2025 (4) TMI 1116 - AT - Service Tax

100% EOU - Levy of service tax on Reverse Charge basis in respect of expenses incurred in foreign currency on business promotion and other activities - HELD THAT - Reference was invited to the decision of the Tribunal in the Final Order No. 50314-50315/2018 dated 12.01.2018 2018 (2) TMI 1408 - CESTAT NEW DELHI . For the period 2006-2007 to June 2012 i.e. pre-negative era wherein the issue was decided by the Tribunal in favour of the appellant relying on the decision of the Tribunal in the case of Torrent Pharmaceuticals Limited Vs. Commissioner 2014 (12) TMI 41 - CESTAT AHMEDABAD and Milind Kulkarni Vs. Commissioner 2016 (9) TMI 191 - CESTAT MUMBAI . It was accordingly concluded that the tax liability under BAS cannot be sustained as the actual expenses now sought to be taxed are only with reference to setting up running and also expenses of that branch incurred by the appellant and not relating to any expenditure in their branches with reference to BAS. The Final Order No. A/50314-50315/2018 of the Tribunal in the case of the appellant in 2018 (2) TMI 1408 - CESTAT NEW DELHI was with reference to the pre-negative era however subsequently in the Final Order No. ST/A/52273/2018-CU(DB) dated 13.6.2018 the Tribunal considered the issue regarding tax liability of the appellant on the RCM in respect of amounts paid towards the branch offices which have been established in different country for the period July 2012 to November 2013 i.e. post negative period in view of the provisions of Section 65B (44) read with Explanation 3(b) and Explanation 4 - For the subsequent period December 2013 to August 2014 the Tribunal vide Final Order No. 51848/2021 dated 01.10.2021 2021 (10) TMI 229 - CESTAT NEW DELHI once again held that the conclusion in Milind Kulkarni that was relied upon in Kusum Healthcare Private Limited 2021 (10) TMI 229 - CESTAT NEW DELHI to set aside the demand after introduction of negative list regime is applicable to the dispute before it and therefore set aside the demand being contrary to law. Conclusion - No service tax liability arises on payments made by the appellant to its overseas representative offices for branch expenses. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this appeal revolve around the applicability of service tax on a Reverse Charge Mechanism (RCM) basis for expenses incurred by an Indian exporter on its foreign representative offices. Specifically, the issues include:

1. Whether payments made in foreign currency to overseas representative offices for business promotion, marketing, and consultancy services are taxable under service tax laws in India.

2. The interpretation and applicability of Section 66A of the Finance Act, 1994, and the Taxation of Services (Provided From Outside India and Received in India) Rules, 2006, in determining the tax liability on services received from abroad.

3. The legal status of overseas representative offices as branches of the Indian exporter and whether the expenses incurred by such branches constitute taxable business auxiliary services under the service tax regime.

4. The impact of legislative changes, particularly the introduction of the negative list regime and amendments to Section 65B(44) and related explanations, on the taxability of services received from overseas branches.

5. The consistency of the present demand with prior decisions of the Tribunal and higher courts, including the Supreme Court's dismissal of departmental appeals.

Issue-wise Detailed Analysis

Issue 1: Taxability of Payments to Overseas Representative Offices under Service Tax Laws

The appellant, a 100% Export Oriented Unit engaged in pharmaceutical manufacturing and export, operates representative offices abroad solely for business promotion and liaison purposes. These offices do not generate independent revenue or enter into contracts with clients; all orders and payments are handled directly by the appellant in India. The department issued show cause notices demanding service tax on payments made to these overseas offices on a reverse charge basis, alleging these were taxable services received in India.

The legal framework invoked includes Section 66A of the Finance Act, 1994, which imposes service tax on taxable services provided from outside India and received in India, and Rule 3 of the Taxation of Services (Provided From Outside India and Received in India) Rules, 2006, which define the conditions for such tax liability.

The Court examined whether the services rendered by the overseas offices fall within the ambit of taxable business auxiliary services under Section 65(19) and whether such services are deemed to be received in India. The appellant contended that the payments relate only to running expenses of branches and not to any taxable service rendered to the Indian entity.

Relying on precedent decisions, the Court noted that the overseas offices function as branches of the appellant and do not constitute separate service providers. The payments made are reimbursements of branch expenses rather than consideration for taxable services. Therefore, such expenses do not attract service tax under Section 66A.

Issue 2: Interpretation of Section 66A and Related Rules

The Tribunal referred to its earlier rulings and those of other benches, including the decisions in the appellant's own case and in cases such as Torrent Pharmaceuticals Ltd. and Milind Kulkarni. These decisions clarified that Section 66A's charging provisions apply only when a taxable service is rendered in India by a foreign service provider to an Indian recipient.

The Court emphasized that the legal fiction of branches as separate entities for tax purposes is limited and should not disrupt the commercial reality of the corporate structure. The overseas representative offices are integral parts of the appellant's business, and their activities facilitate the export operations rather than constitute independent taxable services.

The Tribunal also highlighted that the legislative intent behind Section 66A and the associated rules is to tax services received in India for business or commerce, not to impose tax on intra-corporate reimbursements or branch expenses.

Issue 3: Effect of Legislative Amendments and the Negative List Regime

The Tribunal analyzed the impact of the introduction of the negative list regime from July 2012 and the amendments to Section 65B(44) and related explanations. Despite these changes, the Tribunal found no substantive alteration in the legal position regarding the taxability of payments to overseas branches.

The Court observed that the amendments were procedural or definitional and did not intend to tax the intra-group branch expenses that are essential for export promotion. The Tribunal's consistent view was that the appellant's payments to its overseas offices do not attract service tax under the revised legal framework.

Issue 4: Consistency with Prior Decisions and Supreme Court Affirmation

The Tribunal reviewed its own prior orders covering various periods from pre-negative list era to post-negative list regime, all favoring the appellant's position. The series of decisions consistently held that the service tax demand on branch expenses was unsustainable.

Furthermore, the Supreme Court dismissed the department's appeal against the Tribunal's order for the period September 2014 to September 2015, both on grounds of delay and merits, thereby affirming the Tribunal's reasoning and conclusions.

This judicial consistency reinforced the view that the impugned demand was contrary to established legal principles and precedent.

Significant Holdings

The Tribunal's key legal reasoning is encapsulated in the following verbatim excerpt from the Milind Kulkarni decision, which the present judgment adopts:

"The appellant-assessee has established branches for furthering its commercial objectives. The benefit of assigned activities of the branch will, undoubtedly, accrue to the appellant. There is no dispute that it is the appellant-assessee who enters into contractual agreements with overseas customers for supply of information technology services which have off-shore components rendered directly to the overseas entity by the appellant-assessee. On-site activity is undertaken by deputing employees working at the site of the customer. These employees are, without doubt, on the rolls of the appellant-assessee which, save for the specific and limited role of Section 66A(2), encompasses the branches within its corporate structure. As Section 66A(2) is limited to being a charging section in a specific context, it is not elastic enough to govern the corporate intercourse and commercial indivisibility of a headquarters and its branches. Therefore, any service rendered to the other contracting party by branch as a branch of the service provider would not be within the scope of Section 66A."

Further, the Tribunal concluded:

"Section 66A requires taxing of taxable services rendered by an overseas branch to its head office and the two sets of Rules limit tax demand only to the extent that these services are received in India in relation to business or commerce. ... The proposition that the intent of Section 66A in taxing the activity rendered by an overseas branch to its headquarters in India is limited to the local commercial or business activities of the head office is thereby confirmed. Consequently, mere existence as a branch for the overall promotion of the objectives of the primary establishment in India which is essentially an exporter of services does not render the transfer of financial resources to the branch taxable under Section 66A."

On the application of law to facts, the Tribunal found that the appellant's overseas offices merely incurred expenses for rent, security, electricity, and salaries, which were reimbursed by the appellant. These expenses were essential for the functioning of the branches and did not amount to taxable services received in India. The appellant did not receive any distinct business auxiliary service from these offices that would attract service tax under the reverse charge mechanism.

In treating competing arguments, the Tribunal rejected the department's assertion that the payments constituted taxable services received in India. It held that imposing tax in such circumstances would be inequitable and contrary to the legislative intent, especially considering the appellant's status as a 100% Export Oriented Unit entitled to refunds and credits under the service tax regime.

The final determination was to set aside the impugned order confirming the service tax demand and to allow the appeal, thereby affirming that no service tax liability arises on payments made by the appellant to its overseas representative offices for branch expenses.