2024 (4) TMI 73 - AT - Service Tax

Classification of services - appellant is registered SEZ unit under the Special Economic Zone Act, 2005 for carrying out authorized operations namely Software Development - Agreements with IVP-US and BACS - IVP-US had provided services for identification and prediction of market trends in US - Business Auxiliary Service or intermediary services - reverse charge mechanism - place of provision of services - revenue neutrality - period April, 2013 to June, 17 - interest and penalty - HELD THAT - The terms and conditions of agreement indicate that IVP US AND BACS were working as an Agent of the Appellant. All the elements required for qualifying intermediary were present in the above agreement. IVP US AND BACS could not alter the nature or value of main service, value of intermediary services was clearly identifiable and the services provided by intermediary were clearly identifiable. There were three persons involved in the above deal, i.e., the Appellant, Clients of the Appellant and IVP US OR BACS. Reference is made to the decision of the CESTAT in the case M/S. EXCELPOINT SYSTEMS (INDIA) PVT. LTD. VERSUS CST, BANGALORE 2017 (10) TMI 806 - CESTAT BANGALORE where the party was engaged providing project support services, consulting services, marketing on product, technical support services, providing advice, clarification and technical assistance to customers on behalf of the group company located outside India and payment received in convertible foreign exchange. The party in the said matter contested that he was providing services in nature of Business Auxiliary. It is seen that demand was raised and subsequently confirmed under reverse charge mechanism treating the place of provision of services within taxable territory. Under the Place of Provisions of Services Rules, 2012 (POP Rules), place of provisions of services were specified for different services - In the present case services for which demand was raised were intermediary services. In accordance with Rule 9 of the POP Rules, place of provision of service of intermediary service was location of service provider. Service providers in the instant case were located in USA. Hence, place of provision of service was USA. As both the service provider and service recipient were located in non-taxable area, service tax demanded in this case is not sustainable. The demand in the instant case pertains to April,13 to June,17 when the definition provided under section 65 was not in existence. The classification of service on the basis of a non-existing provision is bad in law. With effect from 01.07.12, all services except services mentioned in negative list were made taxable. Contrary to that, definition of intermediary was available even after 01.07.12 and nature of impugned services were within four corners of intermediary services. Thus the observation of the Pr. Commissioner is not sustainable and liable to be set aside. It is also important to note that the Appellant was a SEZ unit and was availing Cenvat credit of taxes paid on its input services. Services which were provided by IVP US/UK were input services for the Appellant. In this case service tax was payable under reverse charge mechanism under notification No.30/12-ST dated 20.06.12 by the service recipient and the same was available for taking back in the form of Cenvat Credit. Thus, there was no gain to the government exchequer in that case. It is a case of revenue neutrality. Once demand is not sustainable, interest and penalty under Section 78 would not be imposable. The impugned order is set aside - appeal allowed.

Summary

Issues Involved:
1. Classification of services provided by IVP-US and BACS.
2. Applicability of service tax under reverse charge mechanism.
3. Entitlement to exemption under SEZ Act.
4. Imposition of interest and penalty.

Summary:

1. Classification of Services Provided by IVP-US and BACS:
The core issue was whether the services provided by IVP-US and BACS were "Business Auxiliary Services" or "Intermediary Services." The Tribunal examined the agreements between the appellant and IVP-US/BACS and determined that the services provided were in the nature of "Intermediary Services" as defined under Rule 2(f) of the Place of Provisions of Services Rules, 2012. The Tribunal emphasized that intermediary services involve three parties: the service provider, the principal, and the customers of the principal. The services provided by IVP-US and BACS facilitated the sale of the appellant's software products, fitting the definition of intermediary services.

2. Applicability of Service Tax under Reverse Charge Mechanism:
The Tribunal found that according to Rule 9 of the Place of Provisions of Services Rules, 2012, the place of provision for intermediary services is the location of the service provider, which in this case was outside India. Therefore, the services provided by IVP-US and BACS were not taxable within the Indian territory. Consequently, the demand for service tax under the reverse charge mechanism was not sustainable.

3. Entitlement to Exemption under SEZ Act:
The appellant argued that the services provided were part of their authorized operations under the SEZ Act, 2005. The Tribunal noted that the appellant was a SEZ unit and was availing CENVAT credit for taxes paid on input services. Given that the services in question were intermediary services and not directly taxable in India, the Tribunal did not delve deeply into the SEZ exemption issue but acknowledged the appellant's status and operations under the SEZ framework.

4. Imposition of Interest and Penalty:
Since the demand for service tax was not sustainable, the Tribunal held that the imposition of interest and penalty under Section 78 of the Finance Act, 1994, was also not justified. The Tribunal referenced several judgments to support the view that in cases of revenue neutrality, no penalty is imposable.

Conclusion:
The Tribunal set aside the impugned order, allowing the appeal with consequential relief, and confirmed that the services provided by IVP-US and BACS were intermediary services, not subject to service tax under the reverse charge mechanism.