Whether service tax is leviable on following services:- On the services of maintenance and repair received from the offshore service providers and also, On payments made to General Sales Agents (GSAs) appointed by the appellant in various foreign territo

PJ/Case Law/2013-14/1980

Case:-AIR INDIA LTD. Vs COMMISSIONER OF SERVICE TAX, NEW DELHI

Citation:-2013 (30) S.T.R. 458 (Tri. - Del.)

Brief facts:- The facts giving rise to this appeal and stay application, in brief, were as under :-
The appellant, a wholly Government of India Company were engaged in the business of transportation of passengers and goods by Air. Since the company had international operations, it had branches in a number of countries. Besides the branches, in some countries, agents called “General Sales Agents” (GSA) had also been appointed to manage it affairs. The GSAs represent the appellant and handle its affairs at those locations for which they received commission from the appellant.
The appellant in terms of their agreement with various foreign parties send air crafts and components to them for repair for which the payment was made in foreign currency by the appellant.
According to the department, the appellant had received the service of repair and maintenance taxable under Section 65(105)(zzg) read with Section 65(64) from the offshore service providers and had also received the service of the Business Auxiliary Service taxable under [Section] 65(105)(zzb) read with Section (65)(19) of the Finance Act, 1994 from the offshore service providers (GSAs) and hence they were liable to pay service tax on the amount paid by the appellant for these services. On this basis, the Commissioner vide order-in-original dated 14-11-2011 confirmed service tax demand of Rs. 65,48,52,240/- against the appellant for 2006-2007 under proviso to Section 73(1) of Finance Act, 1994 along with interest on it under Section 75 ibid and also imposed penalty of equal amount on the appellant under Section 78 and penalty of Rs. 5,000/- under Section 77 ibid. The service tax demand confirmed in respect of repair and maintenance service was Rs. 49.95 crores and demand in respect of business auxiliary service was Rs. 15.53 crores.
Against the above order of the Commissioner, this appeal had been filed along with stay application.

Appellant’s contentions:- Shri S.P. Sahu, Advocate, ld. Counsel for the appellant, pleaded that so far as service in relation to repair and overhaul of aircraft and components through foreign service providers was concerned, in terms of Rule 3(1)(ii) of Taxation of Services (Provided From Outside India and Received in India) Rules, 2006, this service could be said to had been received in India only if the service had been performed in India, that since this service had been performed abroad, and no part had been performed in India, the same couldnot be said to had been provided from outside India and received in India and, hence, the same would not be taxable under the provisions of Section 66A of Finance Act, 1994 read with Rule 2(1)(d)(iv) of Service Tax Rules, 1994, that as regards the service received from General Sales Agent, the same was also not taxable in India, as the services of the GSA had been received by the appellant’s branches located outside India. In this regard he relied upon the judgment of the Tribunal in the case of Rajesh Exports Ltd. reported in 2013 (29) S.T.R. 147 (Tribunal), wherein it was held by the Tribunal that the service of Lead Manager to an issue provided in United Kingdom for raising funds by issuing foreign convertible bonds were received outside India and, therefore, were not liable to service tax in India under reverse charge mechanism. The Commissioner had also failed to appreciate that the GSAs appointed by the appellant at various foreign locations were required to perform various business activities for the appellant and represent the appellant in various assigned regions and as such their activities were not restricted to marketing and sales promotion and the same were not classifiable as business auxiliary service as defined under Section 65(19) of the Finance Act, 1994. In any case the service tax demand raised vide show cause notice dated 24-2-2009 for 2006-2007 period was time-barred, as there was absolutely no suppression of any facts on the part of the appellant, which was a Government of India undertaking, and for the same reason, there was no justification for imposition of penalty under Section 78 of the Finance Act. The appellant had strong prima facie case in their favour on merits as well as on limitation. The appellant was a company having huge accumulated losses and being in extreme financial difficulties, was not in a position to discharge even its statutory liabilities and for this also, it was not in a position to comply with the requirement of pre-deposit and that in view of the above submissions, the requirement of pre-deposit of service tax demand, interest thereon and penalty may be waived for hearing of the appeal and recovery thereof may be stayed till the disposal of the appeal.

Respondent’s contentions:- Shri Govind Dixit, ld. Departmental Representative, opposed the stay application by reiterating the findings of the Commissioner in the impugned order and pleaded that the services of repair and maintenance of aircraft engines and components were taxable under Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994 and since the same had been provided by the offshore service provider and had been received by the appellant in India, the appellant as service recipient would be liable to pay service on the same in terms of Section 66A of Finance Act, 1994 read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. There was no merit in the appellant’s contention that the service was provided wholly outside India, as in terms of the appellant’s agreement with the foreign service providers, the foreign service providers were also under obligation to provide the service in India. As regards the service received from GSAs, from the appellant’s agreements with them, it was clear that the General Sales Agent were to represent the appellant in the region assigned to them and in that region, they were required to promote the business of the appellant and also provide various services on their behalf, that thus the nature of the activities of the GSAs was squarely covered by the definition of business auxiliary service as defined under Section 65(19) of the Finance Act, 1994 and since this service had been received by the appellant based in India and had been used in relation to their business, the appellant as service recipient would be liable to pay service tax in respect of the same, that the appellant had suppressed the relevant facts from the department and, therefore, longer limitation period under proviso to Section 73(1) had been correctly invoked and penalty on them under Section 78 had been correctly invoked, that the department had strong prima facie case against the appellant and, that, therefore, conditions had to be imposed for safeguarding the interest of the Revenue while considering the appellant’s plea for waiver from the requirement of pre-deposit. He, therefore, pleaded that this was not the case for total un-conditional waiver from the requirement of pre-deposit. He also pleaded that financial hardship couldnot be the reason for waiver from the requirement of pre-deposit.

Reasoning of judgment:- The Bench had considered the submissions from both the sides and perused the records. There were two components of the service tax demand against the appellant. The first component of demand of Rs. 49.95 crores was in respect of repair and maintenance service and the second component of the demand of Rs. 15.53 crores was in respect of service of General Sales Agents.
Coming to the service tax demand of Rs. 49.95 crores in respect of the maintenance and repair received from the offshore service providers, this service was covered by Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994. There was no dispute that this service had been provided by the offshore service providers. The point of dispute was as to whether this service could be treated as having been received in India by the appellant so as to charge service tax from the appellant under Section 66A of Finance Act, 1994 read with Rule 21(d)(4) of Service Tax Rules, 1994. In terms of Rule 3(1)(ii) of Taxation of Services (Provided From Outside India and Received in India) Rules, 2006 the service of repair and maintenance taxable under Section 65(105)(zzg) could be said to had been provided from outside India and received in India when this service provided by the offshore service providers had been performed in India and for this purpose, even if the part of the service had been performed in India and part abroad, the same would had been treated as performed in India. In this case, prima facie, the Bench found that the service of repair and maintenance had been performed wholly abroad and as such, there was no evidence adduced by the department to show that part of the maintenance and repair service had been performed in India. In view of this, they were of the prima facie view that so far as this service was concerned, the appellant could not be said to have received this service in India in terms of the provisions of Rule 3(1) of Taxation of Service (Provided From Outside and Received in India Rules), 2006 and as such the service tax demand of Rs. 49.45 crores did not appear to be sustainable.
As regards the service tax demand of Rs. 15.53 crores, this demand was in respect of payments made to General Sales Agents (GSAs) appointed by the appellant in various foreign territories for the services received by them. On perusal of the relevant clauses of the appellant’s agreements with the GSAs as, reproduced in the impugned order, the Bench were of the prima facie view that the services provided by the GSA to the appellant were covered by the definition of Business Auxiliary Service as given in Section 65(19) of the Finance Act, 1994, as the GSAs appointed by the appellant not only represent the appellant abroad and provide various services on their behalf they also promote the sales of the services being provided by the appellant by undertaking various sales promotion activities. Since this service had been used by the appellant in India in relation to their business located in India, in terms of the provisions of Rule 3(1)(iii) of the Taxation of Services (Provided From Outside India and Received in India) Rules, 2006, this service had to be treated as having been provided from outside India and received in India by the appellant and, therefore, in terms of the provisions of Rule 66A of the Finance Act, 1994 read with Rule 21(d)(iv) of the Taxation Rules, 1994, the appellant as service recipient would be liable to pay service tax on the same. The Bench were, therefore, of the prima facie view that the service tax demand of Rs. 15.53 crores was on strong footing. As regards question of limitation, since the same was a mixed question of fact and law, the same could be examined only at the time of final hearing.
Thus, out of the total service tax demand of Rs. 65,48,52,240/- confirmed against the appellant, service tax demand of about Rs. 15.53 crores appeared to be on strong footing.
The appellant had pleaded financial hardship stating that the appellant had on huge accumulated losses and were having difficulty in discharging their statutory functions and, therefore, insistence on pre-deposit of any part of the tax demanded would cause undue hardship and irreparable loss. The Bench were of prima facie view that while financial hardship factor could be taken into account while considering the quantum of pre-deposit, the pre-deposit could not be totally waived on this ground when prima facie demand of about Rs. 15.53 crores, as discussed above, was on strong footing. Thus, keeping in view the provisions of Section 35F of the Central Excise Act, 1944( as made applicable to the Service Tax matters by Section 83 of Finance Act, 1994) while considering the waiver from the requirement of pre-deposit, the interests of the revenue had also to be kept in mind.
Taking into account overall facts and circumstances of the case, the Bench, therefore, direct the appellant to deposit an amount of Rs. 8 Crores within a period of 8 weeks from the date of this order. On deposit of this amount within the stipulated period, the requirement of pre-deposit of balance amount of service tax demand, interest thereon and penalty shall stand waived and recovery thereof stayed till the disposal of the appeal.

Decision:- Stay partly granted

Comment:- The analogy drawn from the case is that
· Service tax shall not be leviable on the service of repair and maintenance if the same had been performed wholly abroad.
· If the GSAs appointed by the assessee not only represent the appellant abroad and provide various services on their behalf but also promote the sales of the services being provided by the appellant by undertaking various sales promotion activities, then as this service had been used by the assessee in India in relation to their business located in India this service had to be treated as having been provided from outside India and received in India by the assessee, so service recipient would be liable to pay service tax on the same.

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