w w w . L a w y e r S e r v i c e s . i n


Kusum Healthcare Pvt. Ltd V/S C.C.E., Jaipur-I

    Service Tax Appeal No. ST/57891/ 2013 - ST [DB] (Arising out of Order-in-Original No. 9/2013(ST)-CE dated 28.02.2013 passed by the Commissioner, Central Excise, Jaipur-I), Service Tax Appeal No. ST/51216/2014- ST [DB] (Arising out of Order-in-Original JAI-EXCUS-001-COM-072-13-14 DATED 31.10.2013 passed by the Commissioner, Central Excise, Jaipur-I) and Final Order Nos. 50314-50315/2018
    Decided On, 12 January 2018
    At, Customs Excise Service Tax Appellate Tribunal Principal Bench New Delhi
    By, THE HONORABLE JUSTICE: S.K. MOHANTY
    By, MEMBER AND THE HONORABLE JUSTICE: B. RAVICHANDRAN
    By, MEMBER
    For Petitioner: B.L. Narasimhan and Narender Singhvi, Advocates And For Respondents: G.R. Singh, D.R.


Judgment Text

1. These two appeals are on identical set of dispute and are accordingly taken up together. The appellants are engaged in the manufacture and export of pharmaceutical products. They are a recognized EOU having established offices in many countries to help promote marketing of their products. The appellant is a single legal entity having branches in these countries. The dispute in the present appeals relates to two issues mainly Service Tax liability on the expenditure incurred by the appellant in setting up of certain branch offices in foreign countries like Bangladesh, Ukraine etc., which is sought to be taxed under Business Auxiliary Service on reverse charge basis and secondly, advertising services availed by the appellant in pursuance of contract with various foreign service providers who advertised and promoted the product of the appellant in foreign countries. This is sought to be taxed on reverse charge basis as advertisement services. The period involved in both the proceedings is from 18.04.2006 to 30.06.2012. The original authority confirmed Service Tax liability on both counts alongwith penalties under Section 76, 77 & 78 of the Finance Act, 1994.

2. The Ld. Counsel appearing for the appellant mainly submitted on the following lines:-

(a) Neither the show cause notice nor the impugned orders explained the reasons to tax them under these two categories. The show cause notice simply reproduced the statutory provision and sought to demand Service Tax and impose penalties. Even the impugned orders did not explain the different components of tax liability statutorily and did not even segregate the tax liability under these two services for liability on reverse charge basis. According to Ld. Counsel the impugned proceedings suffered from vagueness and violation of principles of natural justice. However, he said based on the case laws and the facts available with them, he would like to submit on merits of the case. Explaining the appellants view on tax liability under business auxiliary service, the Ld. Counsel submitted that the tax now confirmed is only attributable to the expenses incurred by the appellant in setting up and running the branch offices established in foreign countries. The Revenue held a view that such branch offices are involved in business promotion of the product exported by the appellant and as such, all these expenses will have to be taxed under BAS on reverse charge basis. He submitted that establishing a branch office and spending on running of these offices, per se cannot be a business promotion. Even otherwise, it is clear that the branch offices engaged in helping the appellant to promote the product and spreading their business in foreign countries and are not doing a service to any other person and if at all the promotion of business is to self. He submitted that the interpretation of Section 66 A (2) alongwith explanation appended therein has been wrongly made by the impugned orders. He relied on the decision of the Tribunal to support that there can be no Service Tax on self service even under the concept of reverse charge.

(b) Regarding Service Tax under advertisement services on reverse charge basis though, the appellant submitted that same should be considered as a service rendered and consumed abroad. He more forcefully contested on the demand being not sustainable due to the fact that the whole exercise is revenue neutral. The appellant is a registered manufacturer in India and admittedly they could have availed the benefit of tax even if paid on reverse charge, either by refund or by utilizing the same. In such situation, there can be no demand or a demand at-least cannot be for extended period invoking mala fide intent to evade payment of duty.

(c) He also mentioned that repeat notices were also issued covering part of extended period and confirming penalties under Section 78 which are not legally sustainable.

3. The Ld. AR reiterated the findings of the impugned order. He submitted that the explanation to proviso to Section 66A makes it clear that the branch office located in foreign country should be treated as a separate legal establishment for tax purposes. Accordingly, the tax liable on the appellant as confirmed by the lower authorities is legally sustainable. Regarding advertisement services, he submitted that it is a category (iii) service as mentioned in Rule 3(1) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. He submitted that the possibility of credit being available to the appellant itself will not take away the tax liability.

4. We have heard both sides and perused appeal records.

5. On the first issue regarding tax liability of the appellant on reverse charge basis under the category of business auxiliary service, we note that the whole Service Tax liability was confirmed on the expenses incurred for setting up and running the branch offices in foreign countries by the appellant. The branch offices were engaged in activities of promoting and liaisoning the business of the appellant in such countries. The lower authority held that such activity will be taxed under BAS as these branches are engaged in promotion and marketing of goods of the appellant. In this connection, we have perused the provisions of Section 66A, more specifically the proviso to the said Section. The statutory provisions are reproduced below:-

"66A. Charge of service tax on services received from outside India-

(1) Where any service specified in clause (105) of section 65 is,-- is,--

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India,

such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:

Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Explanation 1.-- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Explanation 2.-- Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted."

6. We find that the Revenue has taken a stand that since as per the proviso, a branch office located outside India shall be treated as a separate business establishment, the services rendered by such establishment should be treated for tax liability. In this connection, we note, similar dispute came before the Tribunal for tax liability under the very same tax entry in Torrent Pharmaceutical Ltd. - 2015 (39) S.T.R. 97 (Tri.-Ahmd.). The issue of the expenditure incurred by the appellant with reference to the branch office located abroad, which was involved in activities, which may fall under business auxiliary service was considered by the Tribunal. The Tribunal observed as below:-

"5.3 On the issue of demand of service tax of Rs. 11,56,32,589/- with respect to remittances made by the appellant to branch offices, both sides have relied upon the case law of M/s. British Airways v. CCE (Adj.) Delhi : 2014-TIOL-979-CESTAT-MUM]. It is the case of the appellant that nearly Rs. 7 crore demand is with respect to salary of the employees of the appellant working in the foreign branch offices, treating the branch offices/establishments as service providers held by Revenue as a separate legal entities under the provisions contained in Section 66A(2) of the Finance Act, 1994. Senior Advocate appearing on behalf of the appellant strongly argued that in the light of provisions contained in Section 66A(2) of the Finance Act, 1994, the explanation-I has to be read only to clarify the place of services provided and not for the purpose of creating another service tax liability for an activity provided to self. For the remaining demand of service tax, it is the case of the appellant that this demand pertain to services availed abroad by the branch offices/establishments as separate legal entities, on which VAT/GST of the relevant country was discharged by branch offices directly and receipt of these services is nothing to do with the appellant situated in India. It was fairly agreed by the learned Advocate that where local VAT/GST of a foreign country was not paid by the branch offices and billing was directly made by the foreign service providers to the appellant then in such cases service tax on reverse charge basis is required to be paid, which is being paid by the appellant even if the payment of such services availed and consumed in India were routed either through appellant's branch office or distributors.

5.4 Before giving our observations, it is relevant to glance through the provisions of Section 66A(1) of the Finance Act, 1994 reproduced below:-

"66A. Charge of service tax on services received from outside India.-

(1) Where any service specified in clause (105) of section 65 is,

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:

Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Explanation 1. - A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Explanation 2. - Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted."

5.5 Section 66A (1) above is talking of service provider and service recipient as 'persons' which has to mean as different business persons. Section 66A(2) and its Explanation I only make a clarification and to fix service tax liability on recipient of services under reverse charge mechanism that both the permanent establishments in India and abroad of a business person are to be treated as separate persons. The above clarification/distinction made in Section 66A in our opinion is only for making an identification to determine whether a service is provided and consumed in India or abroad. It is an accepted legal position that one cannot provide service to one's own self. If the 'permanent establishment' of the appellant abroad is treated as a service provider to its own head office in India then it will amount to charging service tax for an activity provided to one's own self. Similarly placed branches of the appellant undertaking similar activities in India will not be held so. Therefore, a comprehensive reading of Section 66A of the Finance Act, 1994, a permanent establishment situated abroad as a 'separate person', will be understood to have been prescribed only to determine the provision of service whether in India or out of India. Theoretically it could be possible that a person carrying business through a permanent establishment abroad may like to pay lower rate of local VAT/GST abroad to avoid service tax payment in India by showing the services to have been availed abroad. However, there is no likelihood of such avoidance in case of an assessee who is eligible to Cenvat credit in India for the service tax payable in India for which the assessee is entitled to Cenvat credit. It is also not the case of the of the Revenue that appellant is not capable of utilising Cenvat credit admissible as they have paid more than Rs. 12,000 crores as taxes during the periods 2007-2008 to 2011-2012.

7. The matter came up before the Tribunal again in the case of Milind Kulkarni : 2016 (44) STR 71 (Tri.- Mum.). The Tribunal after examining the earlier decision observed as below:-

"19. The appellant-assessee has established branches for furthering its commercial objectives. The benefit of assigned activities of the branch will, undoubtedly, accrue to the appellant. There is no dispute that it is the appellant-assessee who enters into contractual agreements with overseas customers for supply of 'information technology services' which have 'off-shore' components rendered directly to the overseas entity by the appellant-assessee. 'On-site' activity is undertaken by deputing employees working at the site of the customer. These employees are, without doubt, on the rolls of the appellant-assessee which, save for the specific and limited role of Section 66A(2), encompasses the branches within its corporate structure. As Section 66A(2) is limited to being a charging section in a specific context, it is not elastic enough to govern the corporate intercourse and commercial indivisibility of a headquarters and its branches. Therefore, any service rendered to the other contracting party by branch as a branch of the service provider would not be within the scope of Section 66A. Merely because there is a branch and that branch has, in some way, contributed to the activities of the appellant-assessee in discharging its contractual obligations, the definition of 'business auxiliary service' in Section 65(19) of Finance Act, 1994 may not apply. That is where the impugned order has erred in not reading Section 65(105) along with Section 66A and Rules framed for the purpose of charging tax on services received from abroad. Unless both are applied together, the jurisdiction to tax would be in question.

...................................................

...................................................

23. The catena of judgments cited for both sides, viz., British Airways v. Commissioner of Central Excise (Adjn) : 2014-TIOL-979-CESTAT-Del : 2014 (36) S.T.R. 598 (Tri.-Del.)], Torrent Pharmaceuticals Ltd. v. Commissioner of Service Tax : 2015 (39) S.T.R. 97 (Tri.-Ahmd.)] and Infosys Ltd. v. Commissioner of Service Tax : 2014-TIOL-409-CESTAT-Bang : 2015 (37) S.T.R. 862 (Tri.-Bang.)] does support the proposition that a service is taxable under Section 66A of Finance Act, 1994 only when such service is rendered in India. The question that arises then in the context of the present dispute is whether the branch renders a service is rendered in India within the meaning of the above statutory provisions. A forced disaggregation merely for the purpose of tax when similar domestic structures are not taxed and when commercial soundness calls for establishment of branches would be clearly inequitable.

24. Hence, the legislative intent of this legal fiction may have to be ascertained. In doing so, the goals of the appellant as an exporter cannot be far from our mind.

25. Section 66A requires taxing of taxable services rendered by an overseas branch to its head office and the two sets of Rules limit tax demand only to the extent that these services are received in India in relation to business or commerce. A plain reading would make it apparent that the services referred to must be for pursuit of business or commerce in India. The two sets of Rules provide for availment of Cenvat credit of the tax paid by the Indian entity on 'reverse charge basis.' As an exporter, the Indian entity is entitled to claim refund of taxes lying unutilized in Cenvat credit account. There is no dispute that the activities of the branch are in connection with the export activity of the appellant-assessee. That the legislature would prescribe the collection of a tax merely for the purpose of refunding it subsequently does not pass the test of reason. More so, as there is no inference of any monitorial aspect in undertaking such an exercise. An exporter who operates through branches is clearly not the target of the legal fiction of branches being distinct from head office. The proposition that the intent of Section 66A in taxing the activity rendered by an overseas branch to its headquarters in India is limited to the local commercial or business activities of the head office is thereby confirmed. Consequently, mere existence as a branch for the overall promotion of the objectives of the primary establishment in India which is essentially an exporter of services does not render the transfer of financial resources to the branch taxable under Section 66A."

8. The ratio of the above decision and also the close reading of the proviso to Section 66 A alongwith explanation therein is make it clear that the legal fiction of considering a branch of an assessee as a separate establishment is not to tax a service rendered to its head office. Further, here there is no such service also has been identified with supporting evidence.

9. We fi

Please Login To View The Full Judgment!
nd that the ratio adopted by the Tribunal in examining the application of the said proviso is appropriate to the facts of the present case and accordingly, we hold that the tax liability under BAS cannot be sustained. We note here that the whole expenses now sought to be taxed are only with reference to setting up, running and also expenses of that branch incurred by the appellant and not relating to any expenditure in their branches with reference to BAS. 10. With reference to tax liability of the appellant on advertising service on reverse charge basis, we note that the advertisement services are specifically mentioned as category (iii) services in the 2006 Rules. It is clear that statutorily such services are considered for taxation based on the location of the service recipient. Such being the clear position as per law in the present case the services being utilized by the appellant as a manufacturer of the said goods, which are exported and marketed in the places where the advertisement are held, we hold that the tax liability on such services are correctly made against the appellant on reverse charge basis. However, we note that the appellants have a strong case on limitation as the whole tax paid on such is apparently eligible for credit for the appellant. In such situation, we note, the Tribunal has been consistently held that there can be no question of intention to evade or the existence of any ingredient for invoking demand for extended period. In this connection, we refer to a recent decision in NR Management Consultants Ltd. India Pvt. Ltd. -Final order No. 58317-58318/2017 dated 08.12.2017. The ratio followed in the said decision has been adopted in various other decisions also. Accordingly, while upholding the tax liability, we hold the same should be restricted to the normal period. For the same reasoning, penalties imposed on the appellant shall not be sustained. The same are set aside. 11. In view of the above discussion and analysis, the appeals filed by the appellant are partly allowed. The appellant shall be eligible for consequential relief, as per law.
O R