Service is provided from India and the foreign party makes sales of its products in India but the benefit accrues outside India

PJ/Case Laws/2010-11/1030

Service is provided from India and the foreign party makes sales of its products in India but the benefit accrues outside India – whether export of service is involved

Case: M/s Fanuc India Pvt Ltd v/s CCE & ST, Bangalore

Citation: 2010-TIOL-1645-CESTAT-BANG

Issue:- When service is provided from India and the foreign party makes sales of its products in India but the benefit accrues outside India – whether export of service is involved?

Brief Facts:- Appellant had entered two agreements with M/s Fanuc Ltd., Japan. In terms of the first agreement, appellant was to provide marketing and sales promotion in respect of the contract products of FANUC, Japan, in India. FANUC, Japan, manufactured and sold CNC systems, cell controllers and CNC automatic programming systems in India. Appellant received commission for the services rendered. Appellant also rendered Maintenance or repair services in respect of the contract products.

The Commissioner (A) held that appellanthad rendered services classifiable under the category Business Auxiliary Service & Maintenance and Repair Service during the respective material period 15.03.2005 to 17.04.2006. The Commissioner confirmed demand of service tax under Business Auxiliary Services & as regards the Maintenance & repair services and held that during the material period to qualify for export services had to be delivered outside India and used outside India. In the instant case, Maintenance and Repair Service was delivered and consumed in India.

Hence, appellant is before the Tribunal.

Reasoning of Judgment:- The Tribunal held that withregard to the marketing and sales service rendered in India in respect of products manufactured and exported by a foreign client, the CBEC has clarified that such services had to be treated as export since the beneficiary of such services was based abroad.

The Tribunal relied upon the judgment in the case of M/s IBM India (Pvt.) Ltd. v/s CCE, Bangalore [2009-TIOL-2441-CESTAT-BANG] wherein on similar issue it was held that the impugned BAS services have to be treated as exports and the impugned demand denying the benefit of export to those services involved is not sustainable. It was held that the meaning of the term ‘used outside India’ has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of Rule 3. It was further held that for Category III service [Rule 3 (1) (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.

Accordingly, it was held that prima facie the impugned BAS have to be treated as exports and the impugned demand denying the benefit of export to those services involved in not sustainable.

As regards MRS, it was held that the demand pertains to the period 15.03.2005 to 17.04.2006. During this period, for services to constitute export, the following conditions to be satisfied: -

Services physically performed outside India partly or completed;
Such services delivered outside India;
Such services used in business or for any other purpose outside India; and
Payment for such service provided is received by the service provider convertible foreign exchanges.

It was held that in the instant case, MRS involved were performed entirely in India. Moreover, such services were also delivered in India. In the Circumstances, the MRSs involved do not prima facie qualify for benefit of services exported. Accordingly, it was held that the demand relatable to MRS and the applicable interest sustainable.

Appellant ordered to pay pre-deposit of the part amount. Pre-deposit for balance amount waived and stay granted.

Judgment:- Pre-deposit of part amount ordered and stay granted.

Comment:- There are three criteria for export of services. The list of services are notified for such services. One criteria is that if the service receiver is situated outside India and the benefit of service also occurs outside India then despite of the fact that services were rendered in the India, it will be called as export of service. The same has been upheld in this decision. But second criteria is that the property is situated in India and service is provided in relation to that property then it will not be export of services. Management, repair and maintenance service also falls under that category. Though the payment is received in foreign service, the service will not be termed as export of services.

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PJ/Case Laws/2010-11/1030

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