2024 (3) TMI 344 - AT - Service Tax

Reverse charge mechanism - Liability of recipient of service to pay service tax - deemed services - foreign service provider has supplied services to the Appellants through the service provider s Indian subsidiary and such subsidiary is therefore treated as having establishment in India under Section 66A (Explanation 1) of the Finance Act 1994 - Invocation of extended period of limitation for issuance of show cause notice - revenue neutrality - HELD THAT - Given the facts and circumstances of the present case it is asserted by the Appellants that service tax was not payable by them under the scope of Section 66A Explanation 1 of the Finance Act 1994 as Reverse charge mechanism cannot be made applicable to them in the event a permanent establishment of the foreign company exists in India. It is worthwhile to look into the provisions of Section 66A as with satisfaction of the said provision only the rules containing taxable services provided from outside India and received in India could be scrutinized. In the instant case the Appellants have received goods from entities located outside India whereas the services in respect of the said goods have been provided to the Appellants by the parent company s branch in India by the nature of the services rendered like placing processing of order, negotiation done with customers by Sarin India on behalf of Sarin Israel, installation of the HASP software etc. it can be observed that Sarin India are entrusted with providing such services of higher order that are integral to the smooth functioning of the machines used by the Appellants. As it is entrusted with such crucial responsibilities it cannot be denied that Sarin India operates in the capacity of an Agent/ Branch office of that of Sarin Israel. The Tribunal in the case of M/s Lakshmi Electrical Drives Ltd. v Commissioner of CCE ST, Coimbatore 2023 (4) TMI 610 - CESTAT CHENNAI has held a similar view while discharging the Appellants liability involving issue under similar circumstances wherein the Department had confirmed the demand against the Appellants under reverse charge mechanism when a 100% owned subsidiary of the parent company was already established in India rendering all such services as directed by the parent company situated in Canada. It was erroneous conclusion on the part of the department to allege that Sarin India will not be considered a Permanent Establishment of Sarin Israel. It can be observed from the records that Sarin had head office in Israel and that Sarin India Technology Ltd. was operating as an agency to carry out business of trading in a different country that in the instant case is, India and by flow of that it is opined that by way of Section 66A discharge of liability of service tax cannot be made applicable to the Appellants. Therefore there is no second thought required to be arrived at the conclusion that the Appellants had received goods from a foreign country and services in its extension from service provider in India through the said foreign company s Branch office at that time one of which is located in India thereby sufficiently establishing that they have a permanent establishment hence the Appellants cannot be fastened with the liability of service tax for being a recipient of service under section 68(2) of the Finance Act read with rules 2(1)(d) as a deemed service provider in India. Revenue neutrality - time limitation - HELD THAT - The statements authorized signatory were recorded from time to time. The statements were exculpatory in nature to the extent that no one stated that the Appellant had any intention to evade the liability for payment of Service Tax. In such circumstances, when the Appellant has no malafide intention to evade the payment of Service Tax, larger period of limitation is not invocable - there are force in the submissions on behalf of the appellants that the issue involved is an interpretational issue and the bonafide interpretation of the Appellants was that they were not liable to pay Service tax as the suppliers were providing service through their Indian arm having a fixed establishment in India and therefore, based on a strict reading of the provisions of law, the Appellant was not liable to pay Service Tax. Thus, there are no merit in the claim of the Department that there was willful suppression of facts on the part of the Appellants. Therefore, demand beyond normal period in those show cause notices issued invoking extended period cannot sustain. Hence the Appellants succeed on limitation as well. Thus, under the purview of Section 66A of the Finance Act,1994 when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service tax under reverse charge mechanism - the impugned orders are not sustainable in law and in fact - appeal allowed.

Summary

Issues Involved:
1. Liability of the Appellants to pay service tax under reverse charge mechanism.
2. Invocation of the extended period of limitation for issuance of show cause notice.

Summary:

Issue 1: Liability to Pay Service Tax Under Reverse Charge Mechanism
The core issue is whether the Appellants, as recipients of services, are liable to pay service tax under the reverse charge mechanism when the foreign service provider has supplied services through its Indian subsidiary. The Appellants argued that Sarin Technologies India Pvt. Ltd., a wholly owned subsidiary of Sarin Israel, acted as the service provider in India, thus constituting a permanent establishment under Section 66A of the Finance Act, 1994. This was supported by various activities conducted by Sarin India, such as marketing, promotion, installation, and training, which were integral to the services provided.

The Tribunal examined Section 66A, which states that if a foreign company has a permanent establishment in India, the Indian subsidiary is considered the service provider, not the recipient. The Tribunal found that Sarin India fulfilled the role of an agent for Sarin Israel, performing essential activities related to the services provided. This was further supported by audit reports and various legal precedents, including the cases of Nagarjuna Oil Corporation Ltd. and Lakshmi Electrical Drives Ltd., which held that services provided through an Indian subsidiary do not attract reverse charge mechanism.

Issue 2: Invocation of Extended Period of Limitation
The Appellants contended that the Department failed to provide evidence of malafide intentions to evade tax, which is a prerequisite for invoking the extended period under Section 73. The Tribunal observed that the Appellants were entitled to CENVAT credit and had no incentive to evade tax, making it a case of revenue neutrality. The Tribunal also noted that the Appellants had disclosed all relevant facts in their returns and there was no willful suppression or misrepresentation.

The Tribunal cited various judgments, including Uniworth Textiles Ltd. and Simplex Infrastructures Ltd., to support the view that mere non-payment does not constitute suppression of facts. The Tribunal concluded that the extended period of limitation was not applicable as the essential ingredients for its invocation were not met.

Conclusion
The Tribunal held that the Appellants were not liable to pay service tax under the reverse charge mechanism as the services were provided through a permanent establishment in India. Additionally, the extended period of limitation could not be invoked due to the absence of malafide intentions or suppression of facts. Consequently, the impugned orders were set aside, and the appeals were allowed with consequential relief.