2017 (1) TMI 437 - AT - Service Tax

100% EOU - export of services - reverse charge mechanism - section 66A of Finance Act - Business Auxiliary Services - expenditure incurred on marketing and promotion of their software package outside India - commission to foreign service providers - are the services obtained by overseas branches of appellant are liable to tax under section 66A of Finance Act, 1994? - Held that - receipt of service for use in relation in business or commerce which would, in most circumstances, be the key to determine if service was rendered to the recipient. There is no doubt that, on export, the scheme of taxation divests the tax element. Services rendered by foreign provider are subject to tax by the deeming fiction in section 66A of Finance Act, 1994 that recipient is the provider of the service. The objective of taxing such services in relation to domestic activities of a recipient is well within the scheme of levy of service tax. Utilization of services which are patently in relation to goods/services that have already been exported, it goes against the grain of procedural simplicity to collect the tax by deeming fiction merely for refunding it subsequently. From this it would appear that the reference to business or commerce in rule 3(iii) in Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is restricted to business and commerce in India not to business and commerceoutside India. We find no allegation in the notice or conclusion in the impugned order that service have not been used for business or commerce outside India. The services obtained by overseas branches of appellant are not liable to tax under section 66A of Finance Act, 1994 - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Taxability of services received by overseas branches under 'reverse charge' mechanism.
2. Applicability of section 66A of Finance Act, 1994.
3. Relationship between branch and head office for tax purposes.
4. Application of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006.
5. Determination of recipient of service and location of service use.
6. Consideration of accounting standards in tax liability.

Issue-wise Detailed Analysis:

1. Taxability of Services Received by Overseas Branches under 'Reverse Charge' Mechanism:
The appellant, M/s 3i Infotech Ltd, incurred expenses for consultancy and professional services through its overseas branches, which were assessed for tax under the 'reverse charge' mechanism as 'business auxiliary services.' The demand for the period from 1st April 2006 to 31st March 2011 was confirmed, while demands for periods before 18th April 2006 were abated due to the absence of section 66A in the Finance Act, 1994.

2. Applicability of Section 66A of Finance Act, 1994:
Section 66A was invoked to tax the services received by the appellant's overseas branches. The adjudicating authority held that the appellant was liable under section 66A as the recipient of services. However, the appellant contended that the expenses incurred by the branches outside India should not be taxable in the hands of the appellant in India.

3. Relationship Between Branch and Head Office for Tax Purposes:
The appellant argued that the overseas branches are separate entities bound by the statutes of their respective countries, thus the services used by the branches do not imply that the appellant is the recipient. The Tribunal referred to the decision in British Airways v. Commissioner of Central Excise, which treated branches and head offices as separate entities under section 66A(2) of the Finance Act, 1994.

4. Application of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006:
The adjudicating authority did not sufficiently examine the nature of transactions for which payments were made by the Dubai branch. The Tribunal noted that the Rules require the recipient to be located in India for tax liability to arise, which was not established in the impugned order.

5. Determination of Recipient of Service and Location of Service Use:
The Tribunal emphasized that the services must be received in India for use in business or commerce within India to attract tax under section 66A. The adjudicating authority failed to demonstrate that the appellant was the recipient of services or that the services were used in India. The Tribunal referred to its decision in Tech Mahindra, which clarified that the mere inclusion of branch financials in the corporate entity's accounts does not suffice to conclude tax liability.

6. Consideration of Accounting Standards in Tax Liability:
The Tribunal highlighted that accounting standards mandate the inclusion of branch financials in the corporate entity's accounts, but this does not imply that services were rendered to the Indian headquarters. The impugned order lacked a robust examination of the nature of transactions and the relationship between the appellant and its branches.

Conclusion:
The Tribunal concluded that the evidences presented did not support the finding that services obtained by overseas branches were liable to tax under section 66A of the Finance Act, 1994. Consequently, the appeals were allowed, and the demands were set aside.

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