2014 (3) TMI 696 - AT - Service Tax

Export of services or not - place of provision of services - location of recipient - receipt in foreign exchange - business auxiliary service - services in relation to export of goods - giving recommendation about the product integrity, inspecting export consignments and issuing inspection certificates, screening the vendor s suitability in terms of child labour norms and pollution control norms and recommending the teams to be engaged in logistic work like transportation, clearing and forwarding etc. for export of the purchased products out of India - Export of Service Rules, 2005 - Held that - the arguments of the department are absurd as the DR has not mentioned as to who is the consumer of the services in India, if the services, in question, provided in India by the appellant have not been used and consumed by their principal in U.S.A. It would be absurd to say that the recipient and user of these services are the persons in India and not M/s GAP, U.S.A. for whom all these services provided by the appellant are meant, who have used these services for their business and have made payment for these service in convertible foreign exchange. The Export of Service Rules, 2005 and Taxation of Service (provided from outside India and received in India) Rules, 2006, readwith Section 66A of the Finance Act, 1994 are fully in accordance with the law laid down by the Apex Court in case of All India Federation of Tax Practitioners 2007 (8) TMI 1 - SUPREME COURT and Association of Leasing and Financial Service Companies (supra) that service tax is a value added tax, which, in turn, is a destination based consumption tax in the sense that it is not a charge on business but is a charge on the consumer. Therefore what constitutes export of service has to be decided strictly in accordance with the provisions of Export of Service Rules, 2005 and for this purpose, in case of services in relation to business or commerce covered by Rule 3 (1) (iii), the term service recipient has to be understood in the sense as explained in para 8.3. The performance of such service in India, would not make them received/consumed in India, if beneficiary user/recipient of said service provided in relation to business or commerce, who has paid for these service and has used the service in his business, is located abroad. - The position would be different if the company located abroad who has paid for the service, also has some branch/ project in India and the service provided in India is meant for that branch/project only in that case, the consumption of service would be in India and the service would be taxable in India. The Board's Circular No. 141/10/2011 dated 13/5/11 clarifying that for the period prior to 27/2/10, the condition regarding used outside India also needs to be independently satisfied for availing the benefit of export and that effective use of advertisement services shall be the place where the advertising material is disseminated to the audience though the actual benefit to my finally accrue to the buyer who is located at another place is not only not in accordance with the provisions of Rule 3 (1) of the Export of Service Rules, 2005, but is also contrary to the law laid down by the Apex Court in the case of All India Federation of Tax Practitioners 2007 (8) TMI 1 - SUPREME COURT and Association of Leasing and Financial Service Companies 2010 (10) TMI 4 - SUPREME COURT , as a service which has not been consumed in India, cannot be taxed in India. In any case, the issue involved in this case is identical to the issue involved in the case of Paul Merchant Ltd. and Ors. vs. CCE 2012 (12) TMI 424 - CESTAT, DELHI (LB) which stands decided in favour of the appellant. - order set-aside - Decided in favor of assessee.

Summary

Issues Involved:

1. Classification of services provided by the appellant under Business Auxiliary Services.
2. Determination of whether the services qualify as export of services under the Export of Service Rules, 2005.
3. Applicability of service tax on services rendered in India for a foreign entity.

Issue-wise Detailed Analysis:

1. Classification of Services:

The appellant, an Indian subsidiary of a U.S.-based company, entered into a service support agreement to provide various services related to the procurement of goods. These services included recommending fabrics, vendors, inspecting consignments, and ensuring compliance with child labor and pollution norms. The department classified these services as Business Auxiliary Services under Section 65 (105) (zzb) read with Section 65 (19) of the Finance Act, 1994. There was no dispute regarding this classification.

2. Export of Services:

The central issue was whether these services constituted export of services under the Export of Service Rules, 2005. The appellant argued that the services were provided to a recipient located outside India, and the payment was received in convertible foreign exchange, thus qualifying as export of services. The department contended that the services were performed in India and could not be considered as delivered or used outside India, thus not qualifying as export.

The tribunal examined the conditions under Rule 3 (1) (iii) and Rule 3 (2) of the Export of Service Rules, 2005, which required that the services be delivered and used outside India. The tribunal noted that the services were meant for the business of the appellant's principal located abroad, and thus, the benefit accrued outside India. Relying on previous judgments and circulars, the tribunal emphasized that the location of the service recipient, not the place of performance, was crucial in determining export of services.

3. Applicability of Service Tax:

The department argued that since the services were performed in India, they were taxable in India. However, the tribunal highlighted that service tax is a destination-based consumption tax, and since the services were consumed by the principal located outside India, they should be treated as exported services. The tribunal referenced the Apex Court's rulings, which stated that service tax is levied on the consumer, not the business, and is a destination-based tax.

The tribunal concluded that the services provided by the appellant were indeed exported, as they were meant for and used by the principal's business located abroad. The tribunal found the department's arguments to be absurd and unsupported by the provisions of the Export of Service Rules, 2005.

Conclusion:

The tribunal set aside the impugned order, ruling in favor of the appellant. It determined that the services qualified as export of services, and thus, were not subject to service tax in India. The appeal was allowed, and the tribunal emphasized the importance of adhering to the principles of destination-based taxation as laid down by the Apex Court.