ST on services rendered outside India by overseas branches.

PJ/Case Law/2013-14/2331

Case:- KPIT CUMMINS INFOSYSTEMS LTD. VERSUS COMMISSIONER OF C. EX., PUNE-I

Citation:- 2014 (33) S.T.R. 105 (Tri. - Mumbai)

Brief facts:- The appeal and stay application were directed against Order-in-Original No. : 30/RKS/ST/P-I/2012, dated 12-10-2012 passed by the Commissioner of Central Excise, Pune-I.
The appellant, KPIT Cummins Infosystems Ltd., Pune were engaged in providing various services such as Business Auxiliary Service, Business Support Service, Information Technology Software Service, Management Consultancy Service, Maintenance or Repair Service, Renting of Immovable Property Service, Transport of Goods by Road Service, etc. They had their branch office in three countries outside India, namely, Japan, Singapore, South Africa, etc. These branch offices were engaged in ‘Software Development and Consultancy Service’ and these services were provided to overseas customers. Consideration for the services rendered abroad was received by the branches that raised such bills on the customers. Thereafter, deducting the expenditure incurred for rendering the services abroad, excess of income over expenditure of the branches was remitted to their head office of the appellant in India. The department was of the view that the services rendered by the overseas branches on behalf of the parent-company falls under the category of ‘Business Auxiliary Service’ and accordingly, the entire amount received by the overseas branches were liable to Service Tax. Therefore, a show cause notice dated 24-4-2012 was issued demanding Service Tax of Rs. 17,29,61,546/- on the total receipt of the overseas branches amounting to Rs. 1,55,22,06,404/-.
The appellant had also permanent establishment abroad by way of personnel located in the offices of their various clients abroad. These personnel rendered the service to the overseas clients and for rendering such services, they incurred various expenditure such as rentals, telephone, insurance charges, vehicle charges, postage and courier charges, conference and event management expenses, software AMC and licence renewals. For meeting these expenses the head office remitted money from India amounting to Rs. 1,15,30,16,285/-. The department was of the view that the appellant was liable to pay Service Tax, on reverse charge basis, amounting to Rs. 13,66,44,081/- during the period October, 2006 to December, 2011. The impugned show cause notice also proposed to confirm the above demand along with interest thereon. The notice also proposed to impose penalties on the appellant.
The notices were adjudicated vide the impugned order and Service Tax demands were confirmed along with interest and a penalty of Rs. 30,72,75,553/- was imposed on the appellant under Section 78 of the Finance Act, 1994.

Appellant’s contentions:- The learned counsel for the appellant made the following submissions :
The branches were not independent entities and they were part of the appellant’s organization. Therefore, if the branches had undertaken service to the overseas customers, it would not be considered as service received by the appellant as there could not be a service to self. Even if it was held that the appellants had rendered the service, since service had been rendered to the overseas customers, it amounted to export of service. Thirdly, the appellant had received the proceeds in convertible foreign exchange and they had not made any payments to the branches. Therefore, the question of payment of any Service Tax on reverse charge basis under Section 66A of the Finance Act, 1994 would not arise at all as there was no payment by the appellant to their branches abroad for rendering of any services.
For the services rendered abroad they had discharged tax liabilities such as GST/VAT etc. in accordance with the local laws. Therefore, on the same transaction, the authorities in India did not have any jurisdiction to impose any Service Tax. Similarly, in the case of payments made to service providers in USA for services rendered to the permanent establishment, the said service had been rendered in USA and the tax liability had been discharged thereon. Therefore, there was no jurisdiction vested with the Indian authorities to levy a tax thereon.
They rely on the decisions of this Tribunal in the following cases :
(i)          Aztecsoft Ltd. v. Commissioner of Central Excise, Bangalore - 2012 (26)S.T.R.552;
(ii)         IDS Systems Pvt. Ltd. v. Commissioner of Central Excise, Bangalore - 2012 (28)   S.T.R.389;
(iii)        Intas Pharmaceuticals Ltd. v. Commissioner of Service Tax, Ahmedabad - 2009 (16)S.T.R.748;
(iv)        Tech Mahindra Ltd. v. Commissioner of Central Excise - 2012 (26)S.T.R.344.
Prior to 16-5-2008 ‘Information Technology Service was not under the tax net, and therefore, the question of demanding any Service Tax on such services rendered abroad in respect of ‘Information Technology Software Services’ prior to that date would not arise at all.

Respondent’s contentions:- The learned Commissioner (AR) appearing for the Revenue on the other hand submitted that as per the provisions of Section 66A of the Finance Act, 1994, even in respect of an Indian company, if they had a fixed establishment abroad, the services received by the Indian entity would be leviable to Service Tax in India on reverse charge basis and, therefore, the demand of Service Tax was sustainable in law. Accordingly, he pleaded for upholding the impugned order and putting the appellant to terms.

Reasoning of judgment;- The Bench had carefully considered the submissions made by both the sides. As the issue involved interpretation of law, they took up the appeal for consideration, after waiving the requirement of any pre-deposit.
The provisions of Section 66A were attracted only when services were received in India by a person situated in India even if such persons may had permanent establishment abroad. In the present case, the appellant had provided services through their branches abroad to customers located abroad. Therefore, it was not a case of the appellant receiving the services but it was a question of rendering services abroad. Further, the appellant had not made any payments for the receipt of any services whereas on the other hand, the appellant had received proceeds of the service rendered abroad by their branches, after deduction of expenditure incurred for rendering of services abroad. Therefore, prima facie, they were of the view that the provisions of Section 66A were not at all attracted.
Secondly, if the services rendered abroad had been subject to local taxation, the question of levying Service Tax in India on the very same transactions would not arise at all. There could not be two taxing jurisdictions for the same transactions. Service tax was a destination based consumption tax and taxability would arise only at the place where the consumption takes place. In the instant case, the service had been rendered to the clients abroad and, therefore, the consumption of the service was not in India but abroad. Therefore, the question of subjecting the said activity to Service Tax in India does not appear to be sustainable in law. The appellant had assured that they will be able to lead evidence regarding payment of GST/VAT on the services rendered abroad if opportunity was given to them.
Thirdly, even if it was assumed that the appellant had received the service from abroad from their branches, since the service had been consumed by the clients abroad, it would amount to export of service under Rule 3 of the Export of Service Rules, 2005 in which case also there would not be any Service Tax liability. In the case of permanent establishment of the appellant situated abroad, the service had been provided by foreign service providers abroad and the service had also been consumed abroad.
In this view of the matter, it appeared that the adjudicating authority had not considered any of the issues germane to the matter. Further, this Tribunal in the case of Intas Pharmaceuticals Ltd. (supra) held that when service was provided outside India, liability to pay Service Tax under reverse charge mechanism under Section 66A would not arise. Similarly, in the case of IDS Systems Pvt. Ltd. also this Tribunal held that, as regards reimbursement of expenditure relating to employees deputed to USA, the activities had taken place in USA and therefore, liability to Service Tax would not arise. In the case of Aztescsoft Ltd. also, this Tribunal held that, if the activities had been undertaken in a foreign territory, the question of levying Service Tax in India would not arise.
In view of the above factual and legal position, they were of the considered view that the matter had to go back to the original adjudicating authority for consideration afresh with regard to the question, whether he had any jurisdiction to demand Service Tax on activities which were completely rendered outside India and on which tax liability had been discharged under the local laws where the activity had taken place. All issues were kept open. The appellant was at liberty to produce evidence of discharge of tax liability on the transactions rendered abroad under the local laws before the adjudicating authority.
Thus, the appeal was allowed by way of remand. The stay application was also disposed of.

Decision:- Appeal allowed by way of remand.

Comment:- The analogy drawn from the case is that if the overseas branch act as a part of assesses organization itself, then in such case, no service tax under reverse charge was payable for the services rendered by overseas branches outside India. Further, for the services rendered by the overseas branches, VAT, GST as per the local taxation laws had already been paid abroad. Thus, service tax being a destination based tax, service tax shall not be leviable on the services provided by the overseas branches.
Prepared by: Ranu Dhoot

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PJ/Case Law/2013-14/2331

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