The project office that is temporarily set up in India only for implementation of a particular project is not a ‘permanent establishment’.

PJ/ Case Law/2013-14/1618

Case:- M/s SNC LAVALIN INC Vs COMMISSIONER OF SERVICE TAX, DELHI, GURGAON

Citation:- 2013-TIOL-911-CESTAT-DEL

Brief facts:- The appellant is a company incorporated in Canada. In terms of agreement between Government of Uttaranchal and Canada Commercial Corporation (CCC), the appellant has been appointed as Executing Engineer to fulfil the obligation of CCC and as per the scope of the said agreement; the appellant is required to provide design and consultancy service related to the project. The appellant company has a project office in India, which is registered with Service Tax Department under the category of consulting engineer service. The service of designing, engineering and other technical inputs related to project is provided by the head office from Canada. The project office of the appellant in India undertakes executing the activities relating to an incidental to the project. The head office of the appellant company at Canada has deputed some of its officials at the project office in India for which the debit notes have been raised by the head office in respect of the expenditure incurred on their salary and other expenses. The department was of the view that in view of the provisions of sub-Section (2) of Section 66A read with Explanation I, the project office has to be treated as a person separate from the head office and that since the project office has received the services of manpower recruitment or supply agency taxable under Section 65 (105) (k) of the Finance Act, 1994, the project office in India (appellant) as service recipient would be liable to pay service tax in respect of the same. On this basis, a show cause notice dated 27/10/09 was issued to the project office in India (appellant) for

(a) Recovery allegedly non-paid service tax amounting to Rs. 62,60,160/- alongwith interest on it under Section 75 ibid ; and

(b) Imposition of penalty on the appellant under Section 76, 77 and 78 ibid.

Subsequent to the above show cause notice, three more show cause notices dated 16/4/10, 15/10/10 and 21/10/11 were issued to the appellant for demand of allegedly non-paid service tax amounting to Rs. 16,32,236/-, Rs. 16,20,713/- and Rs. 22,15,519/- along with interest and also for imposition of penalty.

The above four show cause notices were adjudicated by the Commissioner vide order-in original dated 10/10/12 by which -

(a) Total service tax demand of Rs.1,17,28,628/- was confirmed against the appellant along with interest ; and

(b) While penalty of equal amount of Rs.1,17,28,628/- was imposed on the appellant under Section 78 of the Finance Act, 1994, penalty of Rs. 70,000/- was imposed on them under Section 77 ibid.

Against the above order of the Commissioner, this appeal has been filed along with stay application.

Appellants contention:- The learned Counsel for the appellant pleaded that two different persons are not involved in the instant case and this is a case of provision of service by the appellant company based at Canada to themselves, that project office of the appellant company in India cannot be treated as a separate entity from its head office at Canada, as the project office cannot be treated as permanent establishment of the appellant company in India for the reason that the same had been opened only for the project which is being implemented by the appellant company in India, that no service had been provided by the appellant company at Canada to its project office in India and hence there is no question of charging the service tax, that the project office in India of the appellant company is just extended arm of its head office at Canada, that service rendered by a company to itself cannot be subjected to service tax, that Tribunal in the cases of Rolls Royce Indus. Power Ltd. vs. CCE, Vishakhapatnam reported in 2004 (171) E.L.T. 189 (Tri. - Del.) and Bajaj Auto Ltd. vs. CCE, Aurangabad reported in 2005 (179) E.L.T. 481 (Tri. - Mum.) has held that the service rendered to self is not taxable, that projectoffice of the appellant company in India cannot be treated as its permanent establishment and,as such, the provisions of Section 66A are not applicable, that the impugned order is,therefore, not sustainable, and that since the appellant have a strong prima facie case, the requirement of pre-deposit of service tax demand, interest thereon and penalty may be waive for hearing of the appeal and recovery thereof may be stayed till the disposal of the appeal.

Respondents Contention:- Thelearned DR, opposed the stay application by reiterating the findings of the Commissioner in the impugned order and emphasized that the project office of the appellant company in India has an identity separate from the head office and since it has received manpower recruitment or supply agency service from the head office, service tax on the value of the same would be payable by the project office in India. Therefore, pleaded that this is not the case for waiver from the requirement of pre-deposit.

Reasoning of Judgement:- The undisputed facts are that the appellant company's head office is at Canada and in India they have set up only a project office for implementation of a project in terms of agreement between them and the Government of Uttaranchal. Since some of the manpower has been deployed by the head office to its project office in India, in respect of the salary and other expenses of these officials, the head office has issued debit notes to the project office.

According to the department, this amounts to the project office in India receiving the service of manpower recruitment or supply agency from its head office in Canada and accordingly the project office would be liable to pay service tax in respect of the same as service recipient in terms of the provisions of Section 66A of Finance Act, 1994 read with Section 2 (1) (d) (iv) of the Service Tax Rules, 1994. According to the department, the project office of the appellant company in India has to be treated as having identity separate from the head office. On the other hand, the contention of the Appellant is that the project office in India is an extended arm of their head office at Canada, that the project office cannot be treated as a separate entity and that this is a case of providing service by a company to itself and the same would not be taxable.

Under Section 66A (2) when a person is carrying on business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments are to be treated as separate persons for the purposes of this Section. Explanation I to sub-Section (2) states that a person carrying on business through a branch or agency in any country shall be treated as having a business establishment in that country. We are of prima facie view that the project office of the appellant company in India, which has been set up for implementation of the project in terms of agreement between the Government of Uttaranchal and the Canada based appellant company, cannot be called the permanent establishment of the appellant company in India, as the project office is not doing any work other than the work relating to the project and would get wound up once the project is completed. The term "permanent establishment" referred to in sub-Section (2) of Section 66A would cover branch or agency of a foreign based company, which has been set up in India to carry out its business on long term basis and this term would not cover the project office, which has been temporarily set up in India only for implementation of a particular project. We are therefore of prima facie view that the provisions of Section 66A would not be applicable and this has to be treated as where the appellant have provided the service to itself. The impugned order therefore does not appear to be sustainable and as such the appellant have a prima facie case in their favour. The requirement of pre-deposit of the service tax demand, interest thereon and penalty is, therefore, waived for hearing of the appeal and recovery thereof is stayed till the disposal of the appeal. The stay application is allowed.

Decision:- The stay application is allowed.

Comment:-The gist of the above case is that the mere setting up of a temporary office in India for a particular project cannot be covered by the definition of ‘permanent establishment’ liable to service tax under reverse charge mechanism. The temporary office in India cannot be said to be a separate establishment of the foreign company and as it cannot be treated as separate establishment, the same would amount to providing service to oneself, that is not leviable to service tax.

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PJ/ Case Law/2013-14/1618

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