1994. The cited decision has also ventured to appreciate the context in which section 66A(2) has been legislated; to ensure that the mutualisation inherent in the branch-headquarters relationship does not offer an avenue to evade tax that is otherwise leviable. In other words, it has to be evidenced that the transaction between the branch and the overseas customer is one by which service of a third-party is received by the entity in India through the branch.

++ The allegation pertains to what is undoubtedly an export of service which is attempted to be taxed by summary reference to section 66A(2) which, incidentally, is not the charging provision. The adjudicating authority has failed to read section 66A(2) in conjunction with section 66A(1) of Finance Act, 1994 and, thus, incorrectly invoked the former as the charging section. Our examination of the transaction is merely intended to exhibit this contradiction and not to ascertain the provision of 'business auxiliary service' by the branch to the headquarters.

++ Under the Place of Provision of Services Rules, 2012, the place of provision of services shall be the location of the recipient of the service. It would, therefore, appear that if the recipient of the service is in the taxable territory and the activity is transacted for a consideration, tax would be leviable in accordance with section 68 of Finance Act, 1994. There is, therefore, no substantial difference in relation to the determination of taxability in the two periods. In the absence of an activity between the branch and the headquarters for an identified consideration, the remittance received from overseas customers through the branch to the appellant would not be liable to tax. This finding of ours is reinforced by the anomaly of subjecting the export of service to tax if such remittance were to be taxed.

++ The impugned order has identified various services that have been availed by the permanent establishments/branches in the countries in which they operate and has, in relation to those received after 1 st July 2012, dropped the demand pertaining to those which, in accordance with the Rules of 2006 and Rules of 2012, are identified as not taxable.

++ The services that are taxable have been subject to the levy on the amount of remittance that has been made by the headquarters of the appellant to the branches in the presumption that the services have been received by the headquarters of the appellant and for which payment is made by the headquarters of the appellant. This conclusion has been arrived at as the financial statements of the appellant indicate the reimbursement towards such expenses incurred by the overseas branches.

++ Undoubtedly, as a branch or as a permanent establishment, which may be profit centers or cost centers, the ultimate liability for expenditure lies with the appellant entity. The question, therefore, for determination is whether the service procured by the branch/permanent establishment abroad is for the appellant. The provisions of section 66A of Finance Act, 1994 make it abundantly clear that the establishment outside the country is independent of the establishment in the country for the purposes of the levy of tax in the hands of the deemed provider of service.

++ A natural corollary is that taxable service provided by the overseas establishment of an Indian entity to the Indian entity would not only be liable to tax but be taxed in the hands of the Indian entity subject to the nature of the taxable service as enumerated in the Rules. It would appear that the adjudicating authority has, for the purpose of confirming the demand, held that the services rendered to the overseas establishment has been rendered to the establishment in India.

++ Given the distinction drawn between the Indian entity and the overseas branch/establishment in section 66A (2) and, the undisputed fact that the service has, indeed, been rendered outside the country, the insinuation of the headquarters organisation as the ultimate recipient to bring it within the scope of Rule 3 (iii) of Taxation of Services (Provided form Outside India and Received in India) Rules, 2006 would not be consistent with the demutualization that has been legislated by section 66A (2). It is well settled in law that what cannot be done directly should not be done indirectly.

++ We note that the demutualization that has been legislated in Section 66A would not be applicable after 1st July 2012. Consequently, there is no distinction between the overseas establishment and the controlling establishment in India. It would, therefore, appear that, for the period after 1 st July 2012 the services that have been availed and which fall within the scope of rule 4 of Place of Provision of Services, 2012 are liable to tax. These need to be quantified for which limited purpose we remand the matter back to the original authority.

The Appeals were disposed of.

(See 2017-TIOL-2387-CESTAT-MUM)