Whether the service should be provided from India and used outside India to be termed as export of service?

Case: LIFE CARE MEDICAL SYSTEMS V/S COMMISSIONER OF SERVICE TAX, MUMBAI-II

Citation: 2012-TIOL-993-CESTAT-MUM

Issue:- Whether the service should be provided from India and used outside India to be termed as export of service?

Brief Facts: - M/s. Life Care Medical Systems, Mumbai, the appellant, are the exclusive distributors of various medical equipments manufactured by M/s. VIASYS International Corporation, Pennsylvania, USA. Intelligence received by the DGCEI, Mumbai unit, indicated that the appellant Life Care was engaged in promoting, marketing and distributing, the various medical equipment manufactured by VIASYS, in India, for which they are receiving commission. The said service of promotion and marketing appeared to be liable to service tax under the category of ‘Business Auxiliary Services' w.e.f. 01/07/2003 under the provisions of Chapter V of the Finance Act, 1994. It was also noticed that the appellant has not been discharging any service tax on the said service rendered by it to M/s. VIASYS. After going through the various provisions of the agreement entered into by the appellant with VIASYS and also recording the statements of the officials of the appellant, a show cause notice dated 01/09/2008 was issued classifying the service rendered by the appellant M/s. Life Care to M/s. VIASYS as ‘Business Auxiliary Services' under the provisions of Section 65(19) read with Section 65(105)(zzb) of the Finance Act,1994 and demanding service amount of Rs.55,21,954/- for the period from 01/07/2003 to 19/11/2003, 18/03/2005 to 02/03/2006, 02/05/2006 to 25/04/2007 and 30/07/2007 to 05/12/2007. Interest on the said amount was also demanded. It was also proposed to impose penalty on the appellant under Section 76, 77 and 78 of the Finance Act, 1994 and also to deny benefit of exemption Notification No.13/2003 dated 20/06/2003 and under the Export of Service Rules, 2005. The said notice was adjudicated vide the impugned order and the demand for service tax was confirmed along with interest thereon under the provisions of Section 73 and 75 of the said Finance Act 1994 respectively. Penalty of Rs.20,000/- was imposed under Section 77 and a penalty equivalent to service tax demanded was imposed under Section 78 of the Finance Act, 1994. Hence the appellant are before Tribunal.

Appellant’s Contention: - The Appellants submit that business auxiliary service was brought into the service tax net w.e.f. 01/07/2003. As per Notification No. 6/99-ST dated 09/04/1999 which was in force up to 01/03/2003 no service tax is payable if payment for the service rendered is received in convertible foreign exchange. This Notification was rescinded w.e.f. 01/03/2003. Subsequently, Notification No. 21/2003-ST dated 20/11/2003 was issued providing for similar exemption which was in force up to 15/03/2005 till it was rescinded by Notification No.10/2005-ST dated 03/03/2005. W.e.f. 15/03/2005, Export of Service Rules, 2005 was enacted, which provides for definition of ‘export of service' and exemption from payment of service tax in respect of such exports subject to certain conditions. For the purpose of export of services, they have been categorized into three categories, namely –

(1) services provided in relation to any immovable property which is situated outside India [Rule 3(1) (i)];
(2) services provided where the place of performance is outside India [Rule 3(1)(ii)];and
(3) services other those specified in category (1) and (2) above, received by a person outside India [Rule 3(1) (iii)].

Services specified in Rule 3(1) (iii) may be provided either in relation to business or commerce or other than in relation to business or commerce. If such services are provided in relation to business or commerce, they should be provided to a recipient of services who is located outside India. If such services are provided other than in relation to business or commerce, they should be provided to recipient who is located outside India at the time of receipt of service and such services should be used outside India. It has been clarified in Board's Circular No. 111/5/2009-ST dated 24/02/2009 that in respect of services that fall under category (3) [Rule 3(1)(iii)], the relevant factor is the location of service receiver and not the place of performance. In this context the phrase used ‘outside India' has to be interpreted to mean that the benefit of service should accrue outside India. Thus, for category (3) service, it is possible that the export of service may take place even when all the relevant activities take place in India so long as the benefit of these services accrue outside India. Since the services rendered by them falls under category (3) and the recipient of the service is M/s. VIASYS, who is located outside India, the services rendered by them amounts to export of services as defined in Export of service Rules, 2005 and, therefore, they are not liable to pay any service tax during the impugned period.

As regards the demand of service tax for the period from 01/07/2003 to 19/11/2003 it has been clarified in Board's Circular No. 56/5/2003 dated 25/04/2003 that "Service tax is a destination based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax free even after withdrawal of Notification No. 6/99-ST dated 09/04/1999.

To support their contentions, they relies on the judgment of this Tribunal in the case of Em Jay Engineers vs. Commissioner of Central Excise, Mumbai 2010(20) STR 821 (Tri. – Mumbai) = (2010-TIOL-1200-CESTAT-MUM); Lenovo (India) Pvt. Ltd. vs. Commissioner of Central Excise, Bangalore 2010 (20) STR 66 (Tri. - Bang) = (2009-TIOL-911-CESTAT-BANG); and SGS India Pvt. Ltd.Vs. Commissioner of Service Tax, Mumbai 2011 (24) STR 60 (Tri.- Mumbai) = (2011-TIOL-666-CESTAT-MUM) . They also submit that the demand is barred by limitation of time as extended period has been invoked to demand service tax.

Respondent’s Contention: - The Respondent contended that the services relating to promotion/marketing of the medical equipment of the foreign supplier has been done in India and, therefore, it has to be presumed that the services are used in India. The Export of Service Rules clearly stipulate that the provision of any taxable services ought to be treated as export of services only when the following conditions are satisfied, namely,

(a) such services are provided from India and used outside India; and

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

In as much as the service has been rendered in India and used for the development of business in India, the condition relating to use outside India is not satisfied and, therefore, the activity of the appellant cannot be considered as ‘export of services' under the Export of Services Rules, 2005 as amended, and, therefore, he pleads for putting the appellant to terms.

Reasoning of Judgment: - The CESTAT held that the there is no dispute about the classification of service under "Business Auxiliary Services" in this case. The only issue for consideration is whether the services rendered by the appellant to the foreign service recipient is ‘export of service' during the impugned periods which is from 01/07/2003 to 19/11/2003 and from 18/03/2005 to 05/12/2007. By perused the International Distribution Agreement entered into by the appellant with M/s. VIASYS International Corporation, Pennsylvania, USA, they find that the appellant was required to render the following services in the states of Gujarat, Madhya Pradesh, Maharashtra, Goa and Chattisgarh in the Republic of India, namely,-

1) to purchase at least the minimum USD amount specified in the said agreement
2) to use its best efforts to promote and sell the products in the territory allocated which shall be in addition to the minimum purchase requirements;
3) to demonstrate the products to the prospective customers and also install such products at the customers' locations and to provide training to the customers for the proper use of such products;
4) to provide its customers with warranties in a prompt and thorough manner and to respond to warranty requests within 24 hours of its initial receipt.
5) to promptly and completely translate all user and technical manuals as well as such advertising and marketing materials as the foreign manufacturer may from time-to-time provide for use in the country for promotion of the products within the territory.

From the terms and conditions of the agreement, it is clear that the appellant was undertaking promotion and marketing of the goods manufactured by the foreign manufacturer, M/s. VIASYS International Corporation and also installation services, warranty services, advertising services etc. for the foreign principal. These services can be rendered by the appellant only within the territorial jurisdiction assigned which is in India and by the very nature of the services rendered, it is clear that the services were used within the territory of India.

Further they held that prior to 01/07/2003, Notification No.6/99-ST dated 28/02/1999 exempted services provided to any person in respect of which payment is received in Indian in convertible foreign exchange. The said notification was rescinded and subsequently re-issued vide Notification No. 21/2003-ST dated 20/11/2003 and this Notification remained in force till 14/03/2005. During the intervening period i.e. from 01/03/2003 to 19/11/2003, the Board clarified vide Circular dated 25/04/2003 that "Service tax is a destination based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax free even after withdrawal of Notification No.6/99, dated 09/04/1999." In the light of this clarification issued by the Board, the assessee has a prima facie, case for waiver of pre-deposit of dues adjudged for the period 01/07/2003 to 19/11/2003.

With regard to the period from 15/03/2005 onwards, it has to be seen whether the transaction undertaken by the assessee comes within scope of Export of Service Rules, 2005. During this period, under the Rules provided that a taxable service shall be treated as ‘export of service' only if such service so ordered is delivered outside India and used in business outside India. In the instant case, the service of promotion of marketing of goods manufactured by the supplier has taken place in India and the said service is for the purpose of promoting the business of the foreign manufacturer in India. Therefore, it cannot be said that the service has been delivered outside India and used in business outside India; therefore, the activity does not come within the scope of export of service during the period from 15/03/2005 to 18/04/2006.

As regards the period from 19/04/2006 to 28/03/2007, the Rules provided that any taxable service shall be treated as ‘export of service' when such service is delivered outside India and used outside India and payment for such service provided outside India is received by the service provider in convertible foreign exchange. In the instant case, though the condition of receipt of payment in convertible foreign exchange is satisfied, the conditions relating to delivery of service outside India and the use of the service outside India are not satisfied because the promotional activity undertaken by the service provider is in India and it can be used only in promoting the business in India. Therefore, the use of service is not outside India. The same position will prevail during the period up to 30/05/2007. Even for the period from 01/06/2007 onwards, the condition relating to service be provided from India and used outside India is not satisfied. Therefore, the demand of service tax for the period 18/03/2005 to 05/12/2007 appears to be prima facie correct in law.

Appellant has relied upon a few decisions of this Tribunal. In the case of Em Jay Engineers and Lenovo (India) Pvt. Ltd. (cited supra), the issue pertained to liability to service tax on the commission received for procuring orders in India and forwarding the same to their principals abroad. In that context, it was held that procurement of orders and forwarding the same to their principals abroad amount to delivery of service outside India and therefore, satisfies the definition of ‘export of service' and, hence, no service tax is leviable. As regards SGS India Pvt. Ltd (cited supra) the issue pertained to the period from 01/07/2003 to 19/11/2003 and based on the CBEC Circular, relief was granted. In the instant case also, they have already granted benefit of CBEC circular for the period 01/07/2003 to 19/11/2003. As far as the demand for the period thereafter, there is no delivery of service abroad in the instant case. When the appellant is undertaking the promotional activities by way of demonstration and installation of the foreign manufacturer's product in India and trains the customers in India for its use, there is no delivery outside India. Similarly when warranty services are undertaken, the usage of the service is in India. Thus the facts involved in the present case are substantially different and therefore, the ratio of the above cited judgment can not be adopted.

As regards the appellant's reliance of the Board's circular issued in 2009, the Board has clarified the matter further vide circular No. 141/10/2011-TRU dated 13-5-2011 which makes it very clear that to be considered as "used outside India", the effective use and enjoyment should be outside India. In the case of promotion/marketing of goods/services in India, which promotes the business in India of the client (who is located outside India), can it be said that the effective use and enjoyment is outside India. Hence such an interpretation would be totally irrational and illogical.

As regards the contention of the appellants that the demands are barred by limitation of time in as much as the show cause notices have been issued by invoking the extended period of time. It is their contention that they have not suppressed any facts from the department and have claimed the benefit of bonafide belief and have relied on a few judgments in support of this contention. In the case of M/s. Interscape [2006 (198) ELT 275], it was held that bonafide belief is not blind belief and a belief can be said to be bonafide only when it is formed after all the reasonable considerations are taken into account. The agreement itself contains a clause relating to "Responsibility for Taxes and Duties" which itself should have alerted the appellant about their tax liability and they should have taken appropriate steps to ascertain their liability either from the department or from experts on the subject. Further it is on record that the appellant is registered with the Service Tax Department for other services such as maintenance and repair and installation during the relevant period. Therefore, it can not be said that they were ignorant of the provisions of law relating to service tax. The appellant failed to obtain service tax registration under business auxiliary service, failed to pay service tax and also failed to file statutory returns for the said services. They did not disclose to the department about the existence of the agreement with VIASYS and receipt of consideration towards the service rendered. These acts of the appellant clearly constitute suppression of facts on their part, thereby attracting the invocation of extended period of time for demand of service tax.

It was further held that the appellant has not brought on record any evidence as to any financial hardship nor made nay plea to the said effect in their submissions. The Hon'ble High Court of Andhra Pradesh in the case of SQL Star International Ltd. [2012 (276) ELT 465 (AP)] = (2012-TIOL-146-HC-AP-ST) held that prima facie case, balance of convenience and irreparable loss of revenue has to be considered while considering application for stay. Stay cannot be granted merely on prima facie case being shown and balance of convenience must be clearly in favour of making of interim order, and there should not be the slightest likelihood of prejudice to interest of public revenue. In the present case, apart from the fact that no prima facie case has been shown, the balance of convenience lies clearly in favour of revenue. This Tribunal, being creature of statute, cannot ignore the statutory guidance while exercising the powers of interim stay.

Therefore the appellant has not made out a case for complete waiver of the pre-deposit of the dues adjudged. The demand for the period from 18-3-2005 to 5-12-2007 works out to slightly more than Rs. 50 lakhs. Accordingly, they direct the appellant to make a pre-deposit of Rs. 25 lakhs (Rupees Twenty Five lakhs only) within a period of eight weeks and report compliance on 10-9-2012. On such compliance, pre-deposit of balance amount of dues adjudged shall stand waived and recovery thereof stayed during the pendency of the appeal.

Decision: - The stay application was rejected.

Comment:- This is very important decision on export of service. It was common understanding that out of three criteria of export of service, the criteria of location of service recipient is satisfied when he is located outside India and foreign currency is received in India. However, in this decision, one more thing has come out that the service should be provided form India and used outside India. If it is used in India then the service tax is applicable.

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PJ/Case Laws/ 2012-13/ 1193

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