2017 (12) TMI 1653 - HC - Service Tax

Branch of Foreign Company - Management consultancy services - charges recovered in respect of the borrowed services from other Mckinsey entities - According to the case of the revenue, the appellant could not provide satisfactory explanation and supportive documents for OPE of an amount of ₹ 35,68,38,421/out of total sum of ₹ 40,82,55,661/for the period between October 1998 to March 2003 - inclusion of core documents charges, borrowed service charges as well as market research charges in assessable value - disallowance of abatement of traveling, lodging and boarding expenses - tax on miscellaneous expenses incurred on items other than traveling, lodging, boarding and described an infrastructural and establishment expenses - tax for payments received in foreign exchange - service tax on expenses incurred in procuring core document and borrowing other services from Head Office and other McKinsey entities for which no recovery was made from clients - expenses incurred on core documents and borrowed service charges of which recovery was made from the client - section 66 of the Finance Act,1994 - time limitation. Held that - As per subsection 4 of section 66, service tax can be levied at the rate of 5% of the value of the taxable services. Sub clause (r) of clause 48 of section 65 provides that the taxable service means any service provided to a client by management consultant in connection with the management of any organization in any manner. Section 67 deals with the valuation of taxable service for charging service taxes. Clause (q) of section 67 provides that in relation to service provided by management consultant to a client, the valuation of taxable service shall be on the basis of the gross amount charged by the such consultant from the client for services rendered in connection with the management of any organization in any manner. Thus, the service tax is required to be charged on the gross amount charged by the management consultant to his client. The case of the appellant is that to enable the appellant to render service to its client, it was necessary for the client to submit necessary data. As the client did not provide the data, the appellant was required to borrow the said data from other Mckinsey entities and other entities. As a matter of fact, the Appellate Tribunal found that no material has been placed on record to show that the data which is procured from other Mckinsey entities was required to be supplied by the client and that due to inability of the client to supply the said data, the appellant obtained it acting as an agent of the client. As per clause (q) of section 67 of the Finance Act,1994, service tax is payable on gross amount charged by the consultant. Thus, a finding of fact recorded is that the appellant procured data which its clients were not under an obligation to provide. The said data was acquired by the appellant for the purpose of rendering management consultancy services in India. It was used in India for rendering taxable service. Therefore, the amount charged to the client for core documents and other borrowed services is in fact on account of services rendered by the appellant in India. The said amount cannot be said to be payable on account of services rendered abroad. Therefore, we are unable to accept the submission that the taxable event did not occur in India and that the act of denying abatement amounts to invoking extraordinary territorial jurisdiction which is not in existence. The other contention which was canvassed was that the appellant has merely arranged services of their foreign entities for and on behalf of their clients and the consideration for making such arrangement is already included in the consultancy fees. This contention based on factual assertions has not been canvassed before the Appellate Tribunal - The contention sought to be raised is that the amount recovered from the customers is in the nature of reimbursement of expenditure and not for providing of service. This factual contention is not agitated before the Tribunal as there is no reference to the such contention raised in the impugned Judgment. Therefore, the same cannot be raised in this appeal. Appeal is dismissed as no substantial question of law is involved.

Issues Involved:
1. Disallowance of abatement of traveling, lodging, and boarding expenses due to insufficient documentary evidence.
2. Liability to pay service tax on miscellaneous expenses incurred on items other than traveling, lodging, boarding, described as infrastructural and establishment expenses.
3. Liability to service tax on payments received in foreign exchange.
4. Liability to service tax on expenses incurred in procuring core documents and borrowing other services from Head Office and other McKinsey entities for which no recovery was made from clients.
5. Liability to service tax on expenses incurred on core documents and borrowed service charges of which recovery was made from the client.
6. Limitation.

Detailed Analysis:

1. Disallowance of Abatement of Traveling, Lodging, and Boarding Expenses:
The CESTAT remanded the issue concerning the disallowance of abatement of traveling, lodging, and boarding expenses amounting to ?35,68,38,421 due to insufficient documentary evidence. The Tribunal found that further examination was required to ascertain the legitimacy of the claimed expenses.

2. Liability to Pay Service Tax on Miscellaneous Expenses:
The Tribunal also remanded the issue regarding miscellaneous expenses incurred on items other than traveling, lodging, and boarding, described as infrastructural and establishment expenses. The appellant contended that these expenses should be considered as Out of Pocket Expenses (OPE) and thus not subject to service tax. The Tribunal found that further investigation was necessary to determine the nature of these expenses.

3. Liability to Service Tax on Payments Received in Foreign Exchange:
The issue of liability to service tax on payments received in foreign exchange was also remanded by the Tribunal. The appellant argued that services rendered outside India should not be subject to service tax, relying on the circular dated 8th October 2001 issued by the Central Board of Excise and Customs and the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Limited vs. Director of Income Tax, Mumbai.

4. Liability to Service Tax on Expenses Incurred in Procuring Core Documents and Borrowing Other Services:
The demand of ?4,46,37,777 for expenses incurred in procuring core documents and borrowing other services from the Head Office and other McKinsey entities was set aside by the Tribunal. The appellant contended that these services were critical to the job undertaken and should not be subject to service tax. The Tribunal agreed, finding that the appellant acted as an agent of its principal in providing these services.

5. Liability to Service Tax on Expenses Incurred on Core Documents and Borrowed Service Charges of which Recovery was Made from the Client:
The Tribunal confirmed the service tax demand of ?1,09,81,778 for expenses incurred on core documents and borrowed service charges for which recovery was made from the client. The appellant conceded that charges recovered towards expenses paid to the Head Office in respect of core documents and borrowed service charges could be charged to service tax. However, they argued that charges recovered in respect of borrowed services from other McKinsey entities should not be subject to service tax. The Tribunal found that the appellant did not provide sufficient evidence to show that the data procured from other McKinsey entities was required to be supplied by the client.

6. Limitation:
The Tribunal upheld the invocation of the extended period of limitation, finding that the appellant did not have a bona fide belief that core document charges, borrowed service charges, and market research charges would be considered as OPE. The Tribunal noted that the appellant did not declare the gross amount received from the client and claim abatement on the basis of documents. The argument that the appellant had a bona fide belief was rejected, and the Tribunal found that the extended period of limitation was rightly invoked.

Conclusion:
The appeal was dismissed as no substantial question of law was involved. The Tribunal's findings were based on the factual matrix and the appellant's concessions regarding certain charges. The issues concerning abatement of expenses and liability to service tax on foreign exchange payments were remanded for further investigation. The Tribunal upheld the service tax demand on core documents and borrowed service charges recovered from clients and confirmed the invocation of the extended period of limitation.

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