Whether service tax payable if service recipient is outside india and payment received in foreign convertible exchange?

Case:-WARTSILA INDIA LTD. VERSUS COMMISSIONER OF SERVICE TAX MUMBAI-II

Citation:-2015(37) S.T.R. 586 (Tri.-Mumbai)

Brief Facts:- The appeal and stay petition are directed against Order-in-Original No. 45/ST-II/RS/2013, dated 12-8-2013 passed by the Commissioner of Service Tax, Mumbai-II. Vide the impugned order, the learned adjudicating authority has confirmed a Service Tax demand of Rs. 13,23,23,850/- comprising of Rs. 12,06,39,710/ - in respect of 'Business Auxiliary Services' for the period 1-7-2003 to 31-3-2008 and Rs. 1,16,84,140/- for the period 18-4-2006 to 31-3-2008 along with interest thereon and also imposing penalties under Sections 76, 77 and 78 of the Finance Act, 1994. Aggrieved of the same, the appellant is before Tribunal.. The appellant, M/s. Wartsila India Ltd., entered into distributorship and agency agreement with their group entities situated in Finland, Sweden, Norway, Ireland, Switzerland, Italy, France, Singapore, U.K., Germany, China, Philippines and United Arab Emirates in respect of the products manufactured by the foreign entities. The said agreement envisaged that, when acting as a distributor, the appellant will sell in its own name and at on its own account the product of the foreign supplier, and that while acting as an agent, the appellant will solicit customers and promote the sale and services of the products manufactured by the foreign entities and the appellant will also assist in the preparation of any product sale contract between the foreign entity and the Indian buyer and also in the collection of sale proceeds. For these services rendered, the appellant was entitled to receive a commission in accordance with the said agreement. The products covered by the agreement were such as 2/4 stroke engines, domain spare parts; propulsion spare parts, boiler parts and so on and the commission ranged from 5% to 16% of the net sale value. Once the purchase orders were placed by the buyer in India through the appellant to the foreign entity, the goods were supplied directly by the foreign entity to the Indian buyer for which the appellant received a local agency commission. The commission was paid in convertible foreign currency. The department was of the view that this activity undertaken by the appellant comes within the purview of 'Business Auxiliary Service' and since the services has been rendered in India, the appellant is liable to pay Service Tax on reverse charge basis. Accordingly, show-cause notice was issued on 20-8-2008 for the period 1-7-2003 to 31-3-2008 demanding Service Tax of Rs. 12, 06, 39,710/-. The appellant also procured IT products from their foreign entities on which they were discharging Service Tax liability under 'Information Technology Services' since 16-5-2008. The department was of that for the period 18-4-2006 to 31-3-2008, the appellant was liable to pay Service Tax on reverse charge basis under 'Online Information and Database Access and/or Retrieval Services'. The notice was adjudicated and the demands confirmed along with interest and also by imposition of penalties. Aggrieved of the same, the appellant is before Tribunal.

Appellant contentions:- The activity of the appellant in procuring orders for the foreign supplier would, no doubt, falls under 'Business Auxiliary Services'. However, the same comes within the purview of export of services inasmuch as the services has been rendered to a foreign entity and the consideration has been received for the services rendered in convertible foreign exchange. Prior to 1-7-2003, if consideration for services rendered was received in convertible foreign exchange, the same was considered as export of services and exempt under Notification 6/99-S.T., dated 9-4-1999. The said Notification was withdrawn on 1-3-2003. However, the C.B.E. & C. vide Circular No. 56/5/2003-S.T., dated 25-4-2003 had clarified that export of services would continue to remain tax free even after withdrawal of Notification 6 /99-S.T., if the amount is received in convertible foreign exchange. Thus, no Service Tax liability accrues to the appellant for the period 1-7-2003 to 20-11-2013 in terms of the Board's Circular mentioned above. For the period 20-11-2003 to 31-3-2004, Notification 21 /2003-S.T., dated 20-11-2003 provided for exemption on Service Tax in respect of services rendered for which payment was received in convertible foreign exchange. Inasmuch as the appellant has received the consideration in convertible foreign exchange and foreign inward remittance certificates are available evidencing exports, the appellant was eligible for the benefit of Notification 21 /2003-S.T. The same exemption would apply in respect of services rendered during 1-4-2004 to 14-3-2005 in view of Notification 21/2003. For the period from 15-3-2005 to 18-4-2006, the services provided by the appellant amounted to exports in terms of Export of Service Rules, 2005. The condition required to be satisfied to qualify as exports were –
(1) The service should have been provided and used in or in relation to commerce or industry; and
(2) The recipient should be located outside India.
In appellant's case, these conditions are satisfied and therefore, no Service Tax liability would accrue for this period. For the period 1-4-2006 to 31-3-2007, the activity - undertaken by the appellant would continue to be exports under Export of Ser-vice Rules. The conditions required to be satisfied to qualify as exports was (i) recipient should be located outside India; (ii) such services are delivered outside India and used outside India; (iii) payment for such services provided is received in convertible foreign exchange by the service provider. It is their contention that they have satisfied these conditions and, therefore, the activity would fall within Export of Service. For the period 31-3-2007 to 31-3-2008, the conditions required to be satisfied for qualifying as exports were (i) recipient should be located out-side India; (ii) such services are provided from India and used outside India; and (iii) payments for such services received in convertible foreign exchange. It is their contention that they have fulfilled these conditions and hence, even during this period, the activity of the appellant qualified to be exports and, therefore, no Service Tax liability would accrue.
As regards, the demand on software services received in India during the period 18-4-2006 to 31-3-2008, for which a Service Tax demand of 1,16,84,140/- has been confirmed, the learned counsel submits that the product received by the appellant was Information Technology Software Service which became taxable w.e.f. 16-5-2008 and the appellant has been discharging Service Tax accordingly and the department has not disputed this classification. Therefore, for the period prior to 16-5-2008, the services received cannot be classified under "On-line Information and Database Access and/or Retrieval Service'. Accordingly, it is submitted that this demand is also not sustainable.
The appellant also relies on the decisions of this Tribunal in the case of GAP International Sourcing (India) Pvt. Ltd. v. Commissioner of Service Tax, Delhi decided on 28-2-2014 vide [Final] Order No. 50780/2014. In the said case, the appellant therein provided service support agreement to their foreign entity in USA relating to procurement of goods recommending type of goods, vendors, from whom the goods can be procured, analyzing the reports of samples, giving recommendation about product integrity, inspecting export consignment and issuing inspection certificate and so on. The department was of the view that the services rendered merited classification under 'Business Auxiliary Services' under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994. In the said case it was held that since the foreign entity did not have any branch or business establishment in India, the service in relation to procurement of goods being provided by the appellant are entirely meant for the foreign entity and the services in question, namely, BAS was covered by Rule 3(1)(iii) of the Export Service Rules and the transaction has to be treated as delivered outside India and used outside India and since the payments for the services rendered have been received in convertible foreign exchange, the same would have to be treated as export of service. The said decision was followed by the Tribunal in the case of Al-pine Modular Interiors (P) Ltd. v. Commissioner of Service Tax (Adjudication), New Delhi decided vide Final Order No. 51290/2014, dated 13-3-2014 [2014 (36) S.T.R. 454 (Tri. - Del.)]. In the said decision, it was noted that the service of valuation of market trends and identifying of prospective customers in India for the overseas entity for modular furniture business, for which consideration was received in convertible foreign exchange, amounted to exports. In the case of Simpra Agencies & Another v. Commissioner of Central Excise, Delhi-II - 2014-TIOL-687-CESTAT-DEL = 2014 (36) S.T.R. 430 (Tri. - Del.) this Tribunal considered a question in respect of a transaction where the appellant was acting as an agent for several foreign companies for procuring supply orders for them, for which they got a commission in foreign exchange. Besides this, they were also providing services of testing, commissioning and after sales warranty services on behalf of their foreign client for which they got remuneration in convertible foreign exchange. This Tribunal held that these services are covered by the definition of 'Business Auxiliary Services and since it has been provided to a foreign entity, the same would amount to export of service under the Export of Service Rules, 2005 and held that the appellant would be entitled for the rebate of Service Tax paid. Reliance is also placed on the decision of this Tribunal in the case of Lenovo (India) Pvt. Ltd. v. Commissioner of Central Excise - 2010 (20) S.T.R. 66 wherein also a similar question arose and it was held that services provided to a person outside India on commission basis in respect of services of procurement of order and forwarding the same to the Principal in Singapore would be a service delivered outside India and would amount to Export of Service and hence not liable to tax in India.
As regards the demand of Service Tax under 'Online Information and Database Access and/or Retrieval Service', the appellant has submitted copies of the service agreement as per which the appellant is receiving the software and the licence to use the software and also wide area network services and so on, which shows that the services received by the appellant related to 'Information Technology Software Service' and the consideration was paid for maintenance, support and roll out of a software. Accordingly, the learned counsel prays for grant of stay.

Respondent contentions:-The Commissioner (AR) appearing for the Revenue, on the other hand, relies on the interim order of the Tribunal in the case of Microsoft Corporation (I) P Ltd. [2009 (15) S.T.R. 680 (Tri. - Del.)] wherein in respect of 'Business Auxiliary Service' rendered in India to a foreign entity, a prima facie view was taken that since the service had been rendered in India, it is liable to tax in India. As regards the demand of Service Tax under 'Online Information and Database Access and/or Retrieval Service', it is submitted that since soft-ware has been imported into India through internet, it would amount to 'Online Information and Database Access and/or Retrieval Service' and hence liable to Service Tax accordingly.

Reasoning of Judgment:-Tribunal has notice that, for the period 1-7-2003 to 14-3-2005, since the consideration for the services rendered has been received in convertible foreign ex-change, the same is exempt from tax under Notification 21 /2003-S.T., dated 20-11-2003 and also in terms of the Board's Circular No. 56 /5 /2003-S.T., dated 25-4-2003 and, therefore, the liability to pay Service Tax will not arise at all. For the period after 15-3-2005 till 31-3-2008, the appellant has satisfied the conditions of export with regard to the business auxiliary services under Rule 3(1) (iii) of the Export of Service Rules and the said service has been rendered in relation to commerce and industry. The service recipient is situated outside India and the consideration for the provision of service has been received in convertible foreign exchange. Thus, the service has been provided from India and used outside India. In these circumstances, in terms of the Export of Service Rules, as they stood at the relevant time, the activity of the appellant amounts to export of service.
Tribunal has also note that this Tribunal in the case of GAP International' Sourcing (India) Pvt. Ltd.; Simpra Agencies & Another and Lenovo (India) Pvt. Ltd.(supra), wherein also the facts involved were more or less identical, held that if the service recipient is situated outside India and the payments for the .services rendered is received in convertible foreign exchange, in terms of the Export of Service Rules, the service has been delivered outside India and would amount to exports. In the light of these decisions, which are final and with which we respectfully agree, we are of the prima facie view that services rendered by the appellant in the present case also amounts to export of services and hence not taxable in India.
As regards the demand of Service Tax on the 'Information Technology Software' received by the appellant through Internet, we notice that, it is not in dispute that since 1-5-2008, the classification made by the appellant under 'Information Technology Services' has been accepted by the department. If that be so, we do not understand why the same service would merit classification under 'Online Information and Database Access and/or Retrieval Service' for the period prior to May 2008 inasmuch as 'Information Technology Service' has not been carved out of 'Online Information and Database Access and/or Retrieval Ser-vice'. It is a settled position in law that when a levy is introduced on a new category of service, the same would apply only prospectively and the same service cannot be classified elsewhere under other categories prior to the inception of levy.
Thus, the appellant has made out a strong prima facie case for grant of stay. Accordingly, tribunal grant unconditional waiver from pre-deposit of dues ad-judged against the appellant and stay recovery thereof during the pendency of the appeal.

Decision:- Stay granted.

Comment:-The analogy of the case is that here appellant has rendered the service outside India and consideration received in convertible foreign exchange, the activity of appellant amounts to export of service and is therefore exempt under rule 3(1) (iii) of export of service rules, 2005. Furthermore, it was also concluded that it is a settled position in law that introduction of new category of service to apply only prospectively therefore service cannot be classified elsewhere under other categories prior to inception of levy.

Prepared By:- Anash Kachaliya

Comments

PJ/CASE LAW/2015-16/2788

Post a Comment

Query