2017 (9) TMI 632 - HC - Service Tax

Refund of unutilised CENVAT credit - export of services - place of supply - telecommunication services or business support services - denial on the ground that the services provided by Verizon India do not qualify as export of services as they are provided within India - arrangement between related persons - rejection also on the ground of time limitation. Held that - When the Master Supply Agreement between Verizon India and Verizon US is examined, it is plain that the recipient of the service is Verizon US and it is Verizon US that is obliged to pay for the services provided by Verizon India. The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers use the services provided by Verizon India. Indeed in the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former s subscribers. Yet, the recipient of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the users of the services provided by Verizon India but are not its recipients. Circular No. 141/10/2011 dated 13th May, 2011 also throws light on this aspect - It was clarified that the words accrual of benefit was not restricted to mere impact on the bottom-line of the person who pays for the service. It had to be given a harmonious interpretation in the context where the effective use and enjoyment of the service has been obtained. The position becomes even clearer in the post July 2012 period during which the POPS Rules 2012 apply. As already noted provision of telecommunication services does not have a specific rule and so Rule 3 of the POPS Rules, which is the default option, applies. In terms thereof, the place of provision of telecommunication service shall be the location of the recipient of service. Decision in the case of Paul Merchants Ltd v. CCE, Chandigarh 2012 (12) TMI 424 - CESTAT, DELHI (LB) followed. The Department was also not justified in characterising the arrangement of provision of services as one between related persons viz., Verizon India and Verizon US. In doing so the Department was applying a criteria that was not stipulated either under the ESR or Rule 6A of the ST Rules. The denial of the refund of the Cenvat credit to Verizon India and the raising of a demand of service tax on the consideration received by it for export of telecommunication services to Verizon US are not sustainable in law - petition allowed - decided in favor of petitioner.

Summary

Issues Involved:
1. Classification of services provided by Verizon India.
2. Determination of whether the services constitute "export of services."
3. Eligibility for refund of unutilized Cenvat credit.
4. Validity of the show cause notice demanding service tax.

Detailed Analysis:

1. Classification of Services Provided by Verizon India:
Verizon India contended that it provided "Business Support Services" to Verizon US, while the Department classified these as "telecommunication services." Both classifications fall under the same export criteria, making the distinction irrelevant for the refund claims. The services included Local Access, Bandwidth, and MPLS VPN for data transfer, not voice/telephony services.

2. Determination of Whether the Services Constitute "Export of Services":
The court examined the Master Supply Agreement and concluded that the recipient of the service was Verizon US, located outside India. The payment for the services was received in convertible foreign exchange. The court emphasized that the service tax is a destination-based consumption tax, and the recipient of the service is determined by the contractual relationship, not the location of the end users (customers of Verizon US).

Pre-July 2012 Criteria:
- The service recipient must be located outside India.
- Payment for the service must be received in convertible foreign exchange.
- The place of provision of service is determined by the location of the recipient.

Post-July 2012 Criteria (Rule 6A of ST Rules):
- The provider of service is located in the taxable territory (India).
- The recipient of service is located outside India.
- The service is not specified in the negative list.
- The place of provision of the service is outside India.
- Payment for the service is received in convertible foreign exchange.
- The provider and recipient are not merely establishments of a distinct person.

3. Eligibility for Refund of Unutilized Cenvat Credit:
The court found that Verizon India fulfilled the conditions for export of services both pre and post-July 2012. The denial of refund by the Department was based on an incorrect application of Circular No. 90/1/2007, which was superseded by Circular No. 96/7/2007. The court held that the services provided by Verizon India to Verizon US qualified as export of services, making them eligible for the refund of unutilized Cenvat credit.

4. Validity of the Show Cause Notice Demanding Service Tax:
The court set aside the show cause notice dated 11th November 2016, which demanded service tax on the amounts received by Verizon India from Verizon US. The court held that the services provided were export of services and not amenable to service tax. The Department's reliance on the Circular dated 3rd January 2007 was misplaced, and the subsequent Circular dated 23rd August 2007 had repealed it.

Summary of Conclusions:
(i) The classification of services as "telecommunication services" or "business support services" is irrelevant for the export criteria.
(ii) The provision of telecommunication services by Verizon India during the relevant period complied with the export criteria.
(iii) Utilization of Indian telecom service providers did not affect the export status of the services.
(iv) The recipient of the service was Verizon US, and the place of provision was outside India.
(v) Circular dated 3rd January 2007 was not applicable and was wrongly applied by the Department.
(vi) The services satisfied the conditions under Rule 6A of the ST Rules post-July 2012, qualifying as export of services.

Conclusion:
The court allowed the petitions, setting aside the impugned orders denying the refund of Cenvat credit and the show cause notice demanding service tax. Verizon India is entitled to the refund of Cenvat credit along with interest, and the Department must process and issue the refund without delay. The petitions were allowed with no orders as to costs.