Rebate of ST under Export of services Rules, 2005

CASE STUDY

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

Introduction: -

When there is export of service, exemption has been granted from payment of service tax. The Export of Service Rules, 2005 prescribed the criteria as well as the conditions to be fulfilled by the service provider to claim exemption. The criteria prescribed under the said Rules is that the service will be export of service if – (i) it is provided in relation to an immovable property situated outside India; (ii) it is partly performed outside India and partly in India; and (iii) the benefit of the service provided accrues outside India. In the case under study, the appellant was providing BAS fulfilling the criteria prescribed under Category III but the benefit of exemption was denied to him on the reasoning that the service provided by him was utilised in India and only the benefit of the service accrued ouside India.

In the matter of M/s Citizen Metalloys Ltd
[Order-In-Appeal no. 317/2009(Ahd-III)CE/KCG/Commr(A), dated: 11.09.2009]

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.

Brief facts of the case: -

Appellant-assessee were acting as distributor of M/s New PNH, China (foreign company) for marketing of their products in India and were receiving commission from them. The service provided by them was covered under the category of ‘Business Auxiliary Service’.

They paid service tax for the said service. Thereafter, they came to know that they were not required to pay service tax as the service provided by them amounted to export of service under Rule 3 (1)(iii) of Export of Service Rules, 2005.

Accordingly, the appellant filed rebate claim of service tax so paid by them.

The Adjudicating Authority rejected the claims of the appellant on the ground that service provided by the appellant did not fall under the purview of Export of Service Rules, 2005. It was also observed by the Adjudicating Authority that the appellant has not submitted the invoice issued to the overseas party.

Aggrieved by the impugned order-in-original, appellant filed appeal before the Commissioner (Appeal).

Appellant’s Contention: -

The appellant made the following submissions before the Commissioner (Appeal) as under:

- Appellant submitted that the impugned order is denying the refund claim on the ground that condition prescribed in sub rule (i) of the Rule (3) of the Export of Services Rules, 2005. In this regard, reference was made to the provisions of Rule 2 of the Export of Services Rules, 2005 and it was submitted that from the said provision it is clear that the taxable services specified in sub-rule (1) will be treated as export of service only if the two conditions mentioned above are satisfied i.e.

The said service is provided from India and used outside India;

The payment for such service provided outside India is received in foreign convertible foreign exchange.

It was submitted that the refund claim was being denied on the ground that the services were used within India and not outside India. It was submitted that the said condition was being interpreted to mean that the service must be completely used outside India. Reference was made to Circular No. 111/05/2009-ST dated 24.02.09 wherein it was clarified as to what would constitute and mean by “service provided from India and used outside India”.

- It is submitted that the impugned order has completely ignored the clarification given by the Circular No. 111/05/2009-ST dated 24.02.09. The said clarification has been given specifically in relation to Business Auxiliary Services. It is further submitted by the appellant that in their case the benefit of their service was drawn outside India i.e. in China although all the related activities have been undertaken in India.

Appellant submitted that the Board’s Circular No. 111/05/2009-ST dated 24.02.09 was required to be considered by the Adjudicating Authority as the said circular was binding on the Department. In this regard, reliance was placed on the case of Collector of Central Excise, Vadodara vs Dhiren Chemical Industries [2002 (139) ELT 3 (SC)] that the order passed by the Revenue in contravention to the clarifications given by the Board is void ab initio.

The analysis of this decision made it clear that while deciding any case, the Board Circulars are to be kept in mind. However, the said contention has not been taken into consideration at all in the impugned order.

The appellant further submit that the impugned order is denying the refund claim of the appellant on the ground that they have not submitted the invoice raised separately and that without them, the clause of unjust enrichment cannot be verified. In this regard it is submitted that the fact that the invoices raised separately were not submitted is a mere technical lacunae and the refund claim cannot be denied on this ground. The substantial requirement that the service has been provided and payment has been received in foreign convertible currency has been fulfilled. As such the refund can not be denied. Further, it is nowhere specifically provided in the Export of Service Rules, 2005 that the concept of unjust enrichment is applicable in case of export of services. It is also not applicable on export of goods.

Moreover, it is further clarified that the amount of service tax has already been deposited on the total amount received by the assessee in foreign convertible currency. This fact has already been brought to notice of learned adjudication officer. If the service tax is deposited on complete amount then it implies that the appellant have not charged the service tax from buyer. Further, it is clear from the fact of the case that we have deposited the tax on pointing out by audit. The appellant has not paid when the bill was raised. The appellant was not knowing that the service tax is payable on the same. When the appellant came to know only after providing the service then we can not pass on the burden of service tax to the buyer. Furthermore, there was no allegation in the show cause notice that we have passed on the burden to the buyer. Thus, the order is going beyond the show cause notice and it is bad in eyes of law.

Issue:

When Business Auxiliary service is provided to a foreign entity and the benefit of the said service accrues outside India, then whether it can be said to be export of service? And the Rebate claim of the service tax paid on such service will be required to be granted?

Judgment of the Appellate Authority:-

The learned Commissioner (Appeal) held as under:

The Commissioner (Appeal) noted that the rebate claim was rejected by the Lower Authority on the ground that service provided by the appellant did not fall under the purview of Export of Service Rules, 2005 as the conditions prescribed in sub-rule (i) are not met. It was also observed by the Lower Authority that the appellant has not submitted the invoice issued to the overseas party.

With regard to the question that whether the service provided can be considered as export of service, the Commissioner (Appeal) perused the provisions of Rule 3 of the Export of Service Rules, 2005. It was held that as per the above rule, services have been divided into three categories. Admittedly, the service provided by the appellant fell under sub-clause (zzb) of clause (105) of Section 65 of Finance Act, 1994. Therefore, the said service does not fall under category (i) or (ii) but it falls under category (iii). The taxable service specified in sub-rule (1) shall be treated as export of service when such service is provided from India and used outside India; and payment for such service is received by the service provider in convertible foreign exchange.

The Commissioner (A) found that appellant has fulfilled the prescribed conditions and hence the service provided by them can be treated as export of service as the service is provided from India for the recipient located outside India and the payment is received in foreign exchange. It was held that as pointed out by the appellant Board Circular No. 111.5/2009-ST dated 24.02.2009 provided that:

“…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.”

It is not alleged in the notice or in the impugned order by the Lower Authority that the service has not provided in the India and the benefit of service not accrued outside India. Therefore the conditions for export of service have been fulfilled by the appellant and hence the service provided by them is to be treated as export of service under rule 3 of Export of Service Rules, 2005.

Now, for the second question whether the appellant has fulfilled the conditions specified for sanctioning the rebate, the Commissioner (A) found that the conditions for sanctioning of rebate have been provided under Notification no. 11/2005-ST, dated 19.04.2005. Since the rebate has been rejected mainly on the ground that service provided by the appellant did not fall under the purview of Export of Service Rules, 2005, as the conditions prescribed in the sub-rule (i) are now met, which has now been ruled in favour of the appellant, the lower authority shall verify whether the appellants has fulfilled the conditions and procedures laid down under the said notification no. 11/2005-ST and decide the case afresh.

Decision:-

Impugned order is set aside and matter remanded back.

Conclusion:-

It is submitted that the learned Commissioner (Appeal) rightly held that the BAS service provided by the appellant-assessee to the foreign company abroad was export of service when the benefit of the service was accruing outside India and when the payment was received in Foreign Currency as the service fell under Category III [Rule 3(1)(iii)] of the Export of Service Rules, 2005. After the remand of matter for examination of the relevant documents, the rebate claim has been sanctioned since to the appellant.

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PJ/CASE STUDY/2011-12/16
20 July 2011

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PJ/CASE STUDY/2011-12/16 20 July 2011

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PJ/CASE STUDY/2011-12/16
20 July 2011