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TMI Blog2014 (12) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... VAT/ GST to cross Border Trade in Services and Intangibles. In the light of the emerging international concepts on reverse charge mechanisms and the judgment of M/s. British Airways vs. CCE [2014 (6) TMI 626 - CESTAT NEW DELHI (LB)], the foreign branches/ establishments of the appellant have not acted as ‘facilitators’ but have actually consumed those services abroad for which local VAT/GST of the respective country has been paid. The representative invoices produced by the appellant indicate that local VAT/GST paid is ‘Nil’ when billing by overseas service providers is directly raised upon the appellant in India on which service tax is paid by the appellant on reverse charge basis. When billing is raised on the branch office for a service consumed abroad then local VAT/GST applicable abroad is paid by the branch offices on such transactions. Therefore, payment of local VAT abroad will be an indicator to decide whether a service is provided and consumed outside India or has been consumed/ received in India. The agreements/ documents available with the appellant have to be accepted for the purpose of determining place of providing and consumption of a service in India, as no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken to be a considerations for providing services to the appellant. 2.1 Second ground of raising demands is with respect to reimbursements made by the appellant regarding marketing cost incurred by the distributors appointed by the appellant in the foreign countries. These distributors situated abroad are purchasing goods from the appellant for further sale abroad. Such distributors appointed by appellant abroad pay the sale price to the appellant in India and in addition to sale consideration appellant also pays salaries and marketing cost incurred by such distributors abroad by remitting the same in foreign exchange as actually incurred by the distributors. For this purpose, such distributors situated abroad submits details of expenditures incurred by them periodically which are reimbursed by the appellant after due verification including those services which are availed by the distributors abroad for local consumption. It is the case of the Revenue that such reimbursements made by the appellant are chargeable to service tax on reverse charge basis as the distributors are providing the services of distribution and marketing of appellants products abroad. Those services from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire exercise of demand, its payment and admissible credit will be as case of Revenue neutrality as per CESTAT judgment in the case of JPP Mills Limited vs. CCE [2013-TIOL-1643-CESTAT-MAD]. He also argued on the miscellaneous application for filing additional documents like invoices of the overseas branch offices and distributors which was allowed. Written submission filed by the appellant in the present proceedings were received on 21.10.2014 and have been taken on record. 3.1 The first submission made by the Senior Advocate is that services received directly by appellant from the service prodders are chargeable to service tax, for which demands have been raised are eligible as CENVAT credit for discharging duty on the final products exported out of India which is claimed by them in cash by filing rebate claims. The second argument taken by the appellant is that the CENVAT credit is not available on the basis of documents mentioned in Rule 9(1) (bb) of Cenvat Credit Rules, 2004 as the same is covered under Rule 9(1) (e) of the Cenvat Credit Rules, 2004 when service tax is paid under reverse charge mechanism. That with respect to annexures A-1 to B-1 of the show cause notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e countries is paid by the branch offices/ distributors. 3.3. With respect to service tax demand of ₹ 5.43 Crores, as per annexure C-1 to the show cause notice, it was argued that this demand is on the amount remitted to the distributors of the appellant and these remittances are for handling distribution of goods received from the appellants and for selling it to their customers abroad. It was the argument of the appellant that distributors appointed in foreign countries are purchasing the goods at a fixed price and subsequently resell to the customers aboard. That appellant has duly entered into agreements with such foreign distributors which clearly state that it is a transaction of buying and selling and on principal to principal basis. That the said agreement with the foreign distributors contains a clause that appellant will reimburse the actual marketing cost incurred by the distributors in the respective foreign countries which consist of salary of marketing staff exclusively engaged in the sale of appellants product. That these reimbursements also required for meeting the specific pre-approved marketing costs like sales conference expenses etc. That the above rei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statements. That relationship between employer and employee clearly is a master-servant relationship and can not be considered as taxable services as per Section 65 (105) of the Finance Act, 1994. That the adjudicating authority has considered the branch offices of the appellant located outside India as a separate legal person in view of Section 66A(2) of the Finance Act, 1994. It is the case of the appellant that one cannot provide services to one own-self, therefore, by creating a fiction in Section 66A(2) of the Finance Act, 1994, it can not be saild that branch offices of the appellant is to be considered as a separate legal person for the purpose of charging service tax on reverse charge basis. It was strongly argued by the Senior Advocate appearing on behalf of the appellant that this legal fiction has been created only to determine the place of providing of services i.e. to determine whether the services are provided in India or outside India. He relied upon the following case laws in support his argument that salary of the deputed employees cannot be considered as a consideration for service provided:- (a) Volkswagen India Pvt. Limited vs. CCE [201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 714/13/CSTB/C-1 dated 15.03.2013. That in the above case laws all countries in the world follow the same pattern to levy VAT/GST on trans-border transactions where VAT/GST is levied in the country of consumption to avoid double taxation on trans-border transactions in services. That the object towards Section 66A(2) of the Finance Act, 1994 is to tax services received and consumed by a service recipient in India and not intended to charge service tax on the services received and consumed by the branch offices situated abroad when they have been considered as legally different persons. That interpretation taken by the Revenue in against the spirit of Section 66A(2) which was brought into reverse charge machinery for charging service tax on services received and consumed in India. That Section 66A of the Finance Act, 1994 is enacted only to ensure level playing field between the services procured domestically and similar services procured from abroad. That domestically inter unit activities of service of two units of an assessee are not taxed in India and the same should be the position for an overseas branch office and Indian Head Office of the appellant. That the legislative intent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice provided by branch offices are liable to payment of service tax of ₹ 11.56 Crores. That the branch offices situated are nothing else but extended arms of the appellant and that all services availed by these branch offices abroad have to be considered as services availed by the appellant from the services providers abroad even if local GST/VAT is paid. That payment of VAT abroad in the respective country cannot be a valid ground for non-levy of service tax in India on reverse charge basis. (iv) That demand of ₹ 11.56 Crores (approx.) above is with respect to treating branch offices of the appellant abroad as a separate legal person as discussed in detail by adjudicating authority in Para 16.21 of the OIO, which is reiterated. (v) That the argument of Revenue neutrality made by the appellant is not acceptable in view of the following reasons:- (a) Revenue neutrality is a question of fact and factual situation and in this case the same needs to be gone into. (b) Appellant is also producing exempted goods and therefore entire credit of service tax paid cannot be taken. To that extent, there is no Revenue neutrality. (c) If the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1 So far as above demands of ₹ 97,85,726/- and ₹ 12,01,088/- are concerned, learned Senior Advocate appearing on behalf of the appellant fairly submitted that these services were received and consumed directly by the appellant in India and service tax on these services remained to be inadvertently unpaid. These amounts were promptly paid by the appellant along with the interest and are not being contested on merits as cenvat credit of these service tax paid is already taken by the appellant. However, it is the case of the appellant that no penalty is imposable upon them for non-payment of these amounts, in view of paras O.1 to O.18, R.1 to R.9, S.1 to S.3, T.1 to T.4, V.1 to V.2, W.1 to W.5 and X.1 to X.3 of their grounds of appeal. 5.2 So far as demand of ₹ 5,43,47,814/- is concerned, it is the case of the appellant that these amounts repatriated to the distributers is representing reimbursement of certain expenses incurred by the distributers/ customers for activities like Registrations, Staff related expenses employed by the distributer, cost of promotional expenses (partially or fully) incurred by the distributors etc. It was strongly argued by the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is whether the reimbursements provided by the appellant on actual to its distributors abroad can be considered as a discount given to the distributors on list price. Appellant is holding a view that such reimbursements are nothing but akin to discounts and any expenses so done by the distributors have to be considered as services received and consumed abroad and are not liable to service tax. That such expenses incurred by the distributors were not considered to be includable in the assessable value under Section 4 of the Central Excise Act, 1944 as per Apex Court judgment in the case of Philips India Limited vs. CCE Pune [1997 (91) ELT 540 (S.C.)]. Para 3 and 5 of this judgment are relevant and are reproduced:- 3. In Union of India v. Mahindra and Mahindra Ltd. - 1989 (43) E.L.T. 611, the High Court at Bombay emphasised the relationship between the parties, being of buyer and seller on principal to principal basis. The court observed that the manufacturer and its distributor had a mutual interest in maximising the sale of the products. The provisions in the contract between them relating to advertising and the like were in furtherance of this desire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll not be entitled to 100% Cenvat credit on service tax paid on reverse charge basis. Further it was his case that services of any commission agents availed abroad will also not be admissible for credit in view Gujarat High Court s judgment in Cadila Laboratories Limited case. It was thus argued that the present case is not of 100% Revenue neutrality and case law of JPP Mills Pvt. Limited and others vs. CCE Solan (supra) relied upon by the appellant is not applicable. The above arguments taken by the learned AR are misplaced as the adjudicating authority has not discussed and examined any of these situations. It was not shown to the Bench whether these were the issues at all raised in the show cause notice and before the adjudicating authority. There could be a separate proceedings for denial of cenvat credit to the appellant if Revenue is able to establish that appellant is not entitled to the cenvat credit on reverse charge basis also taken with respect to services availed for exempted products etc. 5.2.4 However, as this issue was highly contentious and appellant had a bonafide belief that service tax on such reimbursed expenses was not payable on reverse charge basis, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply: Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply: Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided. (2) Where a person is carrying on a business through a permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s during the period 2007-08 to 2011-12. 5.6 At this stage it will be relevant to examine the judgment of M/s. British Airways vs. CCE (Adj.) Delhi (supra) relied upon by either sides. 5.6.1 The facts of this case were that M/s. British Airways PLC (BA, UK); with its registered office at Harmondsworth, UK; were an Airline engaged in providing the service of transportation of passengers and Cargo by air throughout the world. BA (UK) also had a branch office in India (BA, India). BA (UK) entered into agreement with several CRS/GDS companies for maintaining database regarding flight schedules of BA (UK) Flights, fares, seats availability etc. and this information was made available to IATA agents of British Airways all over the world including BA (India). All the CRS/GDS companies were located outside India and had no branch office in India. CRS/GDS companies also provided certain hardware to IATA agents for providing connectivity for retrieving data and bookings etc. Entire payment to CRS/GDS was made by BA (UK) based on the number of tickets issued by IATA agents. It was the view of the Revenue in that case that services availed by IATA agents in India are liable to service tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS Companies. 5.7 From the above interpretation made in the case of M/s. British Airways vs. CCE (Adj.) Delhi (supra) it has to be seen in the present proceedings whether while procuring services branch offices of the appellant abroad have acted only in the capacity of facilitators and the services so procured were consumed in India or the services so availed were consumed outside India. Learned Senior Counsel appearing on behalf of the appellant relied upon guidelines of 2006 2008, issued by Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy Administration, Paris; on Emerging concepts for Defining Place of Taxation on VAT/ GST to cross Border Trade in Services and Intangibles. Para 8 to 13 of this paper of January 2008, reproduced below, give a glimpse of international thinking on the place of taxation of services and its underlying concepts:- 2. Underlying concepts 8. VAT/GST is generally charged at all stages of the economic process, but with the provision of a mechanism enabling firms to offset the tax they pay on their own purchases of goods and services (input tax) against the tax they charge on their sales of go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Collection Mechanisms 12. It is recommended that the business customer should account for VAT/GST, where applicable, on cross-border business-to-business (B2B) transactions using the reverse charge, self-assessment or tax shift mechanism (hereinafter reverse charge mechanism), as far as this type of mechanism is consistent with the overall design of the national consumption tax system. Once the place of taxation is determined, the country that has the right to tax the supply decides whether any tax is actually due. For example, countries may wish to consider dispensing with the requirement to reverse charge the tax in circumstances where the customer would be entitled to fully recover it through deduction or input tax credit. However, the examples that follow assume use of this mechanism as the means of accounting for the tax. There may well be issues connected to reverse charge that will need addressing at a later stage, but for the moment the working assumption is that this mechanism is appropriate. 13. In these circumstances the reverse charge mechanism has a number of key advantages. Firstly, the tax authority in the country of consumption can verify and enforce complian ..... X X X X Extracts X X X X X X X X Extracts X X X X
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