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TMI Blog2022 (9) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... urview of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The impugned order has failed to identify the taxable service' that the erstwhile foreign entities had obtained from the foreign service provider without which the test of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not met. The adjudicating authority has failed to consider the deemed demutualization of amalgamated entity and amalgamating entities for the period prior to effective merger and has superficially applied the appointed date conundrum to the no brainer , and default, articulation in section 66A of Finance Act, 1994 without taking in the entire canvass of this special provision of law to charge tax on specifically intended transactions. The impugned order has failed to be in compliance with the mandate of section 66A of Finance Act, 1994 warranting it to be set aside - Appeal allowed - decided in favor of appellant. - SERVICE TAXAPPEAL NO. 86285 OF 2015 - FINAL ORDER NO. A/85826/2022 - Dated:- 1-9-2022 - MR C J MATHEW, MEMBER (TECHNICAL) AND MR AJAY SHARMA, MEMBER (JUDICIAL) Shri V Sridharan, Senior Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the trademark of the latter and hence the recourse to section 65(105)(zzr) of Finance Act, 1994 along with section 66A of Finance Act, 1994 in the unique circumstances of a corporate re-structuring exercise that he proceeded to lay bare before us. 3. It would appear that the three foreign companies were sought to be merged with the appellant and the scheme had received the approval of the Hon ble High Court of Bombay on 18th February 2010 with 1st April 2009 being the appointed date as laid out in the proposed scheme though the effective date of merger was 29th April 2010 for M/s Star Asia Region FZ LLC and 31st May 2010 for M/s Star Asian Movies Limited and M/s Star Television Entertainment Ltd. It is his contention that the payments made in the inter regnum by these foreign companies to the other Hongkong entity and reflected in the redrawn accounts of the appellant as required after merger was sought to be taxed in show cause notice issued almost four years after the occurrence of the actual merger. 4. Learned Senior Counsel contends that their disclosure in Form 3CEB under section 92E of Income Tax Act, 1961 against particulars in respect of transactions in intangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gamated or transferor company shall have been deemed to have carried on the business for and on behalf of the transferee company with all attendant consequences. He contended that the judgement of the Hon ble Supreme Court in Marshall Sons and Company (India) Ltd v. Income Tax Officer [2002-TIOL-2570-SC-IT] and those of the Tribunal in Commissioner of Service Tax, Delhi I v. ITC Hotels Limited [2012 (27) STR 145 (Tri-Del] and in Usha International Ltd v. Commissioner of Service Tax, New Delhi [2016 (43) STR 552 (Tri- Del)] support the stand adopted in the impugned order that all tax consequences come into effect on the appointed date, and not on the effective date, of merger. 6. From the rival contentions, we take note that it is common ground that the impugned payment to M/s Satellite Television Asian Region Ltd had been made by the three foreign companies for 2009- 10 and that it also coincided with the period commencing with the appointed date in the scheme of merger as approved by the Hon ble High Court of Bombay. Likewise, it is also not contested that the adjudicating authority, for reasons assigned in the impugned order, held that the consequence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including countervailing taxes, at the boundaries; in relation to goods, the subject of tax and object of tax being identifiable, the mechanism of countervailing at the borders is universally acknowledged and operated through legislation for levy of customs duties. While tax on cross-border rendering of services is a necessary concomitant of scheduling of a domestic tax, its enforceability has to be predicated upon legal fiction owing to it being other than goods. 8. It is thus that Section 66A was inserted in the statute to enable a contrarian mechanism for levy and collection in specific situations. By such incorporation of, viz., 66A. Charge of service tax on services received from outside India. - (1) Where any service specified in clause (105) of section 65 is, (a) provided or to be provided by a person who has established a business or has a fixed establishment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 66A of Finance Act, 1994. With this creation of a new breed of taxpayer, the existence, character and status of the provider was rendered irrelevant in the scheme of taxation thus extending the jurisdiction of Finance Act, 1994 to all and any taxable service subject to specific or general exemptions under Section 93 of Finance Act, 1994. To these we now turn our attention. 9. Exemptions specified under Section 93 of Finance Act, 1994 need not detain as none has been claimed as applicable to the appellant. In the pre- negative list regime, which is germane to the time-lines of this dispute, a general exemption was afforded to the services that were not enumerated in clause (105) of Section 65 of Finance Act, 1994. That is also not pertinent in this dispute. The claim of being outside the ambit of Section 65(105)(zm) of Finance Act, 1994, i.e., to any person, by a banking company or a financial institution including a non-banking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services by being beyond the definitional pale of banking and other financial services in Section 65(12) of Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze), (zzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzk), (zzzzl) and (zzzzo) of clause (105) of section 65 of the Act, be such services as are performed in India : xxxxx (ii) specified in clause (105) of section 65 of the Act, but excluding - (a) .. (b) .. (c) , be such services as are received by a recipient located in India for use in relation to business or commerce. Provided that xxxxx makes it abundantly clear that it not only governs the determination of the import of services in the three categories but also limits the scope of taxation of import of services on reverse charge . Accordingly all services provided from outside India are exempt except in circumstances that determine taxability supra. We take note that, unlike Section 65(105) which assigns equal importance to provider, recipient and activity, the recipient has been accorded overarching significance in the Rules supra reflecting the imperative for Section 66A, viz., the jurisdictional non- existence of the provider. The intent was to close the loophole that enabled escapement from tax that otherwise fastens on a transaction betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord national treatment to services provided from outside after discharge of tax at threshold so that there would be no distinction between service providers located within India and outside India. The fiction of merging provider and receiver is a legislative imperative as the provider based abroad is jurisdictionally non-existent in the eyes of the sovereign legislature. 8. Section 66A of Finance Act, 1994 is not a reverse charge' mechanism for convenience of tax collection within the taxable territory but a conceptual fiction to tax the recipient of service for according national treatment obligations as well as privileges to services procured from abroad. Having been incorporated for that special purpose, and deviating from the norm of taxability, it is intended to have restricted application and only to the extent provided for therein. The case built up the tax authorities is that the appellant appears, from their accounting treatment of the payments made to M/s Satellite Television Asian Region Limited, Hongkong, to be the recipient of intellectual property service for 2009-10 and, hence, liable to tax. The entry in the accounts is not disputed; only the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iver. No one renders service oneself, as such, there can be no question of leviability of service tax. Having held that the amalgamation is effective from 1-4-2004, the service provided by the respondent has to be considered as provided to himself, in which case, no service tax would arise against them. The order of the Commissioner cannot be faulted upon on this ground. At this stage, we may take into consideration the learned DR s reference to clause 7 of the scheme of amalgamation which is as follows : 7. Savings of concluded Transactions : The transfer of the undertaking of the Transferor Companies under clause 4 above, the continuance of the proceedings under clause 5 above and the effectiveness of contacts and deeds under clause 6 above, shall not effect any transaction or the proceeding already concluded by the transferor companies on or before the effective date and shall be deemed to have been done and executed on behalf of the Transferee Company. By referring to the above clause, the contention of the learned DR is that any transaction or proceeding conducted by the transferor company on or before the effective date will not be affected by the scheme of amalga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it - as has happened in this case - it should follow that the date of amalgamation/ date of transfer is the date specified in the scheme as the transfer date . It cannot be otherwise. It must be remembered that before applying to the Court under Section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the court may take some time; indeed, they are bound to take some time because several steps provided by Sections 391 to 394-A and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamating units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(b) does expressly provide that with affect from the transfer date, the Transferor Company (Subsidiary Company) shall be deemed to have carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without a balance- sheet. In certain cases, best-judgment assessment may also be resorted to. Be that as it may, we need not purpose this line of enquiry because it does not arise for consideration in these cases directly. The decision in re Usha International Ltd is on similar lines arising from a dispute on refund claimed in consequence of service being obliterated by merger after tax had had to be paid owing to separate de facto, though not de jure, existence. It does not, therefore, appear that the specifics of the present dispute are amenable to disposal on the basis of the determination cited supra by Learned Authorized Representative. Parking that aspect for the nonce, we address ourselves to the charging provision invoked in the impugned order, viz., section 66A of Finance Act, 1994. In its no frills declaration, liability to service tax arises when the components of any of the taxable services enumerated in section 65(105) of Finance Act, 1994 can be clearly deduced from an identified activity undertaken for consideration by an overseas provider in transaction with a domestic entity. The case of Revenue is that M/s Satellite Television Asian Region Ltd, Hongkong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfotech Ltd, has held that 9. It was submitted on behalf of appellant that Section 66A(2) of Finance Act, 1994 segregates the entity in India from its business in another country for the purposes of taxation which disaggregation should also govern the commercial independence of each other. This was held to be so in re British Airways thus : 31. In this case, as is clear from the RBI s letter, BA, India are a branch office of BA, U.K. permitted for operating air service. There is nothing in this letter from RBI from which it can be inferred that the branch office is only a temporary establishment for some limited purpose. A temporary establishment in India of a Company based abroad would be that establishment which is for a particular project after completion of which, it would get wound up. The BA, U.K. have been allowed by RBI to set up branch office in India for operating air services subject to conditions as mentioned in the letter and the RBI s letter does not mention any period of validity of the permission or that the permission to set up branch, once granted, cannot be renewed. Therefore, the Department s contention that branch office of BA, U.K. in India is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it has to be treated as a person separate from its head office. It is the counter-argument of learned Authorized Representative that the Tribunal in re Torrent Pharmaceuticals Ltd. has determined the specific purpose of Section 66A(2) of Finance Act, 1994 as : 5.5 Section 66A (1) above is talking of service provider and service recipient as persons which has to mean as different business persons. Section 66A(2) and its Explanation I only make a clarification and to fix service tax liability on recipient of services under reverse charge mechanism that both the permanent establishments in India and abroad of a business person are to be treated as separate persons. The above clarification/distinction made in Section 66A in our opinion is only for making an identification to determine whether a service is provided and consumed in India or abroad. It is an accepted legal position that one cannot provide service to one s own self. If the permanent establishment of the appellant abroad is treated as a service provider to its own head office in India then it will amount to charging service tax for an activity provided to one s own self. Similarly placed branches of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the symbiotic business and structural relationship is not susceptible to interpolation into the specific context of Section 66A and each transaction of the overseas branch would have to be scrutinized to ascertain if taxable service has been rendered by branch to headquarters and vice versa. The impugned order has overlooked the requirements of accounting standards which mandates that financials of the branch are to be included in the financials of the corporate entity that has established the branch. Such inclusions owing to accounting standards do not suffice to conclude that services were rendered by foreign service providers to the Indian headquarters. No effort has been undertaken by adjudicating Commissioner to ascertain the nature of the transactions for which payments were made by branch in Dubai and the demand in the impugned order lacks appropriate robustness in consequence. 11. Even if the payments are attributable to service rendered by foreign service providers to the appellant, the scope of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 needs ascertainment. We refer to our decision in re M/s. Tech Mahindra Ltd. whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvisaged in the specific framework of taxability in Rule 3 is beyond the ambit of tax. The impugned order has erred in merely relying on the provisions of Section 66A(2) of Finance Act, 1994 and the non-exclusion of Section 65(105)(zzb) of Finance Act, 1994 from Rule 3 to conclude that tax liability arises. xxxxx 13. The other crucial aspect is receipt of service for use in relation in business or commerce which would, in most circumstances, be the key to determine if service was rendered to the recipient. There is no doubt that, on export, the scheme of taxation divests the tax element. Services rendered by foreign provider are subject to tax by the deeming fiction in Section 66A of Finance Act, 1994 that recipient is the provider of the service. The objective of taxing such services in relation to domestic activities of a recipient is well within the scheme of levy of service tax. Levy of tax through Section 66 of Finance Act, 1994 on all domestic entities receiving services from domestic providers is also within the scheme of taxation of services because the service is not attributable, at that stage, to domestic consumption or exports. Hence Cenvat Credit Rules, 2004 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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