2016 (3) TMI 139 - AT - Service Tax

Import of services - Advertising Agency services - Appellant manufactured pharmaceutical products and exported to Ukraine under an agreement for market promotion and publicity - Demand raised considering the services as advertising agency services taxable under Section 65 (105)(e) of Finance Act, 1994 - Held that the goods are manufactured by the appellant and has deemed the services rendered in Ukraine to have been imported into India for business and commerce. The scheme of deeming of import of services for taxation, can be reasonably inferred that the business or commerce in Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not intended tax services that are rendered in connection with business or commerce outside the territory of India. Since the appellant has no requirement of advertising agency service for manufacture and export of goods, the tax demanded in the impugned order is not on the consideration for a service received in India but a tax on the funds transferred in a cross-border transaction. Such a tax is not contemplated in Finance Act, 1994. Therefore, no Service tax can be demanded. - Decided in favour of appellant

Summary

Issues Involved:
1. Liability of service tax under section 66A of Finance Act, 1994.
2. Classification of services received as 'advertising agency service.'
3. Application of Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
4. Eligibility for tax exemption or rebate for services related to export.

Issue-wise Detailed Analysis:

1. Liability of Service Tax under Section 66A of Finance Act, 1994:
The appellant, M/s. Genom Biotech Pvt Ltd., was held liable to service tax of Rs. 2,38,50,339 as the recipient of 'advertising agency service' from providers based abroad, under section 66A of Finance Act, 1994. The demand pertains to the period from 18th April 2006 to 31st March 2008. The adjudicating authority restricted the tax liability to the period after 18th April 2006, as the taxable service was rendered by a provider based outside India, and tax collection on a 'reverse charge' basis could be effected only from that date due to the absence of a legally valid mechanism prior to it.

2. Classification of Services Received as 'Advertising Agency Service':
The agreements with M/s Biogenetica Ltd, M/s Nicocardia Ltd, and M/s Selesta Holding Company Ltd involved market promotion and publicity for the appellant's pharmaceutical products exported to Ukraine. The adjudicating authority concluded that these services were taxable under section 65(105)(e) of Finance Act, 1994, as 'advertising agency service.' The agreements indicated that the overseas entities were required to market and promote the sale and distribution of the appellant's products, which involved advertising activities. The adjudicating authority noted that M/s Selesta was expressly contracted to prepare advertising material for different media, and the appellant had a proprietorial interest in the prepared material.

3. Application of Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006:
The primary contention in the appeal was that no service was rendered in India, and hence tax liability should not arise. The appellant argued that the payments were reimbursements for publicity material paid on their behalf by the three entities. However, the adjudicating authority and the learned Authorized Representative emphasized that Rule 3(iii) provides that all residuary services shall be liable to tax if provided to a recipient in India for use in relation to business and commerce. The agreements and statements of the Manager (Taxation) and a Director demonstrated that the beneficiary of the advertising campaign was the appellant, and the payments were not merely reimbursements.

4. Eligibility for Tax Exemption or Rebate for Services Related to Export:
The appellant, being a 100% Export Oriented Unit, argued that they should be exempt from tax as the services were related to the export of goods. The Tribunal noted that services utilized in exports are entitled to a rebate of tax paid on such input services under section 93A of Finance Act, 1994. However, the services in question were not directly connected with the manufacture or transport of goods within India but were related to market promotion in Ukraine. The Tribunal concluded that taxing such services would be contrary to the objectives of export promotion and would not align with the legislative intent to tax domestic consumption of goods and services.

Conclusion:
The Tribunal set aside the impugned order, concluding that the tax demanded was not in accordance with law. The services rendered by the Cyprus-based entities were related to business activities outside India and were not required for any activity within India. Therefore, the tax liability under section 66A of Finance Act, 1994, was not applicable to the appellant for the services received from abroad for promoting their exports. The demand of tax on the appellant was deemed to be a tax on funds transferred in a cross-border transaction, which is not contemplated in Finance Act, 1994.