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TMI Blog2022 (5) TMI 1396X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-APP- 075 to 078-14-15 dated 29.09.2014 63,42,72,694 35,72,99,075 27,69,73,619 ST/85232/15- Mum 39,48,90,011 23,84,23,310 15,64,66,701 ST/85229/15- Mum 60,37,55,970 36,01,84,513 24,35,71,457 ST/85230/15- Mum 38,44,78,858 16,78,94,641 21,65,84,217 ST/85613/15- Mum PUN- SVTAX- 000-APP- 0028-14- 15 dated 16.02.2015 73,80,82,659 33,04,89,118 40,75,93,541 ST/86387/15- Mum PUN- SVTAX- 000-APP- 0007-15- 16 dated 15.04.2015 154,02,14,580 71,88,27,386 82,13,87,194 ST/86711/15- Mum PUN- SVTAX- 000-APP- 0063-15- 16 dated 06.07.2015 220,86,90,949 129,97,36,943 90,89,54,006 ST/87194/15- Mum This appeal is filed by the respondent assessee in above appeals mainly challenging the imposition of interest on erroneous refund 2.1 Respondent is engaged in providing of taxable service viz. "Management Consultant Services", "Business Auxiliary Services", "Renting of Immovable Property Service" and "Information Technology Software Services" and are holding centralized Service Tax Registration. Besides this, they are also engaged in exporting "Information Technology Software Services" which is a taxable service under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2014 221,37,77,469 129,97,36,943 91,40,40,526 Order adjusts interest on erroneous refund 2.3 Aggrieved by the impugned orders, revenue has preferred seven appeals and the appellants have preferred one appeal as indicated in the table in para 1 above.. 3.1 We have heard Shri Shamboo Nath, Principal Commissioner, Authorized Representative for the revenue and Shri V Sridharan, Senior Advocate along with Shri Vinay Jain, Advocate for the respondents. 3.2 Arguing for the revenue learned authorized representative while re-iterating the submissions made in appeals, submits that * as regards Model-I, the Commissioner (Appeals) has erred in treating that the value of 'on-site services' provided to overseas clients by the subsidiary of the appellant located outside India, is to be considered as export. * Appellant and their subsidiaries or branches are two separate legal entities, and that they had entered into agreement to perform the services outside the territorial boundary of India, i.e. on-site, since certain services involving activities such as clients requirements study, implementation & up-gradations, testing and certification, maintenance and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the taxable territory of India, therefore, it appears that the condition (a) of Rule 6A is not fulfilled. Further, as regards the conclusion of the Commissioner (Appeals) that in view of the definition under Clause (44) of Section 65B of the Act, the overseas subsidiary cannot be called as provider of services in respect of 'onsite service' component and that the assessee in India was the provider of service, it appears that the provisions of Clause (44) of Section 65B of the Act, would not be applicable to the overseas subsidiary and is required to be considered only in respect of the assessee in the taxable territory of India and would not apply to the person (subsidiary or branch) outside India. Consequently, the conclusion of the Commissioner (Appeals) that the assessee has satisfied the condition (a) of Rule 6A of Service Tax Rules, 1994, appears to be incorrect and not legal. * Similarly, as regards condition (e) of Rule 6A of Service Tax Rules, 1994, that the payment for such service has been received in convertible foreign exchange, the onsite component of the service is rendered/ performed by the overseas subsidiary or branch and as the assessee in India is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndra (America) clarifies this position. Clause 19 of the Agreement provides for relationship between them and reads as follows "Relationship":- All dealings between Parties shall be in accordance with the arm's length standard and nothing contained herein shall be construed as constituting any relationship of agency or joint venture or partnership between the parties or management of any operation of M/s Tech Mahindra Ltd in America relating to this agreement or otherwise, by Tech Mahindra Inc. (America)". This relationship clause implies that the export turnover claimed by the appellants would be restricted to the extent of those work orders executed by the appellants themselves for their overseas clients. It would not include the part of work orders executed by the on-site/overseas subsidiary. Hence, the export turnover related to the onsite services performed by the subsidiary is liable to be severed from the calculation of the eligibility of refund claim erroneously granted by the Commissioner Appeals. This will therefore not get covered in the ambit of 'Export of Services Rules; 2005, as they do not qualify as exports having been performed by another person and also ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l turnover", while calculating the admissible refund claim amount as per the formula under Rule 5 of Cenvat Credit Rules, 2004. 3.3 Arguing for the respondents learned counsel submits that- * Issue in respect of Model I and Model II has been considered by the tribunal in their own case and the matter is no longer res-integra. Revenue has filed these appeals placing reliance on para 4.6 of the order of tribunal, which in fact are the submissions made by the revenue. However the findings have been recorded para 5 onwards rejecting the said submissions. A proper appreciation of the said order has been done by the Commissioner (Appeal) in his order. Hence the appeals filed by revenue on these ground needs to be dismissed. * Against the order of tribunal both revenue and them-selves had filed the appeals before Hon'ble Bombay High Court. Appeals filed by both have been dismissed by the Hon'ble High Court upholding the order. * The position has not changed after introduction of negative list regime of taxation of services and introduction of Rule 6A in Service Tax Rules, 1994. Since the position do not change the said decision is squarely applicable in present proceedings to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, vide their letter dated 11.06.2014, the Appellant clarified that there were no material transactions during the period covered by these appeals under Model-II. However, subsequently when further details were sought from the Appellant, they have given figures of transactions made under Model-II during the relevant periods and it is seen that there were transactions under Model-II also, during each of the relevant periods, though the quantum of these transactions is much less, as compared to the quantum of transactions under Model-I. Therefore, I proceed to discuss the eligibility of refund in respect of onsite services provided by the Appellant under both the Models, one by one. 20. In Model-I, the Appellant enters into a direct contract with the overseas client and invoices are raised for the entire value of services, i.e. onsite and offshore services, against which payment is received by the Appellant from the overseas client for the full value of invoices raised by them as per the contract. The services which are provided onsite are provided by the Appellant through their subsidiary / branch as per the Ld. Respondent. The Appellant have contested the same o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service recipient for the same set of onsite service, as done by the Ld. Respondent. 21. The necessary six ingredients to treat any provision of service as an export of service are given in Rule 6A of the Service Tax Rules, 1994. The same have also been discussed in detail in the impugned Orders-in-Original. Regarding the following clauses of the said Rule 6A, the Ld. Respondent has held that the said ingredients are present in the case of onsite services provided to the overseas clients: (b) The recipient of the service is located outside India, (c) The service is not a service specified in the Section 66D of the Act, (d) The place of provision of the service is outside India, (f)The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act. I have examined the factual position and I find that the above conclusions of Ld. Respondent are correct. 22. Only in the case of clauses (a) and (e) of the said Rule 6A of the Service Tax Rules 1994, the Ld. Respondent has held that the Appellant have not fulfilled the conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the said condition is by treating the subsidiary / branch as the provider of service in the case of onsite services. As concluded in Para 22 above, in respect of onsite services also, the Appellant were the service provider and therefore consequent to receipt of payment for the onsite services in convertible foreign exchange, the Appellant have fulfilled this condition also. Thus, I find that all the six conditions contained in Rule 6A of the Service Tax Rules, 1994 have been fulfilled by the Appellant for onsite services provided under Model-I and accordingly their value is includable in the 'Export Turnover', as defined under clause (D) of Rule 5(1) of the CCR. Further, as stated above, since in Model-I there is no contract between the subsidiary and the overseas client, accordingly no invoices are raised by the subsidiary in the name of the overseas client. From this factual matrix it clearly emerges that under Model-1, the foreign subsidiary of the Appellant acts as sub-contractor of the Appellant for providing the onsite component of the entire set of Information Technology Software Services for which the Appellant have entered into the contract with the overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer located in that non-taxable territory, under a valid contract between them. The invoices raised by the subsidiary in favour of the foreign customer, include the value of these onsite services and it has also received payment from the foreign customer, in that country only, i.e. in the non-taxable territory, against those invoices, as per the contract between them. Thus, it is clear from this factual position that this component of onsite services under Model-II was not exported from India, as neither the service was provided from India nor the payment was received in India nor the entity which provided the service (subsidiary) was located in India (i.e. in the taxable territory). As the contract between the subsidiary and the foreign customer is the primary contract between the provider of service and the receiver of service, it needs to be discussed in a bit detail, followed by discussion on the contract between the Appellant and the subsidiary i.e. the back to back contract). 25. With their appeal memorandum, in respect of Model-II transactions, the Appellant have submitted sample copies of 'Contract Service Provider Agreement between the Appellant and their su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries, being the primary documents, have to be considered for the purpose of refund under Rule 5 of the CCR. The Agreements between the Appellant and their subsidiaries are running contracts and have to be examined only with reference to the invoices raised and payments received in respect of the offshore services provided by the Appellant and against which payments were received in convertible foreign currency. Though the Appellant have raised invoices for the total value of services, i.e. onsite plus offshore, but the subsidiary has also simultaneously issued invoices in the name of the Appellant for the onsite component of the said services after adding their mark. up as a percentage of value of onsite services. (For various subsidiaries incorporated in various countries, the said mark up varies between 5% and 7%. However, as this mark up is not the value of onsite services provided by the subsidiary to the foreign customer, it will not form part of the value of onsite services provided by the subsidiary). Thus, due to this arrangement, under Model-II, there is one set of invoices raised by the Appellant on their subsidiaries (for full value of services, i.e. onsite plus offshor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-contractor providing only the off- shore component of the services to the subsidiary) in respect of that original contract of Rs.100/- between the subsidiary and the overseas client. Accordingly, I conclude that these unusual set of transactions between the subsidiary and the Appellant are more in the nature of paper transactions, created only for accounting purposes. It is a fact that under Model-II, the Appellant are providing services only to their subsidiary and receiving payment only from their subsidiary. Thus, I find that the Appellant's claim that the component of onsite services actually provided the subsidiary to the overseas client directly under a valid contract between those two legal entities (subsidiary and overseas client), is an input service imported by the Appellant, is a hollow claim when examined in light of the factual position, as described above. Accordingly, for Model-II, I conclude that the onsite services were not provided by the Appellant to the foreign customer and the value of the onsite services is not includable in the 'Export Turnover? as defined under clause (D) of Rule 5(1) of the CCR. Further, since the said onsite services were actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide two Orders dated 15-09-2014 of Hon'ble High Court of Bombay whereby the appeals filed by the Appellant as well as by the Department against the said Order of Hon'ble CESTAT were dismissed by the Hon'ble High Court. I have gone through the said Orders of Hon'ble CESTAT and Hon'ble High Court of Bombay. I find that the same were given by interpreting the provisions of Export of Service Rules, 2005 and for the period prior to 01.07.2012. The entire regime of Service Tax underwent a paradigm shift w.e.f. 01.07.2012 with the introduction of Negative list of services and the introduction of POP Rules. Simultaneously, the Export of Service Rules, 2005 were rescinded and Rule 6A of the Service Tax Rules, 1994 was introduced. Further Section 65B was inserted in the Finance Act, 1994, w.e.f. 01.07.2012 and 'Service was defined under clause (44) of the said Section 65B. In addition, in the PoP Rules introduced w.e.f. 01.07.2012 the terms 'Location of Service Provider' and 'Location of Service Receiver' were also defined vide clause (h) and clause (i) of Rule 2 of the POP Rules. Further, Rule 5 of the CCR was also substituted w.e.f. 01.04.2012. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the month of November, 2008 and the remaining 5 claims are for the period post 27-2-2010. Since the transactions are exports, the meaning of the term 'export' has to be ascertained as provided for in the law. 'Explanation' to Rule 5 defines exports of output service as "the output service exported in accordance with the Export of Services Rules, 2005." 5.2 ...... 5.3 It is the first principle of interpretation that a statute should be read in its ordinary, natural and grammatical sense. As observed by the Supreme Court of India, - "In construing a statutory provision the first and foremost rule of construction is the literary construction. All that the Court has to see at the very outset is what does the provision say. If the provision is unambiguous and if from the provision, the legislative intent is clear, the Court need not call into aid the other rules of construction of statues. The other rules of construction are called into aid only when the legislative intent is not clear." The principle of strict interpretation of taxing statutes is best enunciated by Rowlatt J., in his classic statement : "In a taxing statute one has to look merely at what is clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the period prior to 27-2-2010, for a transaction to be considered as 'export', two conditions were required to be satisfied, namely, (i) such service is provided from India and used outside India and (ii) payment for such service provided outside India is received by the service provider in convertible foreign exchange. In the present case, there is no dispute about satisfaction of the second condition. The dispute is only with respect to the first condition, i.e., whether the service has been provided from India. It is clear that in respect of overseas customers, the subsidiaries performed the onsite services on behalf of the appellant at the customers' premises abroad. The appellant's subsidiaries located outside India are independent entities and they are not appellant's agents. This position is clear from the agreement entered into between the appellant and its subsidiary in America, namely, Tech Mahindra America dated 27- 3-2008. Para 19 of the said agreement specifically states that all dealings between the parties shall be in accordance with the arms length standard and nothing contained herein shall be construed as constituting any relationship of agency or Joint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng clarification in this regard and the C.B.E. & C. vide letter dated 23-11-2009 had clarified that if the services are rendered partly offsite and partly onsite, then only that operation provided from India (off-shore service) can be treated as export. The C.B.E. & C. clarification was also based on the RBI Circular No. 54, dated 29-6-2002. This clarification issued by the C.B.E. & C. makes the matter abundantly clear that onsite services rendered in respect of IT software services cannot be considered as export for the purposes of claiming export benefits. To a specific query raised by the bench during the course of arguments, it was clarified that while the off-shore services have been certified as export by the competent authorities (softex bills of export certified by the competent authorities), no such certification exists for the on-site services rendered abroad. This also corroborates the fact that on-site services are not exported from India. 5.7 The appellant has relied on a number of provisions/decisions pertaining to Customs, EXIM policy, Income-Tax, OECD guidelines, decision of the European Court, etc. in support of the contention that onsite services performed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services cannot be considered as export during the relevant period and we hold accordingly. If the intention of the legislature was to treat onsite transactions as exports, then the legislature would have stated the same explicitly as in the case of category II services, where even if the services are partly performed in India and partly outside, it is treated as performed outside India. Such a provision does not exist in respect of category III services. Therefore, in respect of category III services, if the services are partly performed in India and partly abroad, then the services performed abroad cannot be said to have been performed from India and we hold accordingly. The appellant has also sworn an affidavit wherein they have categorically stated that when the onsite services are performed by their branches abroad, they pay the local taxes there and does not treat the transaction as having been provided from India. If that be so, why should the same transaction be treated differently as export merely because it is performed by the appellant's subsidiaries. It is highly illogical to determine the situs of a service based on the status of the service provider as contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have also noted the Notification dated 31-3-2011 bearing No. 22/2011-S.T. published in the Official Gazette and in addition to one noticed above. We are of the view that the Tribunal was right in it's conclusion that the services provided do not satisfy the requirement of the Export of Services Rules, 2005 as prevailing prior to their amendment with effect from 27-2-2010. In such circumstances any wider questions or controversy need not be gone into and decided. The Written Submissions of the Appellants referred to the services in relation to immovable property and based on that the arguments are canvassed. We are of the view that there was no Rule 3(1)(ii) of the Export of Services Rules, 2005 as initially introduced. There was Rule 3(1)(i) and (iii). We are not in agreement with Mr. Sridharan that the business establishment of the service provider is in India and final consumption and consumer is outside India. We find that the provider of service is also a subsidiary outside India and recipient is also outside India. In such circumstances we do not see any reason for placing reliance on these Rules and the Tribunal has rightly negatived such arguments in paragraph 5.5 of the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of item (b) of Explanation 2 of clause 44 of section 65B of the Act The answer to all questions above must be yes to avail the status of export of service. 10.2.2 Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non-taxable territory? No. Even though such persons have been specified as distinct persons under the explanation to clause (44) of section 65B, the transaction between such establishments have not been recognized as exports under the above stated rule. 4.6 Commissioner (Appeals) has in respect of Model I specifically concluded that the services provided by the appellants to their overseas clients through their subsidiaries and branch offices located outside the taxable territory were in fact the services provided by the appellants to their client for which they were billing their clients and receiving the Foreign Exchange from their clients. The subsidiaries/ branch offices did not raised any bill/ invoice on the recipient of the services or received any payments from them. All the services provided by the appellant to their overseas client have been provided under umbrella of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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