2025 (1) TMI 345 - AT - Service Tax

Classification of service - services provided by the Appellant to Canpotex - Business Auxiliary Services (BAS) or fall under Business Support Services (BSS) and Business Promotion Services (BPS)? - place of provision of services - services are used in India in the hands of the Indian farmers - export of services or not - non-application of mind and uncertainty in the mind of the Adjudicating Authority - violation of principles of natural justice - HELD THAT - Reliance is placed on the decision of the Tribunal in Paul Merchants Limited vs. Commissioner, 2012 (12) TMI 424 - CESTAT, DELHI (LB) , wherein it was held that the person, who is obliged to make payment for the service and whose need is satisfied by the provision of the service, is the recipient of service. On this ground, the Tribunal held that where the person located abroad is under an obligation to pay for the service and thus pays for it, the service is used outside India. The Tribunal has further held that when the person on whose instructions the services in question have been provided is located abroad, the destination of the service has to be treated abroad. The destination has to be decided on the basis of the place of consumption and not the place of performance. The place of provision of such services is outside the taxable territory and thus, these are not taxable for the period from July, 2012. In the instant case, considering the nature of services, it is found that the place of provision has to be determined under the general rule, i.e. Rule 3. Under Rule 3 of the POPS Rules, the place of provision of service will be Canada, i.e. location of Canpotex. As the place of provision of these services is outside the taxable territory, the same are not chargeable to Service Tax under Section 66B. In the impugned order the place of provision has been determined under Rule 4(b) of the POPS rules. It is evident from the agreement as well as the impugned order that service was not provided to an individual thus, such rule is not applicable. Further, no recipient of service was acting on behalf of the recipient in India as there was no contract between Canpotex and the farmers and Canpotex was also not present in India, therefore, Rule 4 (b) is not applicable to the facts of the case. Further, the recipient of service is the exporter and not the farmers thus, the presence of exporters determines that the service was performed outside India. The price of goods sold by one party to another is governed by the mutual understanding thereof. The seller may offer discount to the buyer towards the purchase price which will result into reduction of such sale price. The discount can be given in any form. The form of giving the discount cannot modify the nature of such discount being a factor resulting reduction of the price agreed. In this regard reliance is placed on Union of India vs. Bombay Tyres International Private Limited, 1983 (11) TMI 70 - SUPREME COURT , wherein the Hon'ble Supreme Court laid down the principles for determining the deduction on account of discounts - On a perusal of the observations of the Hon'ble Supreme Court, it is clear that irrespective of the nomenclature used to describe discounts, so far as the discounts are established under the agreement or under terms of sale or by established practice and the nature of the discounts is known at or prior to the removal of the goods, they shall be admissible as deduction for arriving at the transaction value. Further, the Court has categorically held that the discounts shall be allowed even if they are not payable at the time of each invoice. Conclusion - The said discount, being towards sale of goods, is not covered under any of the categories of services under Section 65(105) and not chargeable to Service Tax under Section 66 of the Act for the period till June, 2012. Similarly, such discount, being towards sale of goods, is excluded from the definition of 'service' under Section 65B(44) of the Act and thus not chargeable to Service Tax under Section 66B of the Act for the period from July 2012. The confirmation of demand in the impugned order is not sustainable and deserves to be set aside - Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the services provided by the Appellant to Canpotex qualify as Business Auxiliary Services (BAS) or fall under Business Support Services (BSS) and Business Promotion Services (BPS).
• Whether the services provided qualify as export of services under the relevant legal framework.
• Whether the payments received by the Appellant from Canpotex are subject to Service Tax.
• Whether the payments can be considered as incentives or discounts on the sale of goods, thereby exempting them from Service Tax.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Services

• Relevant Legal Framework and Precedents: The classification of services under the Finance Act, 1994, particularly under Section 65(19) for BAS, and the precedents set by cases such as Microsoft Corporation (I) (P) Limited vs. Commissioner.
• Court's Interpretation and Reasoning: The Tribunal found that the services provided by the Appellant were in the nature of BAS as opposed to BSS or BPS. The Tribunal emphasized the non-application of mind in the classification by the Adjudicating Authority.
• Key Evidence and Findings: The Tribunal noted the lack of evidence suggesting that the Appellant was promoting the Canpotex brand, which is a requirement for classification under BPS.
• Application of Law to Facts: The Tribunal applied Section 65(19) and determined that the services were for the promotion or marketing of goods, thus falling under BAS.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's classification under BSS and BPS due to lack of evidence and logical reasoning.
• Conclusions: The Tribunal concluded that the services should be classified under BAS, and the demand based on incorrect classification was unsustainable.

Issue 2: Qualification as Export of Services

• Relevant Legal Framework and Precedents: The Export of Service Rules, 2005, and Place of Provision of Service Rules, 2012, along with precedents such as Gap International Sourcing (India) Private Limited vs. Commissioner.
• Court's Interpretation and Reasoning: The Tribunal emphasized the location of the service recipient, Canpotex, and the receipt of payment in convertible foreign exchange as key factors for qualifying as export of services.
• Key Evidence and Findings: The Tribunal found that the services were provided to Canpotex, located outside India, and that payment was received in foreign exchange.
• Application of Law to Facts: The Tribunal applied Rule 3 of the EOS Rules and Rule 3 of the POPS Rules to determine the place of provision as outside India.
• Treatment of Competing Arguments: The Tribunal dismissed the argument that the services were used in India, clarifying that the recipient's location determines the export status.
• Conclusions: The Tribunal concluded that the services qualify as export of services, exempting them from Service Tax.

Issue 3: Nature of Payments as Incentives or Discounts

• Relevant Legal Framework and Precedents: Section 65B(44) of the Act and precedents such as Union of India vs. Bombay Tyres International Private Limited.
• Court's Interpretation and Reasoning: The Tribunal interpreted the payments as discounts on the purchase of goods, not as consideration for services.
• Key Evidence and Findings: The Tribunal highlighted the agreement's terms linking payments to the purchase of MOP, indicating a discount.
• Application of Law to Facts: The Tribunal applied the principles from the Bombay Tyres case to classify the payments as discounts.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's claim that the payments were for services rendered.
• Conclusions: The Tribunal concluded that the payments were discounts, not subject to Service Tax.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The service recipient would be B who has paid for the service and whose need has been satisfied by the provision of service."
• Core principles established: The classification of services must be based on the nature of activities performed, and the location of the service recipient is crucial for determining export of services.
• Final determinations on each issue: The Tribunal set aside the demand for Service Tax, classifying the services as BAS, confirming their status as export of services, and recognizing the payments as discounts.