2016 (9) TMI 191 - AT - Service Tax

Import of services - taxability of services rendered by subsidiaries to the parent company reverse charge mechanism - section 66A of Finance Act, 1994 - are branches and head offices separate entities so as to attract service tax on outflow by head office to branches? - Held that - 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. A branch, by its very nature, cannot survive without resources assigned by the head office. The business of the appellant assessee is such that credibility in the eyes of its overseas clients lies in the name and style of the appellant assessee. It cannot be substituted by any other entity. The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business. The economic survival of the branch is entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office. The transfer of funds by gross outflow or by netted inflow is, therefore, nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 demand of tax and interest set aside imposition of penalties on appellant and other officers set aside appeal allowed decided in favor of appellant.

Issues Involved:
1. Status of overseas branches vis-à-vis the head office.
2. Jurisdiction to classify the services under section 65(105) of Finance Act, 1994.
3. Receipt of business auxiliary service by the assessee-appellant from its branches.
4. Inclusion of reimbursable expenses for computation of gross receipts under section 67 of Finance Act.

Issue-wise Detailed Analysis:

1. Status of Overseas Branches vis-à-vis the Head Office:
The Tribunal held that the branch and head office are distinct entities for the purpose of taxation under the Finance Act, 1994. The law relating to taxation of service is constitutionally restricted to India, and the incidence of tax on services is to be borne by the recipient of service while the levy is enforced on the provider of service. As a result, a branch located outside India is considered an entity distinguishable from its head office for taxation purposes. The Tribunal emphasized that activities of the overseas entity cannot be classified under section 65(105) of the Finance Act, 1994, as tax authorities lack jurisdiction to scrutinize such activities.

2. Jurisdiction to Classify the Services Under Section 65(105) of Finance Act, 1994:
The Tribunal noted that the classification of services under section 65(105) of the Finance Act, 1994, cannot be applied to activities of an overseas branch. The Tribunal referred to decisions in Torrent Pharmaceuticals Ltd v Commissioner of Service Tax Ahmedabad and KPIT Cummins Infosystems Ltd v Commissioner of Central Excise, Pune-I, which support the view that services taxed by another state should not be taxed under Indian laws. The Tribunal concluded that the activities of overseas branches should not be scrutinized for classification under Indian tax laws unless the tax liability of the assessee is mitigated on grounds of tax discharge abroad.

3. Receipt of Business Auxiliary Service by the Assessee-Appellant from its Branches:
The Tribunal examined section 66A of the Finance Act, 1994, which taxes services received by an assessee as though the assessee has provided the service to itself. The Tribunal found that the business auxiliary service rendered by the branch office must establish receipt of service in India. The Tribunal highlighted that the appellant-assessee's branches are established to further its commercial objectives, and any service rendered by the branch to the head office would not fall within the scope of section 66A. The Tribunal concluded that the impugned order erred in not reading section 65(105) along with section 66A and the relevant Rules.

4. Inclusion of Reimbursable Expenses for Computation of Gross Receipts Under Section 67 of Finance Act:
The Tribunal held that the transfer of funds from the head office to the branch is essentially reimbursement and not consideration for taxable services. The Tribunal emphasized that taxing such reimbursements would amount to taxing the transfer of funds, which is not contemplated by the Finance Act, 1994. The Tribunal noted that the appellant-assessee's activities are in connection with export activities, and the legislative intent of section 66A does not include taxing activities related to exports. Consequently, the Tribunal concluded that the demand for tax on reimbursements is without authority of law.

Conclusion:
The Tribunal allowed the appeals, setting aside the demand for tax and penalties imposed on the assessee-appellant and its principal officers. The Tribunal concluded that the activities of the overseas branches related to export activities do not fall within the scope of section 66A of the Finance Act, 1994, and taxing such activities is not justified.

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