2022 (2) TMI 411 - AT - Service Tax

Classification of goods - whether footwear, in respect of which patterns and designs were received by the appellant, is an article intended to be worn by human beings? - fashion designing services would fall under rule 3(ii) of the Import Rules or not - HELD THAT - There can possibly be no doubt that footwear is worn by human beings. The Tribunal in M/S VIROLA INTERNATIONAL VERSUS COMMISSIONER, CUSTOMS, CENTRAL EXCISE SERVICE TAX, KANPUR 2018 (8) TMI 23 - CESTAT ALLAHABAD also examined this precise issue. The appellant therein had paid certain amount to an entity outside India towards collection and development of samples of footwear and footwear components, which samples were used by them for display before the overseas buyers for obtaining export orders. The appellant contended that it was manufacturing footwear and the service received by it would be fashion designing service since the activity was in relation to any other articles intended to be worn by human beings . The adjudicating authority accepted this contention of the appellant and further held, that in view of the provisions of rule 3(ii) of the Import Rules, it was not taxable under the reverse charge mechanism. What needs to be noticed is that in the earlier round of proceedings concerning the previous years for which the appellant had claimed refund of the amount paid as service tax under fashion designing services as it was not required to pay tax, the classification of the service received by the appellant as falling under fashion designing was not disputed by the Department. The Department cannot now be permitted to classify the same element of service provided to the appellant under a different head in subsequent proceedings - It is also not possible to accept the contention of the learned authorized representative appearing for the Department that footwear articles would be covered under consumer goods and, therefore, would fall in the definition of design services . When a footwear is worn by human beings it is specifically covered under any other articles intended to be worn by human beings and, therefore, any activity relating to footwear would be covered by fashion designing services. Paragraph 3 does not limit the fashion designing services to articles made up of clothes. Infact, it specifically provides that a fashion designer may be involved in designing of any goods which are intended to be worn by human beings. Paragraph 4 deals only with a specific query raised as to whether tailors and jewellers will be covered under the service tax. It does not talk about a manufacturer of leather footwear for women. Whether fashion designing services would fall under rule 3(ii) of the Import Rules? - HELD THAT - The fashion designing services fall under section 65(105)(zv) of the Finance Act and, therefore, would be covered in the second category of rule 3(ii) of the Import Rules. These services are performed outside India and, therefore, cannot be made taxable under rule 3(ii) of the Import Rules. In this connection reliance has been placed on the decision of the Tribunal in INTAS PHARMACEUTICALS LTD. VERSUS COMMISSIONER OF SERVICE TAX, AHMEDABAD 2009 (5) TMI 73 - CESTAT, AHMEDABAD , wherein it has been held that if services are entirely provided outside India, the proviso to rule 3(ii) of the Import Rules is not applicable and no tax can be levied on the same. Such being the position, the impugned order cannot be sustained - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of services received by the appellant.
2. Applicability of rule 3(ii) of the Taxation of Service (Provided from Outside India and Received in India) Rule, 2006.
3. Invocation of the extended period of limitation under section 73(1) of the Finance Act.
4. Consistency in classification by the Department for different periods.

Detailed Analysis:

1. Classification of Services Received by the Appellant:
The primary issue revolves around whether the services received by the appellant should be classified under "fashion designing" services or "design services." The appellant, engaged in the manufacture and export of leather footwear for women, availed services like prototypes, designs, and patterns from foreign parties. The appellant argued that these services should be classified under "fashion designing" as defined under section 65(43) of the Finance Act, which includes activities related to creating designs and preparing patterns for articles intended to be worn by human beings, including footwear.

The Department, however, contended that the services should be classified under "design services" as defined under section 65(36b) of the Finance Act, which includes services related to designing consumer products. The Department argued that "design services" is a more specific description compared to "fashion designing."

The Tribunal examined the nature of services provided, which included procurement and development of samples, providing various types of prototypes, designs, and patterns for footwear. It noted that "fashion designing" services deal with designing articles intended to be worn by human beings, which includes footwear. The Tribunal also referred to a previous decision in Virola International, where similar services were classified under "fashion designing."

2. Applicability of Rule 3(ii) of the Import Rules:
The appellant argued that according to rule 3(ii) of the Import Rules, "fashion designing" services are taxable in India only when performed in India. Since the services were performed outside India, the appellant contended that no service tax liability arose.

The Tribunal agreed with the appellant, noting that "fashion designing" services fall under section 65(105)(zv) of the Finance Act and are covered under rule 3(ii) of the Import Rules. Since the services were performed entirely outside India, they could not be taxed under rule 3(ii). The Tribunal cited the decision in Intas Pharmaceuticals Ltd., which held that services provided entirely outside India are not taxable under the proviso to rule 3(ii).

3. Invocation of the Extended Period of Limitation:
The Department issued a show cause notice invoking the extended period of limitation under the proviso to section 73(1) of the Finance Act, arguing that the appellant had suppressed facts. The appellant contended that it had not suppressed any facts and that the extended period should not apply.

Given the Tribunal's decision on the classification and applicability of the Import Rules, it found it unnecessary to delve into the issue of the extended period of limitation.

4. Consistency in Classification by the Department:
The appellant argued that for the previous period, the Department had accepted the classification of the services under "fashion designing" and had not disputed it until the issuance of the show cause notice. The Tribunal noted that the Department cannot change the classification for subsequent periods if it had accepted it earlier.

The Tribunal concluded that the services received by the appellant should be classified under "fashion designing" and not "design services." It set aside the impugned order dated 12.12.2013, which had confirmed the demand for service tax under "design services," and allowed the appeal.

Conclusion:
The Tribunal allowed the appeal, setting aside the order dated 12.12.2013, and held that the services received by the appellant should be classified under "fashion designing" services, which are not taxable under rule 3(ii) of the Import Rules as they were performed outside India. The Tribunal also emphasized the need for consistency in classification by the Department across different periods.