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PJ/Case Law/2019-2020/3612

Does marketing/ Sales promotion services provided for parent concern located outside India qualify as Export of services?
M/s IBM India Pvt. Ltd. (CESTAT Bangalore) Final Order No. A/20017-20018/2018, Dated 01.01.2019
Issue: Does marketing/ Sales promotion services provided for parent concern located outside India qualify as Export of services?
Brief Facts:  M/s IBM India Pvt. Ltd. is engaged in providing taxable service under the category of Business Auxiliary Service (BAS).They entered into an agreement with M/s IBM, USA that they are appointed as IBM USA’s Business Partner in India for the purpose of marketing selected IBM products in India for which commission shall be paid in the convertible foreign currency. The work majorly consisted of procurement of orders and providing marketing support to identify and promote the products of IBM, USA in India. A Show cause notice was issued to M/s IBM India Pvt Ltd stating that services provided by IBM India therefore appeared to have been provided and consumed within India insofar as, promotion of sales, marketing of IBM products is concerned. So service tax needs to be provided on such Business Auxiliary services.
Applicant’s Contention:  The applicant stated that the services provided by them are ‘Export of Services’ in terms of Export of Service Rules, 2005 as they satisfy all the conditions required to qualify as export of service. The conditions are as follows
  1. Services provided are in relation to commerce or industry.
  2. The service recipient i.e. IBM USA is located outside India;
  3. The consideration for rendering the sale promotion activities is received in convertible foreign exchange;
  4. Such services have been delivered and used outside India based on the following reasons :-
.... The appellant promotes products of IBM USA by identifying specified customers for IBM products in India.
.... Based on identification of customers, appellant would get potential orders for IBM USA’s products.
.... Such orders are forwarded to IBM USA for its consideration.
.... IBM USA would analyze such orders and would then take a decision            whether to sell its goods to such customers. The decision with respect             to acceptance/rejection of an order is solely with IBM USA
Further reliance has been placed on Board’s Circular No. 111/05/2009-S.T., dated 24-2-2009 wherein the meaning of the phrase “used outside India” has been clarified in relation to different categories of taxable services. The relevant portion of the circular is being extracted as follows-
“Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange.
….
For the services that fall under Category III [Rule 3(I)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(I)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company.”
Moreover the appellant has quoted cases which contained similar facts and had been decided in favour of the assessee.
 
Reasoning of Judgement: After considering the submissions of both the parties, CESTAT has allowed the appeal in favour of the appellant stating that service tax shall not be applicable on the services as it qualifies for ‘export of service’. The reasoning provided by CESTAT is as follows
--It has been admitted that IBM USA doesn’t have any commercial or industrial establishment or any office in India.
--All the conditions in relation to ‘Export of Service’ are being satisfied.
--The rules only provide that recipient of service should be situated outside India and thus specifically acknowledges that export of service can be provided in India.
 
Comment:-  The issue being discussed relates to the period of 2005 to 2007. But we have entered the GST era and it has been three years since GST implementation. This case shall be of great help as we are all aware of the adverse Advance rulings being announced by the Authorities. One such ruling given is in the case of Vserv Global Private Limited wherein AAR observed that all the activities performed by applicant for its client indicate that the applicant is engaged in arranging/facilitating supply of goods and services between client and its customers and therefore, qualifying as an intermediary.
As per this AAR ruling, services provided by intermediaries should not be treated as ‘zero rated supplies’ has lead to litigation as the authorities would use it to slap taxes on many companies exporting services. The ruling may go against the GST law.
Prepared by- CA Akanksha Anchaliya
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