Commission received for BAS to Foreign Company

PJ/Case Study/2011-12/22

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]
And Megha Jain, B. Com

Introduction:-

For claiming exemption from payment of service tax in case of export of service, the Export of Service Rules, 2005 prescribes the criteria as well as the conditions to be fulfilled. There are three criteria prescribed are as under:-

1.                  services should have been provided been in relation to immovable property situated outside India; or
2.                  the service should be performed partly in India and partly outside India
3.                  the third and last criteria is that the service recipient should be situated outside India.

All categories of services are listed in these three criteria. The particular service falling in the particular criteria has to fulfil the same to become export of service. Apart from the criteria, the other conditions prescribed are that the service provider should be outside India and should not have any office in India. The second common condition is that the payment of the service provided should be received by the Indian service provider in foreign currency.

In the case under study, the assessee was providing the service of commission agent to foreign company and it falls under “Business Auxiliary service”. The criteria of “service recipient situated outside India” is applicable in this case. The other conditions namely no office in India and amount is received in foreign exchange were also fulfilled. But the Department was denying the benefit of export of service on the ground that the same will not fall under the category of export of service.

Relevant Legal Provisions: -

- Rule 3 of Export of Service Rules, 2005:

3. Export of taxable service. –

(1) Export of taxable services shall, in relation to taxable services.–

(i) specified in sub-clauses (d), (m), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh), (zzzr), (zzzy), (zzzz), (zzzza), (zzzzm) and (zzzzu) of clause (105) of section 65 of the Act, be provision of such services as are provided in relation to an immovable property situated outside India;

(ii) specified in sub-clauses (a), (f), (h), (i), (j), (l), (n), (o), (w), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw), (zz), (zza), (zzc), (zzd), (zzf), (zzg), (zzi), (zzl), (zzm), (zzo), (zzt), (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze), (zzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzk), (zzzzl) and (zzzzo) of clause (105) of section 65 of the Act, be provision of such services as are performed outside India:

Provided that where such taxable service is partly performed outside India, it shall be treated as performed outside India;

Provided further that where the taxable services referred to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of section 65 of the Act, are provided in relation to any goods or material or any immovable property, as the case may be, situated outside India at the time of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall be treated as the taxable service performed outside India;.

(iii) specified in clause (105) of section 65 of the Act, but excluding.–

(a) sub-clauses (zzzo) and (zzzv);

(b) those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses (d),(zzzc),(zzzr) and (zzzzm) does not relate to immovable property; and

(c) those specified in clause (ii) of this rule, when provided in relation to business or commerce, be provision of such services to a recipient located outside India and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:

Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India.

Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is provided to a recipient located outside India, then such taxable service shall be treated as export of taxable service subject to the condition that the tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-

(b) payment for such service provided outside India is received by the service provider in convertible foreign exchange.

Explanation.- For the purposes of this rule “India” includes the installations structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.

- Relevant Para of Circular No. 111/05/2009-ST dated 24.02.09

3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, 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. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [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. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.

In the matter of M/s Citizen Mettaloys Ltd.
[Order-In-Original no. 76/ST/D/10-11, Dated: 15.07.2011]

Brief Facts:-

- Assessee is engaged in the manufacture of Copper Tube/Rod/Flat falling under Chapter 74 of the First Schedule to the Central Excise Tariff Act, 1985. They were availing cenvat credit facility.

- During Audit, it was noticed by the department from Balance-Sheet for the year 2007-08 and Trial Balance for the year 2008-09 (up to Feb., 09), that assessee had received Commission from foreign company of Rs.9,24,255/- & Rs.1,67,482/- respectively, aggregating to Rs.10,91,737/-.

- As per Section 65(105) (zzb) of the Finance Act, 1994, any service provided or to be provided to a client, by any person in relation to Business Auxiliary Service is a taxable service and the service provider is liable to pay service tax. In assessee’s case it was the service provider and had received commission. Department alleged that assessee were liable to pay service tax amounting to Rs.1, 34,939/- (S.T.Rs.1, 31,009/- + Ed. Cess Rs.2, 620/- + H.S. Ed. Cess Rs.1, 310/-) along with interest.

- Department issued Letter dated 24.07.2009 asking the assessee to pay up the Service Tax along with interest pointed out by the Audit party vide Revenue para-01 to 04. Assessee informed the Department vide their letter dated 07.10.2009 that they have paid the amount against another audit para.

During the period from year 2007-08 & 2008-09 (upto Feb.'09) the assessee had received an amount of Rs.9,24,255/- & Rs.1,67,482/- respectively, aggregating to Rs.10,91,737/- for the service provided by him to the clients, which was falling under the category of (iv) and (v) of "Business Auxiliary Services'. The Service tax leviable on the service provided was not paid by them, which works out to the extent of Rs.1, 34,939/-

- It was alleged by the department in show cause notice that assessee had received Commission from foreign company of Rs.9, 24,255/- & Rs.1, 67,482/- respectively, aggregating to Rs.10, 91,737/- and the assessee is liable to pay Service Tax to Rs.1, 34,939/- (S.T.Rs.1, 31,009/- + Edu. Cess Rs.2, 620/- + H.S. Edu. Cess Rs.1, 310/-) for the period from 2007- 08 & 2008-09 (up to February'2009).

- Department issued show cause notice alleging that assessee had concealed and suppressed the facts, papers and documents from the authority in order to evade payment of Service Tax. It was only because of audit of records of the assessee these facts came to light otherwise this Service Tax liability would have gone unnoticed. Demand of service tax with interest was raised and penalties were proposed to be imposed on the assessee under Section 76, 77 and Section 78 of the Finance Act.

Assessee’s Contentions:-

Assessee made following submissions before the Commissioner (Appeal):

- That the assessee are not liable to pay service tax on the commission received by us. This is because the service provided by them was export of service. There are three criteria for the export of services as per Export of Services Rules, 2005. The first criterion is that the immovable property should be situated outside India. The second criterion is that service should be partly provided in India and partly outside India. The Third criterion is that the service recipient is situated outside India and remittance should be received in Foreign exchange. The “Business Auxiliary Services” clearly falls under third category. They have provided the services to foreign company which is situated outside India and it has no offices in India. As such the first condition is satisfied. The payment is also received in Foreign Exchange i.e. in US Dollars. A copy of their invoice and Bank realization certificate was enclosed for ready reference. This clearly implies that all the conditions are satisfied. Hence it is clearly export of services and as such there is no need of payment of service tax. Therefore, they are not liable to pay service tax on the commission received by the assessee from the foreign company to which they have provided service under BAS.

- That the benefit of service provided by them was accrued outside India and the payment of the same was received in foreign exchange. Therefore, the service provided by them was export of service. In this respect, assessee relied upon the latest Circular no. 111/08/2009-ST dated 24.2.2009 issued by the Board wherein it is clarified that so long as the benefit of the particular services is derived outside India, it will be treated as export of service even when all the related activities are undertaken in India only. This has been explained specifically in relation to Business auxiliary services. The analysis of the point no. 3 of above circular above makes it crystal clear that there will be export of Business Auxiliary Services provided the benefit is derived outside India and the payment is received in foreign exchange. Since the assessee have also paid the service tax under Business Auxiliary services under the provisions of section 66A of the Finance Act, 1994 for the payment received in foreign exchange; this Circular is squarely applicable in their case. As they have exported the service, they are not liable to pay service tax. Thus, the impugned show cause notice is required to be set aside. It is settled principle that the Board circular are binding on the departmental authorities. Reliance is placed on Collector of Central Excise, Vadodara vs Dhiren Chemical Industries [2002 (139) ELT 3 (SC)] wherein it is held that the order passed by the Revenue in contravention to the clarifications given by the Board is void ab initio.

- Assessee further submitted that they have exported the service and therefore, they are not required to pay service tax. In this respect they submitted that Export of Services Rules, 2005 provide the service provider an option either to pay the service tax for the service provided and then claim refund or to export the service without payment of duty. Accordingly, they have exported the service without payment of service tax and are not liable to pay the service tax.

- Assessee further submits that for the earlier period also, appellant have exported the services and filed the refund claim with the department. This has been disallowed by your good office vide OIO no. 08/STC/REF/2009-10 dated 26.05.09. But appellant has preferred the appeal before the Commissioner (Appeal). The learned Commissioner has allowed their appeal vide OIA no. 317/2009(Ahd-III) CE/KCG/Commr(A) dated 07.09.09.

- Assessee further submits that no penalty can be imposed on them as they bona fide believe that they were not liable to pay service tax on the service we have exported. There was no suppression of facts on our behalf with intent to evade payment of service tax. In the case of Abe Value Point Systems Pvt Ltd v/s Commissioner of Service Tax, Bangalore [2009 (013) STR 0288 (Tri-Bang)] it was held that appellant was under bona fide belief that they need not discharge the service tax liability and therefore imposition of penalty under Section 76 appears very harsh.

It is further submitted that in the case of Mahalakshmi Textiles v/s Commissioner of Central Excise, Coimbatore [2008 (232) ELT 0099 (Tri. - Chennai)]it was held as under: -

Impugned short levy arose due to divergent interpretations of exemption Notification No. 38/2003-C.E. There was no dishonest or fraudulent conduct on the part of the party which would justify a penalty. It is a settled position that penalty cannot be imposed just because it is legal to do so. Penalty imposed vacated. Appeal partly allowed. (Para.3)

Therefore, no penalty can be imposed on them as they have acted under bona fide belief that they were not liable to pay service tax on the service provided by them. Thus, the impugned show cause notice is required to be set aside.

Issue: -

Whether the service provided by the assessee is export of service or otherwise? Whether the said assessee is liable for paying the service tax on such services or otherwise?

Reasoning of the Deputy Commissioner:-

- The learned Deputy Commissioner gave finding that the assessee had received Commission from foreign company of Rs.9, 24,255/- & Rs.1, 67,482/- respectively, aggregating to Rs.10, 91,737/- for the services provided by them.

- That the service recipients are situated outside India and they have no office in India.

- From the invoices and Bank Realization Certificate, it was found that the payment was received in Foreign Exchange i.e. US Dollars.

- In view of the above, the Deputy Commissioner found that the conditions of export of services have been fulfilled by the service provider and hence the service provided by them can be treated as export of service as the service has been provided from India and used outside India.

- Also, the Circular No. 111//05/2009-ST dated 24.02.2009 clarify that the services provided by the assessee can be treated as export service.

- It was also noted that in the assessee's own similar matter, the Commissioner (Appeals) vide OIA No. 317/2009 (Ahd-III)CE/KCG/Commr(A) Dated 07.09.2009, the said service has been treated as "export service".

Decision of the Adjudicating Authority:-

The learned Deputy Commissioner dropped the proceedings initiated by the impugned show cause notice against the assessee.

Conclusion:-

When all the conditions prescribed in the Export of Service Rules were fulfilled by the assessee and when the BAS service was held to be falling under third criteria i.e. service recipient situated outside India, then he had exported the service and he was permitted to avail the exemption from payment of service tax. Even in the earlier proceedings for earlier period, the service provided was held to be export of service. Thus the Learned Deputy Commissioner rightly held in favour of the assesee.

Although it seems very easy case but it becomes very difficult case in the sense that the assessee has sold the goods of foreign buyer in India. The department said at every stage that when the goods are imported into India then how it can be concluded that this is export of service. We have to make them understand that export of goods and export of service are two different things. Export of goods is clear when goods leaves India but the export of services are when the payment is received in foreign exchange. The whole concept and criteria of export of services were told to them. Thereafter only the adjudication as well as appellate authorities were convinced on the same.

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PJ/CASE STUDY/2011-12/22
31 August 2011

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PJ/CASE STUDY/2011-12/22
31 August 2011