2014 (5) TMI 417 - AT - Service Tax

Demand of service tax - Foreign service provider - Held that - The period of dispute in this case is from 1-7-2003 to 31-12-2004. There is no dispute that the service provider is a U.K. based company not having any office or establishment in India, and it has provided the taxable service, in question, to their client in India, M/s. Goeteze (India) Limited. It is alleged that the appellant during the period of dispute by making available to M/s. Goeteze (India) Limited certain technical information for manufacture of certain product and permitting them to the use of their brand name within certain territory, have provided business franchise service and, therefore, the royalty charged by the appellant from M/s. Goeteze (India) Limited (sic) would attract service tax. During the period of dispute, there was no provision for recovery of service tax from a foreign/offshore provider in case where any taxable service has been provided by a foreign/offshore service provider to a person in India. On the contrary, in terms of the provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 in such situation, it is the service recipient in India who is liable to pay service tax. Subsequently a Notification No. 36/2004-S.T. dated 31-12-2004 effective from 1-1-2005 was issued under Section 68(2) of the Finance Act, 1994 specifically making the service recipient in India liable to pay service tax when service is received from a non-resident foreign service provider not having any office or business establishment in India. Thus, throughout during the period of dispute, there was no provision under which the service tax could be recovered from a foreign/offshore service provider, rather as per the provision of service tax rules it is the service recipient in India who is liable to pay service tax. Moreover, the provision of Finance Act, 1994 cannot be extended beyond the territory of India for demanding service tax from a foreign service provider - Decided against Revenue.

Summary

Issues:
Service tax demand against a foreign company providing franchise service in India without an office in India.

Analysis:
The case involved a service tax demand of Rs. 7,46,373 against a foreign company for providing franchise service in India without an office in the country. The Additional Commissioner confirmed the demand, imposed interest and penalties under relevant sections of the Finance Act, 1994. The Commissioner (Appeals) set aside the order, stating that the provisions cannot be extended to foreign companies without offices in India. The department appealed this decision.

The department argued that Section 68 of the Finance Act, 1994 makes every person providing taxable service in India liable for service tax, without distinguishing between foreign and Indian service providers. They contended that foreign service providers are not immune to the Act's provisions when services are provided in India.

The respondent defended the Commissioner (Appeals) decision, citing Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, which states that in cases of service provided by an offshore provider to a person in India, the service recipient in India is liable for service tax, not the foreign service provider.

The Tribunal considered the submissions and records, noting that the service provider was a UK-based company without an office in India. The Tribunal found that during the disputed period, there was no provision to recover service tax from foreign service providers. The rules specified that the service recipient in India is responsible for paying service tax in such cases. A subsequent notification effective from 1-1-2005 clarified the liability of the service recipient for service tax when receiving services from non-resident foreign providers without offices in India. The Tribunal concluded that the Finance Act's provisions cannot be extended beyond India's territory to demand service tax from foreign providers. Therefore, they upheld the Commissioner (Appeals) decision and dismissed the appeal.